Ascendas REIT – UOB Kay Hian

BACKGROUND
Ascendas REIT (A-REIT) is a business and industrial REIT which invests in a diversified property portfolio in Singapore, comprising business and science parks, hi-tech industrial properties, light industrial properties, logistics and distribution centres as well as warehouse retail facilities.

OUTLOOK/RECOMMENDATION
Positive rental reversions in FY11. A-REIT will benefit from positive rental reversions for lease renewals across all sub-segments in FY11, as current market rentals are at 4-21% premium to expiring rents, with existing business park rentals commanding a 19% premium to space due for renewal. A-REIT will also benefit from the bottoming out in industrial rentals and the improvement in the manufacturing sector outlook.

• Industrial rentals picking up. The Urban Redevelopment Authority (URA) industrial rental index bottomed out in Sep 09 and is up 8.0% ytd. Average market rents for business parks, factory and warehouse space are up 6.9%, 8.0% and 8.1% ytd respectively. Hi-tech industrial space is expected to recover in 2011 after bottoming out this year due to supply overhang in the segment.
• Downside protection in earnings. A-REIT has a well-diversified and stable portfolio with average lease to expiry of five years. About 45% of the leases are long-term, typically with annual rental escalation, of which 32% have adjustments pegged to the Consumer Price Index.
• Continued acquisitions and developments to drive growth. A-REIT acquired DBS Asia Hub at Changi Business Park and another industrial property in Joo Koon in 1Q10. Development projects, such as the recently completed Plaza 8 @ Changi Business Park (CBP) and Phase II of CBP due to be completed in 1Q11, will contribute to FY11 and FY12 earnings.
• Debt headroom of S$953m. A-REIT has a debt headroom of S$953m from its current gearing level of 34.3% before reaching the 45% aggregate
• leverage. This presents ample opportunity to fund build-to-suit (BTS) development projects and acquisitions.
• Maintain BUY and target price of S$2.50. We value A-REIT based on the dividend discount model (required rate of return: 7.7%, terminal growth: 2.0%).