A-REIT – DBSV

Commanding a premium for safety

• 1HFYMar13 results in line; forms 51% of our full year forecast

• New asset enhancement initiatives; further commitment of S$235m to bring gearing to 35%

• Premium valuations, HOLD, TP S$2.24

Highlights

2Q13 results in line with our expectations. Ascendas REIT (AREIT) reported 18% and 14% y-o-y growth in topline and net property income to S$143.3m and S$102.9m respectively. The strong performance was due to additional rental income from its recently completed acquisitions and development projects, supported by positive underlying organic growth (c+5% yoy). Distributable income came in at S$79.1m (+16% y-o-y), translating to a DPU of 3.53 Scts (+6% y-o-y). Sequential performance was relatively stable. At half-time, A-REIT delivered a DPU of 7.06 Scts, forming 51% of our full year forecast.

Our View

Portfolio continues to deliver steadily. Operationally, average occupancy levels continue to remain stable at 96.6% while rental reversions remained healthy at 12.8% (vs 11.6% in 1Q13) compared to previously contracted rates. We expect A-REIT’s operational performance in the coming quarters to remain steady, cushioned by expiring rental rates that are 18-52% below current market levels.

New asset enhancements unveiled, a further S$235.2m to be funded. A-REIT unveiled a further 2 asset enhancement works at Ultro Building (retrofitting and upgrading premises as a Business Park) and Aztech Building (Conversion to a high tech industrial), costing S$19m. These 2 AEI works are expected to deliver strong returns given current low passing rents that are c40-100% below market levels. While earnings impact is unlikely to be significant, this together with its other investments totaling S$450m (S$235.2m yet to be funded), are expected to deliver a steady growth profile of 2-3% p.a. as these projects progressively complete over 2HFY13-FY14.

Collaterized securities are now “in the money”. A-REIT had issued S$300m worth of collaterized securities in 2010, with a conversion price of cS$2.27 and is currently in the money. We understand that the manager has not received any conversion notice and we have not factored this in our estimates. However, we estimate a c5% dilution to our forecasts (cFY14F yield will decline to 5.4%) if 100% conversion is assumed.

Recommendation

HOLD Call maintained, TP S$2.24. A-REIT has been a prime beneficiary for yield-hungry capital markets in recent times. In our view, valuations appear rich at prospective FY13-14F yields of 5.6-5.7% and P/BV ratio of1.3x. Implied cap rate of 5.0% in our view, appears to be pricing in too much growth than we believe it can achieve given its sizeable and mature portfolio. HOLD call maintained, TP S$2.24 based on DCF.