Time to take profit

• Broadly in line; downgrade to Underperform from Neutral. 9MFY11 results met Street and our expectations. DPU of 10cts (-4%) forms 69% of our FY11 forecast of 14.4cts. After accounting for a new development project just announced, lengthening the timing of new contributions, and lowering non-taxable deductible items, our DPU estimates fall by 2-5% for FY11-13. Our DDM target price (discount rate 8.4%) dips correspondingly to S$2.09 from S$2.13. While the industrial outlook appears to be stabilising, intensifying competition from existing and upcoming industrial REITs and funds could make it increasingly challenging for AREIT to grow much more in Singapore. As such we downgrade to Underperform. AREIT’s recent share price surge is an opportune time for investors to take profit and switch to Cache Logistics for more value.

• Default cases slowing down. Despite stable gross rental income and declining property expenses, net property income of S$83m in 3QFY11 was still down 1% qoq. However, this was to some extent a positive thing as AREIT’s lower other income was largely due to reduced liquidation damages received in the form of forfeited security deposits from defaulting tenants (including LabOne, TT International and Autron), pointing to dwindling default cases. Portfolio occupancy also improved: 95.6% from 95.3% in 2Q11 for the entire portfolio and 91.1% from 90.5% for multi-tenanted properties. New take-up rates increased 1-12% from the last quarter across the portfolio except for Hi-tech space (-14%). However, renewal rates were down 3-9% across the sectors, except Hi-tech (+6%). Management is committed to distributing YTD retained income of S$4.5m which would add 0.22cts to 4Q11 DPU.

• New S$35.9m development project. AREIT has commenced a new S$35.9m build-to-suit logistics facility in Changi. Completion is expected by Mar 12. We have assumed 9% yields and income contribution only in FY13.

Firm occupancy levels

• Steady DPU of 3.29 Scts on the back of sustained high occupancy levels of 95.6%.

• New BTS project announced to underpin longer term earnings growth.

• Maintain HOLD, TP S$2.19 offers total return of 6%

3Q11 DPU of 3.29 Scts in line with estimates. Higher topline and net property income of S$ 109.9m (+3.7% yoy) and S$83.0m (+2.0% yoy) respectively were largely from rental income of new properties since Dec 2009, while rental rates remain firm. NPI margins remained stable at c75%. Operationally, average occupancy levels inched up qoq to 95.6% (vs 95.3% in 2Q11) as the manager continues to see expansionary demand on the ground.

Spending S$35.9m on new build-to-suit (“BTS”) project. AREIT continues to display solid execution in its BTS projects with Phase 2 plot 8 Changi Business Park completed on schedule (100% commitment from Citibank) and also reported a revaluation gain of 123%. Next on the plate is the construction of a BTS logistic facility for a multi-national company end-user, which A-REIT secured a 10-year long lease upon completion, thus further improving the REIT’s long term earnings stability and visibility. We are not adjusting our estimates as we have previously assumed S$150m acquisitions /BTS projects in our numbers.

Strong balance sheet – Debt headroom of up to S$931m at 45% leverage level. Currently geared at 34.7%, A-REIT is empowered with S$931m headroom (till 45% gearing level) for further investment opportunities, which the manager remains on the lookout.

HOLD, TP S$2.19 maintained. A-REIT currently trades at 1.4x P/BV and offers FY11-12F yield of 6.2%-6.4%, which is a fair 340-360 bps above the 10-year bond yield and in line with its historical mean trading levels. Our HOLD call is maintained given limited price upside to our target objective.

A-Reit gross revenue in Q3 up 3.7% to $109m

ASCENDAS Real Estate Investment Trust (A-Reit) yesterday posted gross revenue of $109 million for the third quarter ended Dec 31, 2010.

This is 3.7 per cent higher than a year ago, as completed investments brought in additional rental income.

On the back of this, net property income rose 2 per cent to $83 million.

Operating expenses were higher as A-Reit’s portfolio grew, and as the government stopped granting land rent and property tax rebates.

Distributable income inched up 0.8 per cent to $61.7 million.

Distribution per unit (DPU) for the quarter rose 0.6 per cent to 3.29 cents.

For the nine months ended Dec 31, DPU was 9.96 cents, down 4 per cent from 10.37 cents a year ago.

The unit base had expanded, partly from a placement exercise in August 2009.

On a proforma basis, the nine-month DPU last year would have been 9.81 cents, translating to 1.5 per cent year-on-year growth.

A-Reit completed Phase 2 of Plot 8 Changi Business Park in December last year, achieving a revaluation gain of around $42.9 million.

