A-REIT – OCBC

1Q DPU boosted by one-off items

1Q11 DPU boosted by one-off items. Ascendas REIT (AREIT) reported 1Q FY10/11 gross revenue of S$113.6m, up 10.9% YoY and 9.3% QoQ. Net property income of S$87.3m also rose 8.2% YoY and 13.8% QoQ. A-REIT will pay out 3.37 S cents to unitholders, down 6.9% YoY because of an enlarged unit base (+11.2%) over the previous year. On a QoQ basis, DPU actually jumped 23.4% but we note that this is largely due to one-off items. To recap, one-off upfront fees for loans dented 4Q DPU by a magnitude of 0.35 S cents. This quarter’s DPU also included favorable non-recurring items of about S$4.8m (approximately 0.26 cents). Stripping out these items for both 1Q11 and 4Q10, DPU rose a marginal 1% QoQ.

Stable portfolio performance. Portfolio occupancy slipped marginally to 95.6% at end Jun versus 95.7% at end Mar and 96.5% at end Dec. Occupancy of its multi-tenanted buildings clocked in at 91.5% versus 91.2% three months ago and 93.1% six months ago. Occupancies remained above market averages across asset types. The manager secured 41,619 sqm of lease renewals and 29,919 sqm of new leases during the quarter, achieving positive rental reversions in two of four sub-sectors. 11.8% of property income remains due for renewal this financial year. Guidance was cautiously optimistic noting positive data points in Singapore are offset by increasing uncertainty in the global macroeconomic outlook. Nonetheless, with low lease expiry for this year, a diversified portfolio, and a weighted average lease to expiry of 4.9 years, A-REIT said it saw “a high degree of predictability and sustainability of earnings”‘.

Most expensive industrial S-REIT. As of 30 Jun, A-REIT has an aggregate leverage of 34.1%, which is fairly comfortable in our view. A-REIT is currently trading at a 26.6% premium to book (as of 30 Jun). Based on 1Q11 DPU, it also trades at an annualized yield of 6.7% (or 6.2% after stripping out one-off items). In comparison, other industrial REITS are trading at an average 7.6% discount-to-book and an average trailing yield of 8.6%. While we believe A-REIT may deserve a premium because of its size and the quality of its portfolio, valuations do not seem compelling at the moment. With a change in analyst coverage, we will be reviewing our assumptions and this may affect our FY11 and FY12 estimates. As such, we put our previous HOLD rating and S$1.85 fair value UNDER REVIEW. A-REIT will trade ex-distribution on 22 Jul