AREIT – OCBC

Will it be the M&A aggressor?

DPU growth slowed on fewer acquisitions. Ascendas REIT (AREIT)reported its 1Q08 results with revenue rising 13.7% YoY and 4.5% QoQ to S$77.3m. Distribution per unit (DPU) was reported at 3.37cents, +9.1% YoY and only 2.1% QoQ, in line with our forecast of 3.35 cents. The marginal DPU growth is mainly attributed to the acquisition of 1 asset worth S$11.2m over the last quarter.

No guidance for acquisition in FY08. The key earnings driver for AREIT has been its aggressive strategy to acquire assets. AREIT acquired S$488m of assets in FY07, S$656m in FY06 and S$1,000m in FY05. AREIT has not given any guidance with respect to target acquisitions in FY08, but based on the already announced contracts and S&P agreements, it has a further S$148m to complete. This brings the YTD potential acquisition to only S$159.2m. For FY08, we forecast that it could potentially acquire
about S$300m-S$400m of assets.

Market competition is intensifying. The main reason is that the industrial market space is getting very crowded. There are presently four industrial REIT players in the market, i.e. AREIT, Mapletree Logistics Trust, Cambridge Industrial Trust and most recently MacarthurCook Industrial REIT (listed last quarter). Another industrial REIT i.e. JTC REIT will probably be listed over the next 12 to 18 months. More importantly, there is very little difference between these REITs as they all adopt the same acquisitionled growth strategy. And the implication is that growth for all the industrial REITs will get more and more difficult. The ability to grow notwithstanding, the market continues to expect these REITs to continue to grow rapidly as reflected by their respective Price to Book value of 1.4-2.0x. We see the
next leg of growth to likely come from M&A between the REITs. The key issue is who is likely to be the aggressor.

Maintain HOLD. The key worry for AREIT is its high Price/Book ratio of about 2.1x. More importantly with the industrial REIT space getting very crowded, we see a high risk of market being disappointed unless they are able to merge or acquire a competitor. Finally in terms of valuation, we have allowed for AREIT’s asset size to increase from its current S$3.3b to S$5.0bn over the next 2 years. On this target asset size basis, our fair value is S$2.63. We maintain our HOLD rating.