A-Reit Q3 property income up 9.7%

ASCENDAS Real Estate Investment Trust (A-Reit) yesterday posted a net property income of $81.3 million for the third quarter ended Dec 31, 2009 – up 9.7 per cent from a year ago.

Higher gross revenue – boosted by rental income from newly completed development projects – and lower property expenses helped lift the industrial Reit’s earnings. As a result, distributable income rose 13.4 per cent to $61.2 million over the same period.

Despite this, distribution per unit (DPU) fell 19.3 per cent to 3.27 cents in Q3, from 4.05 cents a year ago. This reflected the larger unit base, partly due to A-Reit’s share placement and preferential offering exercises.

On a proforma basis, adjusting for the increased number of units, DPU for Q3 last year would have been 2.88 cents. Compared with the DPU in Q3 this year, there would have been a 13.5 per cent increase.

For the rest of this financial year, the manager ‘expects to be able to deliver a return that is in line with market expectations’.

As at Dec 31, A-Reit’s portfolio comprised 91 properties with a total asset value of about $4.8 billion. The occupancy rate for the portfolio was 96.5 per cent, down from 97.2 per cent at Dec 31, 2008.

A-Reit still managed to secure positive rental reversion for renewed leases at its business and science parks, hi-tech industrial properties and logistics and distribution centres in the financial year to date.

‘However, the manager observed signs of moderation in the rate of positive rental reversion in line with current market rental trends,’ the Reit said.

A-Reit was also working on reducing its exposure to ‘vulnerable’ tenants. Its manager earlier identified 12,098 square metres of space as ‘vulnerable’. It has repossessed and re-let 2,416 sq m of space with no negative financial impact, and taken legal action against a tenant occupying 8,843 sq m.

As at Dec 31, A-Reit’s aggregate leverage stood at 31.2 per cent, sharply lower than the 42.2 per cent a year ago. It is in the process of refinancing a $300 million term loan facility maturing in March.

A-Reit units closed two cents lower at $2.02 yesterday.

Delivers another steady quarter

3QFY10 results in-line with expectations. A-REIT reported a 13.5% YoY gain (-6.0% QoQ) in 3QFY10 DPU to 3.27¢. Annualised 9MFY10 DPU came in at 13.6¢, marginally above our FY10 forecast of 13.3¢ (Street’s forecast 13.2¢). Net property income was up 9.7% due to positive rental reversion and contributions from new acquired properties and development projects. A-REIT will trade ex-3Q10 distribution on 22 Jan 2010. We fine-tune our FY10 DPU estimate to 13.62¢ from 13.26¢ to account for marginally higher occupancies. We correspondingly raise our TP to S$2.11 from S$2.05. At our TP, A-REIT offers a yield of 6.5%, a reasonable peg in our view. Maintain NEUTRAL.

Occupancy fell marginally; tenancy default risk low. Reflecting the stabilisation in global demand, A-REIT’s portfolio occupancy declined marginally to 96.5% from 96.8% in 2QFY10. For its multi-tenanted properties, occupancy moderated to 93.1% from 93.3%. According to management, AREIT has about 12,098 sqm of its 2m sqm of NLA (0.4% of gross monthly rental income) which could run the risk of default. Of this, 2,416 sqm had since been repossessed and re-let with no negative financial impact. In the current quarter, A-REIT has taken legal actions against a tenant occupying 8,843 sqm (0.5% of portfolio NLA) of space and contributing 0.2% of monthly gross revenue.

Focus on built-to-suit and other acquisition opportunities. Following its S$296m equity fund raising exercise, A-REIT has a sturdier balance sheet with gearing of about 31%. Management has indicated that they will continue to scout for opportunistic acquisitions and/or built-to-suit development projects for high-credit quality tenants.

Stock almost fully valued; trading near peak valuations. At its current price, A-REIT offers investors a stable dividend yield of 6.8% for FY10 and FY11 – with dividends well supported by the long-term leases on single-tenanted buildings which accounts for 50% of revenue. Between 2005 and 2007, A-REIT traded at heyday yields of 6%, implying minimal upside from current valuations. Should we factor a more bullish yield peg of 6%, A-REIT’s recursive fair value would be S$2.27, an upside of only 13%. Maintain NEUTRAL. Buy on dips.

