A-REIT – CIMB

Positivity dampened

AREIT 3QFY14 revenue rose by 6.4% yoy while DPU fellby2.2% yoy.9MFY14DPUaccountedfor 77% of our FY14 forecast. As the industrial market in Singapore remains challenging and the rental market is expected to slow due to the high supply, we have lowered our FY14/15 revenue forecast by 1.4% and raise our risk-free rate by30bp to 3.7% to account for a higher interest rates environment. Maintain Hold rating with a slightly lower DDM-based (discount rate: 7.7%) target priceof S$2.36.

Stable set of results

Ascendas REIT (AREIT) recently reported 3QFY14 revenue of S$154.4m (+6.4% yoy) and DPU of 3.54Scts (-2.2% yoy) as a result of the dilution from the 160m unit placement in Mar 2013. The higher revenue was mainly attributed to the additional contribution from The Galen, Nexus@one-north and A-REIT City@Jinqiao, as well as the positive rental reversions on renewal. AREIT’s portfolio occupancy was 89.7% in 3QFY14, slightly lower than the 90.1% in 2QFY14 due to the addition of c.25,000 sq m from its newly acquired properties and completed AEIs.

Change in management fee structure

AREIT announced that it would change the structure of both its base and performance fees in favour of unitholders. Under the new structure, effective from FY14/15, base fees will be adjusted to 0.5% of deposited properties less derivative assets and investment properties under development. On the other hand, performance fees will ensure that unitholders will enjoy a minimum 2.5% growth in DPU if Tier 1 fees kick in or 5.0% if Tier 2 fees kick in (Figure 5).

Maintain Hold due to challenging market

We remain cautious on the outlook for the industrial property sector, particularly for the business and science parks, and the high specification segment. These segments comprise 54% of AREIT’s portfolio. The business and science parks are expected to add 219,000 sq m (58% pre-committed) to FY14 supply, while the latter segment will add 228,000 sq m (64% pre-committed). Thus, we lower our FY14/15 revenue forecast by 1.4% and raise our risk-free rate by 30bp to 3.7% to account for a higher interest rates environment. Maintain Hold with a slightly lower DDM-based target price of S$2.36.