Ascendas  REIT  (A-REIT)  has  recently  entered into a put and call option
agreement  with  Chasen  Holdings  for  the  sale of 6 Pioneer Walk (Goldin
Logistics Hub) for SGD32m

Based  on our forecasts, business/science parks currently constitute 40% of
our FY12F GAV, followed by hi-tech (23%), logistics and distribution (19%),
light  industrial  (15%)  and  warehouse  retail facilities (3%). Potential
acquisitions   overseas  could  provide  further  upside  for  DPU  growth.
Importantly,  A-REIT  is  also  less  vulnerable to asset erosion, with its
defensive  properties  located  primarily in Singapore. The stock currently
trades  at  6.7%  FY3/13F  yield  and  1.1x  P/BV.  Reiterate  BUY  with  a
DDM-derived target price unchanged at SGD2.23.

Capital Recycling Kicks Off

Goldin Logistics Hub sold for SGD32m. Ascendas REIT (A-REIT) recently entered into a put and call option agreement with Chasen Holdings for the sale of Goldin Logistics Hub for SGD32m (~SGD148 psf on GFA basis). This marks its first divestment in 9.5 years since listing and represents a 42.2% premium over the original purchase price of SGD22.5m in 2007 and a 33.3% premium over the last valuation of SGD24m as at 31 Mar 2012.

Targeting end-June completion. The hub is located at 6 Pioneer Walk within the Jurong Industrial Estate and has a remaining land tenure of about 24 years. It is a two-storey warehouse with a ramp-up driveway and a four-storey ancillary office, as well as a single-storey workshop and a container yard with a gross floor area of 216,300 sq ft (less than 0.8% of portfolio GFA). The transaction is subject to JTC’s approval and is expected to be completed by end-June 2012. The existing lease will expire in Dec 2017 and will be assigned to Chasen upon completion of the sale.

Adjustments to our estimates. We raise our FY3/13F DPU by 2.2% in view of the divestment gains (assumed paid out) but lower our FY3/14F-15F DPU by 0.6% pa. We expect FY3/14F-15F gross revenue to decline by 0.3% pa due to the loss of rental income. Following this sale, A-REIT will now own 100 properties in Singapore and one business park in China.

Conviction BUY among industrial REITs. We continue to like A-REIT for its stable DPU yield, healthy lease expiry and debt maturity profile, underpinned by a diverse portfolio (business/science parks, hi-tech industrials, flatted factories, light industrials, logistics and distribution centres and warehouse retail). Based on our forecasts, business/science parks currently constitute 40% of our FY12F GAV, followed by hi-tech (23%), logistics and distribution (19%), light industrial (15%) and warehouse retail facilities (3%). Potential acquisitions overseas could provide further upside for DPU growth. Importantly, A-REIT is also less vulnerable to asset erosion, with its

defensive properties located primarily in Singapore. The stock currently trades at 6.8% FY3/13F yield and 1.1x P/BV. Reiterate BUY with a DDM-derived target price unchanged at SGD2.23.

Prime asset, prime valuations

Highlights

• 4QFYMar12 DPU of 3.5 Scts was slightly ahead. Gross revenues and net property income increased 19% and 13% y-o-y to S$134.4m and S$95.1m respectively. FY12 was a fruitful investment year, where the REIT invested close to S$946m in development & asset enhancement projects and new assets into growing its portfolio. As a result, distributable income in 4Q12 was 19% higher at S$72.9m (DPU of 3.5 Scts). Full year DPU of 13.56 Scts formed 103% of our FY12 estimates.

• 6.9% lift in NAV to S$1.88. A-REIT also reported a revaluation gain of close S$222m, resulting in a lift in NAV to S$1.88, largely due to improving rentals and occupancies, and supported by a 10bps cap rate compression compared to 31st March 2011.

Our View

• Sound operational outlook; ability to pass on cost increases to tenants a key positive. We note that NPI margin of 71% (vs 74% a year ago) was marginally lower. This was due to higher utility costs incurred on an expanded portfolio, while the conversion of several buildings into multi-tenanted buildings eroded effective portfolio margins. Margins should remain relatively stable from hereon as the manager should be able to pass on some of these costs to tenants through raising service charges as per rental agreements.

• Portfolio performance to remain steady. Portfolio occupancy remained high at 96.4%for its multi-tenanted buildings. Overall occupancy (excl new acquisitions which averaged c.76.6%) was stable at 92.8% (vs 92.2% a year ago), while rental reversions remained positive at 5.2%-15.7% across all sub-segments. We see minimal leasing risks in FY13, mitigated by an average long WALE of 4 years and having only 13% of topline up for renewal, which is further diversified across various industrial segments. In addition, we see earnings risks from negative rental reversions to be low for this year, as market rentals are a healthy 16-32% above expiring rents.

• Debt expiry profile is well spread out. Gearing at c.36% is within management's target of 35-40%. The manager reported that they have issued a new 12 year ¥10bn denominated MTN @ 2.55% p.a., further lengthening its debt maturity profile.

