Business Park blues overdone but few catalysts

An unprecedented supply of new business-park space is anticipated in the next four years. While there could be some pressure on AREIT’s business parks, we believe fears may have been overdone.

We maintain our estimates and DDM target price (discount rate 8.6%) but downgrade AREIT to Neutral from Outperform in view of limited catalysts. We advocate a switch to CCT at a cheaper 0.7x P/BV with similar yields (6%).

61% of supply pre-committed

We anticipate almost 7m sf of new business/science park space between 2012 and 2015. Almost 40% of this should be completed in 2012. There are some doomsday forecasts in the market, which we believe are over pessimistic. For the whole 7m sf of new supply, pre-commitment is 61%. For the 2.8m sf of new space completing in 2012, 68.5% has been pre-committed.

Demand looks positive, still

Net formation of companies that are likely to take up space at business/science parks (manufacturing information & communication, financial & insurance, professional scientific & technical activities, and arts & entertainment) is still positive, auguring well for take-up of business-park space.

Low rents of single-user and BTS buildings to offer buffer

AREIT’s fairly high weighted average rent of S$4.22 is skewed by unusually high rents from its Telepark data centre which has high specifications. If we exclude this, rents for its single-user space would range between S$1.25 and S$2.39psf; multi-user space between S$1.83 and S$3.85psf. On a weighted average basis, gross income from buildings with average rents below S$2.75psf contributed 40% to its gross income in FY11. We believe the pockets of low-based rents in its portfolio provide a safety net for possible negative rental reversions.

Growth story remains intact

• Management at post-results luncheon meeting affirms healthy operational outlook

• Investments to bear fruit in coming quarters. Maintain FY13-14F earnings growth of c2-4%.

• Maintain HOLD and DCF-based TP S$2.14

Operational outlook remain healthy. A-REIT’s operational performance in 3Q12 was in line with expectations. 9MFY12 earnings formed 76% of our forecasts. Portfolio occupancy remained steady at 95.6% (multi-tenanted buildings at 92.3%), with a slight sequential dip after the consolidation of recently acquired Corporation Place (79.6% occupancy) and 3 Changi Business Park (95% occupancy). Looking ahead, leasing risk is limited with WALE of 4.1 years and only 16% of topline due for renewal. Renewals are also diversified across various industrial segments. In addition, current market clearing levels are at a healthy 18-34% margin above expiring rent levels.

Investments to kick-start earnings growth over FY13-14F. Having invested c.S$712m (S$238.4m yet to be deployed) in growing and enhancing its portfolio, A-REIT is expected to reap the fruits come FY13-14F as these projects reached completion. The manager is also currently looking at a couple of opportunities to grow the REIT, but maintain disciplined in its acquisition approach. China remains in focus, targeting to grow its exposure to 20% of total asset over the longer term. Property types will be for valued added industries (software, corporate HQs) instead of manufacturing.

Capital management. The manager remains disciplined and kept gearing at comfortable 34.1% (heading towards estimated 38% upon completion of investments). However, management does not rule out equity fund raisings for potential acquisitions, if any that are DPU accretive to unitholders.

HOLD call on valuation grounds, maintain DCF-based TP S$2.14. While we like A-REIT’s defensive and well-diversified portfolio and strong execution track record, upside to our target price appears limited from current level. Forward yields of 6.6-6.9% should limit share price downside.

Stable performance

Rental renewals in the quarter rose strongly relative to the last renewal period even though new take-up is slowing. We anticipate resilient yields helped by limited lease renewals in the coming year and boosted rents after asset enhancement.

3Q12/YTD DPU forms 25% and 74% of our full-year estimate. The results are slightly ahead of consensus. We raise our DPU and DDM-based TP (disc rate: 8.6%) to account for acquisitions announced in Dec 11. Maintain OUTPERFORM on portfolio resilience.

Renewal rates strong, though new take-up was slow

Rental renewals rose strongly (compared to the last renewal period, typically three years ago) by 5.7-28.4%, led by the logistics segment (which was 18% below market rents). However, new take-up slowed to 0.5-3.6% for the three sectors. Occupancy at multi-tenanted properties dipped to 92.4% from 93.0% in 2Q12 while portfolio occupancy moderated from 96.4% to 95.9%. This was attributed to the acquisition of Corporation Place, which had a low occupancy rate (79.6%) and the commencement of refurbishment work at 9 Changi South Street 3, which affected occupancy.

Asset enhancement

Phase 1 refurbishment of 10 Toh Guan Road has been completed. About 57% of the additional 87,000sf space created has been pre-committed, resulting in an estimated 12% ROI for Phase 1 investment. We estimate gross rents of S$4psf for this space. Separately, the manager is adding space to 9 Changi South Street 3.

Accounting for Dec acquisitions

We account for the acquisitions of Corporation Place and 3 Changi Business Park Vista totalling S$179m, assuming full contributions in FY13. We anticipate DPU accretion of 0.1ct (less than 1%) at 88% occupancy.

Acquisitions lift A-Reit’s Q3 DPU by 5.8%

Revenue rises 15.7% to $127.3m while net income climbs 11.6% to $93.9m

ASCENDAS Real Estate Investment Trust (A-Reit) saw better results for its third quarter ended Dec 31, 2011, on the back of increased rental income arising from the completion of projects and acquisitions since December 2010.

Gross revenue for the quarter climbed 15.7 per cent year-on-year to $127.3 million as rental from acquisitions rolled in. Net property income rose to $93.9 million, up 11.6 per cent from the year before.

Total amount of income available for distribution also jumped 17.4 per cent to $72.5 million. As a result, distribution per unit (DPU) for Q3 came in at 3.48 cents, 5.8 per cent higher than the 3.29 cents a year earlier.

Cumulatively, for the nine months since the start of the financial year, gross revenue rose 10.2 per cent from the previous year to $368.9 million, while net property income rose 7 per cent to $273.2 million over the same period.

This led to an 11.9 per cent increase in the total amount available for distribution to $208.9 million, translating to a DPU of 10.06 cents.

Yesterday, the counter closed three cents, or 1.5 per cent, higher at $2.01.

Commenting on the industrial Reit’s occupancy, chief executive officer and executive director of the Reit’s manager, Tan Ser Ping, said: ‘Occupancy for the multi-tenanted properties and the portfolio declined marginally from the previous quarter to 92.4 per cent and 95.9 per cent from 93.0 per cent and 96.4 per cent respectively due to the acquisition of a property in the third quarter which has a relatively low occupancy. However, positive rental reversions of between 5.7 per cent and 28.4 per cent were achieved across all segments.’

The Reit’s aggregate leverage as at Dec 31 stood at 34.3 per cent.

The group expects a stable performance for its full financial year ending March 31, 2012, barring any unforeseen events.