AREIT – OCBC
Market continues to expect strong growth
DPU growth slowed on fewer acquisitions. Ascendas REIT (AREIT) reported an unexciting 2Q08 results with revenue rising 15% YoY and 4% QoQ to S$80.2m. Distribution per unit (DPU) came in at 3.51 cents +11% YoY and +4% QoQ. This is slightly better than our forecast of 3.4 cents, and we are marginally adjusting our FY08F from 13.4 cents to 13.9 cents. We retain our FY09 estimate of 14.5 cents. The growth driver in the last quarter was from lease renewal and not from acquisition. This is clearly seen from the flat sequential growth of AREIT’s investment property portfolio. Its NPI margin remains at 75%, similar to the last 2 quarters, reflecting the difficulty in achieving greater efficiency for industrial assets.
Market getting very crowded. The industrial market space is getting very crowded. There are presently four listed industrial REITs, with JTC REIT expected to come into the market over the next 12-18 months. More importantly, there is very little to differentiate their growth strategies. This means that growth will get more difficult and less accretive. AREIT’s situation is compounded by market continuing to price in strong growth.
Taking greater risks to deliver growth. One way to avoid the price war with other REITs is to develop its own properties. Presently, AREIT has projects (both started and yet to start) worth about S$338m. This is about the maximum that it can take based on present REIT rules and its asset size of about S$3.3bn. Assuming that it takes about 1.5 years to complete these projects, this means that AREIT’s annual capacity for new development project is at best S$200-300m. We believe this is below market growth expectation and perhaps explains the share price weakness. Another possibility open to AREIT is via M&A with other smaller players (e.g. Cambridge or MacarthurCook). Whichever route AREIT takes, it means that the risk profile is likely to rise.
Maintain HOLD. The key worry for AREIT is its high price-to-book ratio of about 1.65x (down from 2.1x since our last report in July). With the industrial REIT space getting very crowded, we see a high risk of market being disappointed . Alternatively, AREIT should start to moderate expectations. Finally, in terms of valuation, we maintain our fair value of S$2.63 and HOLD rating.