A-REIT – OCBC

Results dragged by higher costs

Results dragged by higher costs. Ascendas REIT’s (A-REIT) 4Q FY09/10 results came in below our expectations. Gross revenue fell 0.4% YoY to S$103.9m, attributable to the decommissioning of 1 Senoko Avenue. Net property income fell by a larger 4.2% to S$76.8m due to lower revenue, higher operating expenses with the expiry of the property tax rebate and land rental rebate, and higher utilities expenses. The valuation of A-REIT’s property portfolio was written down by S$53.7m following its annual revaluation exercise. DPU of 2.73 S-cents has been declared for 4Q FY09/10 and this is 17.8% below our forecast DPU of 3.32 S-cents. But the variance was largely attributable to the one-off upfront fees for its loans that slashed away 0.35 S-cents from DPU, as well as the higher operating expenses.

Mix signals from operating data. Portfolio occupancy rate declined to 95.7% at the end of March (end Dec 09: 96.5%) but was largely due to the addition of new business park space from the recently completed tower block at Plaza8@CBP. Affected by the economic slowdown, some tenants had also reduced their floor areas upon their lease renewals, which also contributed to the decline in occupancy rate. On a positive note, A-REIT secured more new tenants in 4Q FY09/10 and has continued to see a pickup in leasing enquiry. While management believes that rents are bottoming out, any increase would only be visible after 2-3 quarters, depending on economic growth. Nevertheless, A-REIT should continue to enjoy positive rental reversions in FY10/11 as the expiring rents are still below the current market asking rents.

Embarking on new AEIs. A-REIT plans to redevelop 1 Senoko Avenue to target potential tenants in the food processing industry. Further value can be extracted from this property by raising its plot ratio from the current 0.6x to 2.5x. The development will take place in two phases and complete in 18 months. For 10 Toh Guan Road, A-REIT plans to remove the existing Automated Storage and Retrieval System and reposition the property for higher value usage.

Maintain HOLD. There is no cause for concern despite the below expectation results as this was largely due to the oneoff upfront fees. While we have raised our forecasts for operating expenses, our cost of debt has also been lowered from 4.2% to 3.94% (A-REIT’s weighted average all-in funding cost). As a result, the net impact is an increase in our FY10/11 DPU estimate to 13.8 S-cents (previously 12.9 S-cents), which translates to a DPU yield of 7%. Our fair value has also been raised to S$1.85 (previously S$1.76). With a potential total return of just 0.1%, we maintain our HOLD rating on A-REIT.