A-REIT – Daiwa

Soft occupancy remains a concern

What has changed?

• Ascendas Real Estate Investment Trust (AREIT) announced its 4Q FY10 results on 19 April 2010. The distribution per unit (DPU) of 2.73¢, down 16.6% QoQ, was 10.8% below our forecast.

Impact

• Net-property income (NPI) was 8.7% below our forecast on lower-than expected revenue (due to a lower overall occupancy rate of 95.7% as at 31 March 2010 versus 96.5% as at 31 December 2009, and the decommissioning of 1 Senoko Avenue for redevelopment) and higher-than-expected expenses due to the expiry of the property-tax rebates, and higher utilities and ad-hoc maintenance charges.

• After fine-tuning our assumptions, we have revised up our DPU forecasts by 0.5% for FY11 and 1% for FY12. We have also revised down our net-property income (NPI) forecasts by about 1%, but have also adjusted downward our finance-cost assumptions by about 8% after the manager locked in its borrowing costs for the next 3.1 years at 3.94% p.a. (fixed rate). It also redeemed €165m of CMBS ahead of its expiry in 2012, and issued S$300m of 2015 exchangeable collateralised securities (ECS) at a coupon of only 1.6%.

Valuation

• We have raised our six-month target price, based on parity with our RNG valuation (a finite-life Gordon Growth model) slightly, to S$1.68 (from S$1.66). We have not changed our effective cap-rate assumption of 7% (consisting of an assumed discount rate of 8.5% and an internal growth rate of 1.5%).

Catalysts and action

• We maintain our 4 (Underperform) rating for AREIT, which trades at a price to to NAV (as at 31 March 2010) of 1.26x. We regard the FY11 DPU yield of 7.0% as rich, considering that the prevailing cap rate for the portfolio is also about 7%. We believe AREIT has room for some acquisitions, but with an overall occupancy rate (91.2% for its multi-tenanted properties versus 93.1% in previous quarter) that still appears delicate (in our opinion) and some refinancing requirement for FY11, we expect the manager to tread cautiously during this recovery phase.