A-REIT – OCBC

FY10/11 results mostly in line; Maintain HOLD

4QDPU of 3.27 S-cents. Ascendas REIT (A-REIT) reported 4QFY11 gross revenue of S$112.9m, up 8.7% YoY and 2.6% QoQ. Net property income of S$84m also rose 9.5% YoY but declined 0.1% QoQ on the back of higher maintenance & conservancy charges and land rent. For FY11, gross revenue jumped 8.2% to S$447.6m, which was in line with our expectations. The revenue increase was attributed to the completion of the development of 5 Changi Business Park Crescent (a built-to-suit business park facility for Citibank N.A.). NPI also rose 6.1% to S$339.4m. Distributed income was 5.6% higher at S$247.9m. This included a capital distribution of S$4.77m, from the interest income derived from a finance lease granted to a tenant. 4QDPU is 3.27 S-cents, which is 19.8% higher YoY but 0.6% lower QoQ. On an annualized basis, the latest distribution represents a yield of 6.73% .

Portfolio Management. Portfolio occupancy improved marginally to 96% at end Mar versus 95.3% at end Dec. Occupancy of its multi-tenanted buildings also clocked in 92.1% versus 91.2% three months ago. The manager secured 238,927 sqm of lease renewals and 127,810 sqm of new leases for FY11 versus 186,637 sqm and 87,869 sqm respectively the previous FY. It also achieved positive rental reversion of between 2.1% and 6.7% in FY11 in three out of the four industrial subsectors, namely the Business & Science Park, High-Tech Industrial & Logistics & Distribution Centres subsectors. Only the light industrial subsector saw a decline in renewal rates due to large floor plate discounts given to major tenants. As of 31 Mar 2011, 43% of leases are long term with periodic rental escalation, of which about 33% have CPI-pegged adjustments.

Maintain HOLD. As at 31 March 2011, A-REIT’s aggregate leverage was 35.2% with a weighted average borrowing cost of 3.46%. Taking into account A-REIT’s subsequent private placement and post the funding of the acquisition of Neuros & Immunos and the deployment of net proceeds, aggregate leverage is expected to decline to 31.1%. With this, A-REIT will have debt headroom of about S$839m to reach aggregate leverage of 40%. For investments in China, A-REIT has a 3-5 years target of up to 20% exposure and will initially focus on major tier one cities such as Shanghai. We noted that listed companies with assets in China tend to trade at a lower premium to book vis-à-vis those with purely Singapore assets. We thus envisage A-REIT’s PBR to compress further moving forward. Maintain HOLD with a RNAV-derived fair value of S$2.04.