A-REIT – OCBC

3QFY10/11 Results Lacklustre; Maintain HOLD

Distribution Income on the downtrend. Ascendas REIT (A-REIT) reported 3QFY10/11 gross revenue of S$109m, up 3.74% YoY but down 1.89% QoQ. Net property income (NPI) of S$83m also rose 2.05% YoY but declined 1.06% QoQ. Its income available for distribution was up 2.6% YoY but down 0.5% QoQ. A-REIT will disburse 3.29 S cents to unitholders, payable on 28 Feb. This is the second consecutive quarter that A-REIT saw a decline in gross revenue, NPI, income-available-for-distribution and income distributed.

Portfolio Management. Portfolio occupancy improved marginally to 95.6% at end Dec versus 95.3% at end Sep. Occupancy of its multi-tenanted buildings also clocked in 91.1% versus 90.5% three months ago. The manager secured 30,165 sqm of lease renewals and 48,796 sqm of new leases during the quarter, achieving positive rental reversion only in one out of the four industrial sub-sectors1 . 2.9% of property income remains due for renewal this financial year. A-REIT also announced that it has embarked on its 11th development project, a built-to-suit logistics facility in the eastern part of Singapore at an estimated cost of S$35.9m2 . This facility is fully pre-committed for a period of 10 years upon expected completion in 4QFY11/12. In addition, A-REIT has completed Phase 2 of Plot 8 Changi Business Park in Dec. This property is fully pre-committed to Citibank N.A. and the lease will commence progressively from Feb 2011. For FY10/11, management also aims to at least maintain the previous financial year’s level of net income on the back of a high-degree of predictability and sustainability of portfolio earnings.

Maintain HOLD on valuation grounds. As of 31-Dec, A-REIT has an aggregate leverage of 34.7% and an interest-cover-ratio of 4.6x, which is fairly comfortable in our view. It also has ample debt headroom to fund further investment opportunities, with an additional S$931m leeway to reach 45% aggregate leverage. We were disappointed that there was no announcement of international acquisitions, despite previous reports that A-REIT has set up a representative office in Shanghai and is actively exploring investment opportunities in Asia3 . A-REIT is currently trading at a 37.5% premium to book, with a 1-year forward yield of 6.4%, while the broader industrial-REITs are trading at an average 7.8% premium to book with a forward yield of 7.5%. While we believe A-REIT may deserve a premium because of its size and quality of its portfolio, valuations and prospects do not seem compelling at the moment. Maintain HOLD with a reduced RNAVderived fair value of S$2.20.