Ascendas Reit’s Q4 DPU dips

ASCENDAS Real Estate Investment Trust (A-Reit) saw a 1.4 per cent dip in its distribution per unit (DPU) for the fourth quarter ended March 31, from 2.77 cents to 2.73 cents.

For the financial year, the Reit saw an 11.4 per increase in its DPU from 11.76 cents to 13.10 cents.

These comparisons were based on the proforma DPUs from the previous financial year, which took into account the units issued from the placement in August and units issued in lieu of the 20 per cent base management fee in May and December last year.

Net income available for distribution for the year also rose 11.4 per cent from $210.9 million to $234.9 million. Net property income grew by $24 million to $320 million, an 8 per cent increase.

Out of the $24 million, $9.1 million had been from one-off items in revenue and property operating expenses, such as a land rental rebate of $1.2 million and a property tax rebate of $2.7 million.

‘We are pleased to conclude the financial year with improvements in A-Reit’s operational metrics despite the challenging economic environment in 2009,’ said Tan Ser Ping, chief executive officer and executive director of Ascendas’ manager, Ascendas Funds Management (S) Limited.

‘Occupancy rate for the portfolio moderated to 95.7 per cent from 96.5 per cent a quarter ago. Nonetheless, occupancy for the various sectors continued to be higher than market average.’

A-Reit’s multi-tenanted properties also declined from 93.3 per cent to 92.1 per cent.

During the financial year, Ascendas completed three development projects and two acquisitions – DBS Asia Hub and 31 Joo Koon Circle.

The two acquisitions, which were completed at the end of March this year for a total of $131 million, are estimated to provide a full year net property income contribution of about $9 million for the next financial year.

As at March 31, A-Reit had a portfolio of 93 properties with a total asset value of about $4.8 billion.

The Reit’s counter closed one cent lower in trading yesterday, at $1.98.

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.

Industrials looking up

• Results in line; upgrade to Neutral from Underperform. FY10 DPU of 13.1cts was in line with Street and our expectations, forming 101% of our estimate. We make moderate adjustments to incorporate actual occupancy rates in the last quarter. Our DPU estimates decrease by 2% for FY11-12. We also introduce a DPU forecast of 14.8cts for FY13. Our DDM-based target price (discount rate 8.4%) is intact at S$2.02. AREIT offers a forward dividend yield of 7.3%. With a strong economic recovery, we believe the outlook is looking up for industrialists, auguring well for its portfolio. We upgrade the stock to Neutral in view of this. AREIT also offers some hedge against inflation with 32.5% of its leases structured with CPIpegged adjustments. Nonetheless, it is expensive against peers at a 26% premium to book value.

• FY10 net property income of S$320m was up 7.9% yoy from positive rental reversions (1-3% p.a.) in multi-tenanted buildings and step-up increases for singletenant buildings. Even more positive was take-up by new tenants, which had risen significantly qoq for Business & Science Parks (+13.8% qoq) and Light Industrial (+9% qoq). Portfolio occupancy as at Mar 10 moderated to 95.7%, down from 97.8% last year. Business Parks’ occupancy dipped 6.7% pts from last year. However, this was in part due to the late completion of DBS Asia Hub and Plaza 8 @ CBP where tenants were still fitting out.

• Rental income to increase organically and through acquisitions. Revenue contributions from FY11 are expected to climb with the following: 1) acquisitions of DBS Asia Hub and 31 Joo Koon Circle last year, with the sales only completing in Mar 2010; 2) full contributions from development projects completed late last year: 71 Alps Avenue, Plaza 8 @ CBP and 38A Kim Chuan Road; 3) anticipated improved occupancy; and 4) step-up increases in sale-and-leaseback leases. Management guides that sale-and-leaseback acquisitions as well as build-to-suit buildings remain possible in Singapore in the coming year. Although it remains interested in overseas acquisitions, there is nothing on the horizon yet. Current asset leverage is comfortable at 31.6%, with debt headroom of S$1.2bn if we assume asset leverage of 45%.