Fairly valued

• Maintain Underperform; results in line. 3QFY10 results met Street and our expectations. Our DPU estimates and DDM-based target price of S$2.02 (discount rate 8.4%) are intact. We maintain our Underperform rating in anticipation of negative rental reversions in the next financial year.

• Results met expectations. 9MFY10 DPU of 10.37 cts came in at the higher end of our expectations, at 80% of our full-year forecast. DPU for the quarter (3.27cts) shrank 19.3% yoy due to new units issued during its public and private equity issuance in Aug 09. Net property income of S$81.4m was up 10% yoy on additional rental income from completed projects, Expeditors Building and Plaza 8, in Sep 09, much lower utility expenses and property tax rebates. Qoq, property operating expenses increased 12% mainly due to higher ad-hoc maintenance and conservancy costs, and rising energy costs.

• Occupancy stable despite reducing “vulnerable tenants”. AREIT has been reducing the number of “vulnerable tenants”. For instance, it restructured its lease to TT International at 10 Toh Guan Road from a sale-and-lease back to a standard 3-year lease. The building contributes 2% to AREIT’s gross revenue. As at 31 Dec 09, 57.4% of the building was occupied by 38 tenants, including TT International. Assuming occupancy does not improve, the security deposit from TT International would be sufficient to top up rentals to their original level (of full occupancy) for the next 15 months. The remaining 42.6% of the space will be retrofitted for a prospective tenant under negotiation. Despite the restructuring, AREIT’s portfolio occupancy was stable at 96.5% (-0.3% pt qoq) as at end-Dec 09, with multitenanted buildings standing at 93.1% (-0.2% pt) and sale-and-leaseback buildings remaining fully occupied.

• Renewal rents still positive but slowing. AREIT’s rental renewals remained mostly positive (2.2-17.1%) except for Light Industrial (-3.1%) albeit at moderated rates of decrease. We do not expect big falls in the top line in the last quarter as AREIT has only 2.1% of gross revenue due for renewal for the rest of the year.

Occupancy Stabilizing

Quick Comment: Ascendas Real Estate Investment Trust’s (A-reit) 9M09 NPI and distributable income are 79% and 80% of our full-year estimates, respectively, and with only 2.1% of the portfolio due for renewal in FY10 and rental and occupancy declines moderating, we see upside risks to our estimates. We maintain our Equal-weight rating for A-reit and see limited upside from current levels as a recovery in industrial rents typically lags the economic cycle. Valuations are not particularly attractive, in our view, at 1.3x P/B, flattish DPU growth expected in the next two years, and a dividend yield of 6.3%. We would turn more positive if further acquisitions or built-to-suit properties were to be announced. With leverage at only 31.2% at December 2009, we believe A-reit is sufficiently well capitalized to take advantage of opportunities should they arise.

Occupancy better than expected; upside risk to forecasts: MTB occupancy fell to 93.1% in 3Q09 from 93.3% in 2Q09, and while occupancy continues to decline, the rate of decline appears to have been
arrested. (Exhibit 4) Upcoming industrial supply of ~1.3mn sq m in 2010 remains a concern, but demand from the recovering economy is likely to support occupancy levels.

Rental decline also slowing: Industrial rents are showing surprising resilience given the weak economic environment in 2009. With economic activity likely to improve (MS GDP forecast of 5% for FY10 and FY11), declines in rents are likely to slow. Our main concern lies with FY12 renewals, as rents due for renewal are close to spot and further decline in rents will lead to negative rental reversions in FY12.

Completed built-to suit for Singtel in 3Q09; started on Phase 2 of CBP for Citibank: A-reit completed the construction of the built-to-suit property for Singtel in F3Q10, one quarter ahead of our expectations. With only CBP Ph2 remaining, we believe scope for inorganic growth is limited unless further deals are announced.

Time for a pause

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