A-REIT – MS

Time For Portfolio To Improve

Quick Comment: Ascendas Real Estate Investment Trust (A-reit) 1Q11 headline earnings were in-line, with NPI and distributable income both 25% our full-year estimates. However, results were bolstered by S$4.8m of non-recurring income which was comprised predominantly of liquidated damages. Excluding the non-recurring income, A-reit’s 1Q11 would marginally miss our estimate, at 23% of our full year distributable income. Going forward, we expect A-reit’s underlying operations to start improving on the back of a pick up in occupancy and bottoming industrial rents. We maintain our Equal-weight rating for A-reit and expect it to trade in-line with the sector given the lack of positive catalysts.

Organic Growth Now More Important: Post the acquisition/completion of DBS Asia Hub, 31 Joo Koon and 38A Kim Chuan, we see limited opportunity for material acquisitions or Built-to-suit opportunities and further upside to A-reit’s earnings will have to come from improvements in the underlying portfolio. We think MTB occupancy at 91.5% will start to track higher, as we believe occupancy at buildings like 3 Changi Business park (56.9%), Ubi Biz Hub (79.2%), 3 Tai Seng Drive (76.7%) and Xilin Distri Centre (83.1%) will improve over the course of the year as economic activity in Singapore continues to stay buoyant. Industrial rents are bottoming, and rental reversions could start turning more positive going forward.

Maintain Equal-weight: A-reit has risen 5.8% in the last month and is now yielding 6.9% for FY11e (March year end). We believe A-reit is fairly valued, trading slightly below its historical average dividend yield of 7.8%. Positive sentiment from stronger than expected Singapore economic growth recently announced is, in our opinion, already reflected in the price and we do not see any near term positive catalyst for the stock.