Recommendation

• Maintain HOLD with TP slightly raised to S$2.17. We tweaked our estimates up to reflect higher reversionary rents and occupancy rates in 2012. While we like A-REIT's FY13-14F yields of close to 7.0%, we are maintaining our HOLD rating given limited upside to TP.

A-Reit full-year DPU up 2.5%

Amount available for distribution in Q4 rises 19% to $72.9 million

A SET of decent results for its final quarter capped off an eventful financial year for Ascendas Real Estate Investment Trust (A-Reit).

Gross revenue for the quarter ended March 31 jumped 19 per cent year on year to $134.4 million, mainly due to the acquisitions of Cintech I, Cintech II and Cintech III & IV in March this year, as well as new projects such as FoodAxis@Senoko that were completed.

Consequently, net property income rose 13.2 per cent over the same period to $95.1 million.

The total amount available for distribution rose 19 per cent to $72.9 million, translating to a distribution per unit (DPU) of 3.50 cents.

For the full year, gross revenue climbed 12.4 per cent from the previous year to $503.3 million, with net property income rising 8.5 per cent to $368.3 million.

This resulted in a 13.6 per cent spike in the total amount available for distribution to $281.7 million. DPU for the 12 months ended March 31, 2012 rose 2.5 per cent to 13.56 cents from a year ago, translating to a distribution yield of 6.7 per cent when placed next to the Reit's closing price of $2.02 on March 30, 2012.

The counter ended trading yesterday at $2.01, up 1.5 cents, or 0.8 per cent.

Said Tan Ser Ping, CEO and executive director of the Reit's manager: "This year has been an active year for A-Reit with nearly $1 billion worth of new investments made, concluding the year with 102 properties and a total asset of about $6.6 billion. Even so, A-Reit was able to maintain an aggregate leverage of 36.6 per cent as at March 31, 2012 as a result of proactive and prudent capital management."

However, the industrial Reit – which has been on an active acquisition trail over the past financial year, purchasing a total of seven properties (including its maiden acquisition in Beijing, China) – expects a slowdown in such activities in the coming year.

Said Mr Tan: "The situation during the last financial year was unusual where we had quite a number of opportunities which we took advantage of. We do not think the same kind of volume would be taking place again this year."

The manager also priced the issuance of 10 billion yen (S$154.9 million) in 2.55 per cent per annum Notes (due in 2024) yesterday, for the purpose of refinancing A-Reit's existing borrowings. The issuance, which is expected to be completed by the end of this month, will extend the Reit's weighted average term of debt to 4.20 years from 3.49 years as at the end of the last financial year, with a weighted average borrowing cost of around 3.04 per cent.

Commenting on the outlook, Mr Tan said: "It's not as bad as imagined to be six months ago . . . We are not seeing businesses failing, and we are seeing renewals and rental growth. But it is still uncertain due to the many macro issues that continue to hang over Singapore and the rest of the global economy."

In the upcoming financial year ending March 31, 2013, the Reit has around 13.8 per cent of its revenue up for renewal, but the manager remains confident that the Reit will turn in a stable report card, barring unforeseen circumstance.

STILL IN THE PINK OF HEALTH

•Completes purchase of Cintech properties

•Leverage around 36% post acquisition

•Positive rental revisions in the cards

Completion of acquisition of Cintech properties

Following the announcement on 6 Feb to acquire three properties at Science Park Drive from sponsor Ascendas Land, Ascendas REIT (AREIT) reported that the transaction was completed on 29 Mar at a total consideration cost of S$185.5m. No consideration units were issued as Ascendas Land had indicated that it did not wish to receive any equity consideration. This is contrary to A-REIT’s initial intention to fulfill the acquisition by making partial payment via unit issuance amounting to not more than 50% of the purchase price. As a result, the purchase consideration was fully paid in cash by way of internal resources and drawdown of debt. This should raise A-REIT’s aggregate leverage from 34.3% as at 31 Dec 2011 to ~38%, according to management. However, following the recent revaluation gains of S$260.5m (+4.5%) over the prior valuation for its portfolio properties, we estimate that its leverage may be lowered closer to 36%.

Portfolio performance remains resilient

In the same announcement, A-REIT updated that its Singapore properties continued to achieve positive rental reversions of 2.6-12.5% YTD upon renewal of its existing leases. Moreover, the passing rents for all the leases in its multi-tenanted buildings, with expiry dates over multiple years, are still some 13-28% below the prevailing market spot rental rates. This is in line with our view that A-REIT’s operating performance is likely to stay resilient in the coming quarters. As a note, property consultant DTZ Research is expecting industrial rents to fall by 5-10% in 2012. This is still higher than AREIT’s passing rents, even if industrial rents correct to the higher end of the estimates.

Maintain BUY

We now factor in the acquisition of Cintech properties and portfolio revaluation into our forecasts. We also re-jig our DDM model assumptions (cost of equity at 7.5%, up from 7.0% previously) and roll over our valuation to FY13. This raises our fair value marginally from S$2.30 to S$2.31. Maintain BUY.