FY10/11 results mostly in line; Maintain HOLD

4QDPU of 3.27 S-cents. Ascendas REIT (A-REIT) reported 4QFY11 gross revenue of S$112.9m, up 8.7% YoY and 2.6% QoQ. Net property income of S$84m also rose 9.5% YoY but declined 0.1% QoQ on the back of higher maintenance & conservancy charges and land rent. For FY11, gross revenue jumped 8.2% to S$447.6m, which was in line with our expectations. The revenue increase was attributed to the completion of the development of 5 Changi Business Park Crescent (a built-to-suit business park facility for Citibank N.A.). NPI also rose 6.1% to S$339.4m. Distributed income was 5.6% higher at S$247.9m. This included a capital distribution of S$4.77m, from the interest income derived from a finance lease granted to a tenant. 4QDPU is 3.27 S-cents, which is 19.8% higher YoY but 0.6% lower QoQ. On an annualized basis, the latest distribution represents a yield of 6.73% .

Portfolio Management. Portfolio occupancy improved marginally to 96% at end Mar versus 95.3% at end Dec. Occupancy of its multi-tenanted buildings also clocked in 92.1% versus 91.2% three months ago. The manager secured 238,927 sqm of lease renewals and 127,810 sqm of new leases for FY11 versus 186,637 sqm and 87,869 sqm respectively the previous FY. It also achieved positive rental reversion of between 2.1% and 6.7% in FY11 in three out of the four industrial subsectors, namely the Business & Science Park, High-Tech Industrial & Logistics & Distribution Centres subsectors. Only the light industrial subsector saw a decline in renewal rates due to large floor plate discounts given to major tenants. As of 31 Mar 2011, 43% of leases are long term with periodic rental escalation, of which about 33% have CPI-pegged adjustments.

Maintain HOLD. As at 31 March 2011, A-REIT’s aggregate leverage was 35.2% with a weighted average borrowing cost of 3.46%. Taking into account A-REIT’s subsequent private placement and post the funding of the acquisition of Neuros & Immunos and the deployment of net proceeds, aggregate leverage is expected to decline to 31.1%. With this, A-REIT will have debt headroom of about S$839m to reach aggregate leverage of 40%. For investments in China, A-REIT has a 3-5 years target of up to 20% exposure and will initially focus on major tier one cities such as Shanghai. We noted that listed companies with assets in China tend to trade at a lower premium to book vis-à-vis those with purely Singapore assets. We thus envisage A-REIT’s PBR to compress further moving forward. Maintain HOLD with a RNAV-derived fair value of S$2.04.

Acquisitions to sustain earnings growth

• 4Q11 results in line with expectations

• Acquisitions to drive FY12-13F earnings growth of 11%

• HOLD call, DCF-based TP S$2.14 maintained

4Q11 results in line with expectations. 4Q11 distributable income of S$61.2m (DPU of 3.27Scts), +19.8% yoy, – 0.6%qoq was in line with our expectations. Topline of S$112.9m (+8.7% yoy, +2.6% qoq) was largely due to acquisitions completed in 1Q11 and the completion of its development project – 5 Changi Business Park Crescent which was 100% pre-committed to Citibank on a long term lease. This was aided by an uptick in average portfolio occupancy level to 96%, with 1pct sequential improvement in take-up of its multi-tenanted buildings to 92.1%. A-REIT continued to see positive rental reversions – 0.6% to 3.7% increase from 3Q11. NPI margins fell to 74.4% due to the expiry of proper tax rebates, an enlarged portfolio coupled with higher utility costs incurred in 4Q11.

Acquisitions driving FY12-13F earnings growth of 11% Earnings growth over the next 2 years will be driven by new acquisitions of S$376.1m (including committed investments development projects, asset enhancement plans). In addition A-REIT is pursuing some S$200m worth of opportunistic acquisitions in the coming months, which we have assumed in our numbers.

HOLD call on valuation grounds, DCF-based TP S$2.14 is maintained. While we like A-REIT for its defensive and well diversified portfolio and execution track record for its development projects, upside to our target price is limited from current level. Forward yields of 6.7-7.0% should limit downside to share price.

A-Reit’s Q4 DPU jumps 19.8%

Net property income up 9.5% on completion of new projects

IMPROVED results for the fourth quarter capped a strong financial year for Ascendas Real Estate Investment Trust (A-Reit).

The industrial Reit, which has been actively snapping up properties or enhancing existing ones in the past financial year, expects to invest more this year if all goes well.

Gross revenue for the quarter ended March 31 grew 8.7 per cent year-on-year to $112.9 million as new projects were completed. This pulled net property income up 9.5 per cent to $84 million.

Total amount available for distribution jumped 20 per cent to $61.3 million. As a result, distribution per unit (DPU) was 3.27 cents, up 19.8 per cent.

For the full year, gross revenue climbed 8.2 per cent from the previous year to $447.6 million, and net property income increased 6.1 per cent to $339.4 million.

This contributed to a 5.6 per cent increase in total amount available for distribution to $248 million. DPU rose one per cent to 13.23 cents.

The DPU, seen against A-Reit’s closing price of $2.04 on March 30, translates to a distribution yield of about 6.5 per cent. The counter ended trading yesterday at $1.97, one cent down.

A-Reit had been busy with investments in FY10/11, committing $376.1 million to acquisitions, asset enhancement works and development projects. For instance, it recently bought Neuros and Immunos in Biopolis for $125.6 million.

The pipeline of deals this year is ‘generally more encouraging’ than last year’s, said Tan Ser Ping, CEO and executive director of A-Reit’s manager, at a briefing yesterday.

‘If everything pans out well, then I think we should do better than the last financial year,’ he said.

To support its purchases, A-Reit had raised net proceeds of around $393.3 million through a private placement last month.

Mr Tan told BT that the Reit is unlikely to need more equity fundraisings for ‘a good while’ as it will have a debt headroom of over $800 million after the placement, taking committed projects into account.

Another of A-Reit’s purchases was a business park building in Shanghai.

A-Reit will focus on both Singapore and China but in the next three years or so, its portfolio is expected to remain predominantly Singapore-based, with up to 20 per cent of assets potentially in China, Mr Tan said.

Positioning for future growth

• Cash call to fund recent acquisition/development activities

• Dilution in FY12F but earnings kicker in FY13F

• Maintain HOLD with S$2.15 TP.

New acquisition coupled with an equity fund raising. In 2 separate announcements, Ascendas REIT announced (1) acquisition of Neuros & Immunos, located at Biopolis, for S$125.6m and (2) A private placement to raise S$400m gross proceeds at S$ 1.91-1.96/unit, representing a 4.3-6.7% discount to its VWAP on 30 Mar. We note that the placement was completed, priced at S$1.94/unit

(1) Acquisition of Neuros & Immunos for S$125.6m. Located in an emerging research hub for biomedical services at One-North, Neuros & Immunos is a multi-tenanted research and office building, and houses firms involved in neuroscience and immunology research. While we note that it caters to a specialized field, the building is understood to be 100% leased.

(2) Gross proceeds of S$400m to fund recent acquisition & development activities. Proceeds will be deployed towards its ongoing Build-to-Suit development project, selected enhancement works at Techview & 10 Toh Guan Road, forward acquisition of a business space property in Shanghai and Neuros & Immunos. We estimate these properties to return a weighted average projected yield of 7.5% vs implied cost of capital of 7.0%, hence these projects are earnings accretive.

Near term dilution, DPU growth from FY13 onwards. While we estimate there will be DPU dilution in FY12F, unitholders can look forward to a 5% uptick in DPU in FY13F as a majority of its projects are expected to start contributing positively from FY12F/13F. Our FY12-13F distribution income are adjusted downwards by 3-7% to take into account the fund raising, with TP accordingly revised down slightly to S$2.15.

Buying Neuros & Immunos & Private Placement

Proposed Acquisition. Ascendas REIT (A-REIT) announced yesterday its proposed acquisition of Neuros & Immunos, located at Biopolis, from its sponsor for S$125.6m. Neuros & Immunos is a 7-storey business/science park building sited on a land area of 8,051 sqm with a 30+30 years land lease tenure effective from Feb 2005. It has a GFA and NLA of 36,931 sqm and 28,345 sqm respectively. These properties are currently 100% occupied, largely by biomedical companies with three-year rolling leases. The proposed acquisition will further diversify A-REIT’s portfolio of properties as well as the tenant-mix.

Private Placement. In addition, A-REIT closed a private placement of 209,186,000 new units yesterday evening at an issue price of S$1.94 to raise proceeds of approximately S$406m. The proceeds will be utilised in the following manner: (1) ~S$125.6m for acquisition of Neuros & Immunos; (2) ~S$117.6m to fund A-REIT’s forward purchase of a business space property in Shanghai; (3) ~S$35.9m to fund A-REIT’s eleventh development project for the construction of a BTS logistics facility next to the Airport Logistics Park; (4) ~S$97m to fund A-REITs ongoing asset enhancement initiatives at Techview and 10 Toh Guan Road and redevelopment of FoodAxis @ Senoko; (5) ~S$6.7m to pay the estimated fees and expenses incurred by A-REIT, and the balance (~S$23.2m) will be used for general corporate and working capital purposes. A-REIT will also declare an estimated cumulative distribution of 3.69 S-cents for the period from 1 Jan 2011 to the day immediately prior to the date on which the new units are issued (expected on 11 Apr 2011). The book closure is on 8 Apr and payment is around 9 May.

Dilutive Effects. A-REIT is presently also in discussion on a potential S$200m acquisition. Pending final negotiations, the transaction might be completed within the next 3-6 months. In addition, the Manager believes that there are other opportunities for BTS developments and asset enhancement initiatives ahead. Nonetheless, the private placement represents an increase of 11.2% of the total number of units in issue as at 30 Mar 2011. The dilution factor thus works out to about 10.1%. A-REIT is trading at a current PBR of 1.27x vis-à-vis its historic PBR of 1.39x since IPO. We also noted that the offer price denotes a 9.35% discount from its share price high of S$2.14 on 26 Jan (after previous ex-date). We are wary of the dilutive effects on existing shareholders (especially retail investors), given the fairly sizeable discount granted to new private placees, in our opinion. Maintain HOLD with a reduced fair value of S$2.12.