Citibank will be leasing the entire property, and the lease will start progressively from February.

Work on A-Reit’s eleventh development project, a built-to-suit logistics facility next to the Airport Logistics Park of Singapore, has begun.

The estimated development cost is $35.9 million, and the project should be completed in the fourth quarter of FY2011/12.

A multinational company has committed to leasing the entire facility for an initial tenure of 10 years.

As at Dec 31, A-Reit’s portfolio occupancy rate was 95.6 per cent, up from 95.3 per cent the previous quarter.

Its aggregate leverage was 34.7 per cent. It has a debt headroom of $931 million before leverage hits 45 per cent.

A-Reit has about $457 million of debt maturing this year, and it said it is in the process of refinancing it.

The counter lost two cents yesterday to close at $2.16.

BACKGROUND
Ascendas REIT (A-REIT) is a business and industrial REIT which invests in a diversified property portfolio in Singapore, comprising business and science parks, hi-tech industrial properties, light industrial properties, logistics and distribution centres as well as warehouse retail facilities.

OUTLOOK/RECOMMENDATION
Positive rental reversions in FY11. A-REIT will benefit from positive rental reversions for lease renewals across all sub-segments in FY11, as current market rentals are at 4-21% premium to expiring rents, with existing business park rentals commanding a 19% premium to space due for renewal. A-REIT will also benefit from the bottoming out in industrial rentals and the improvement in the manufacturing sector outlook.

• Industrial rentals picking up. The Urban Redevelopment Authority (URA) industrial rental index bottomed out in Sep 09 and is up 8.0% ytd. Average market rents for business parks, factory and warehouse space are up 6.9%, 8.0% and 8.1% ytd respectively. Hi-tech industrial space is expected to recover in 2011 after bottoming out this year due to supply overhang in the segment.
• Downside protection in earnings. A-REIT has a well-diversified and stable portfolio with average lease to expiry of five years. About 45% of the leases are long-term, typically with annual rental escalation, of which 32% have adjustments pegged to the Consumer Price Index.
• Continued acquisitions and developments to drive growth. A-REIT acquired DBS Asia Hub at Changi Business Park and another industrial property in Joo Koon in 1Q10. Development projects, such as the recently completed Plaza 8 @ Changi Business Park (CBP) and Phase II of CBP due to be completed in 1Q11, will contribute to FY11 and FY12 earnings.
• Debt headroom of S$953m. A-REIT has a debt headroom of S$953m from its current gearing level of 34.3% before reaching the 45% aggregate
• leverage. This presents ample opportunity to fund build-to-suit (BTS) development projects and acquisitions.
• Maintain BUY and target price of S$2.50. We value A-REIT based on the dividend discount model (required rate of return: 7.7%, terminal growth: 2.0%).

Ascendas Reit looks for assets beyond S’pore

ASCENDAS Real Estate Investment Trust (A-Reit), which at present owns industrial properties only in Singapore, is looking to acquire assets in the rest of Asia.

Its manager has set up a representative office in Shanghai, China, and is also ‘actively exploring’ investment opportunities in the mainland. Deals may materialise in the next year or so.

A-Reit announced its widened investment scope in a statement yesterday after the stock market closed. It will follow its customers to serve their real estate needs in Asia, it said.

It added that a geographically diversified portfolio will give unit-holders ‘an opportunity to ride on growth in other Asian markets’ and allow them to access real estate markets which they ‘could not access efficiently on their own’.

BT understands that Malaysia and Japan are other countries that may be of interest to A-Reit.

As at Sept 30, A-Reit had 92 properties in Singapore worth around $4.8 billion. They include business and science parks, hi-tech industrial properties, logistics and distribution centres and warehouse retail facilities.

A-Reit said its investment focus in Asia will remain on such properties, and that its manager ‘will persist in its disciplined evaluation of all potential investments’.

It added that its portfolio will continue to be dominated by Singapore-based assets ‘in the foreseeable future’.

An analyst who declined to be named said overseas expansion is a ‘natural progression’ for A-Reit. It has grown to a considerable size in Singapore and its sponsor Ascendas also has properties abroad.

In China, Ascendas has developed Dalian Ascendas IT Park, Singapore- Hangzhou Science & Technology Park and other industrial properties.

The analyst pointed out, however, that Singapore-focused Reits tend to enjoy a premium on the stock market, and A-Reit could lose its premium as it would face more risks doing business overseas, including exchange rate volatility and possible political instability.

A-Reit gained three cents yesterday to close at $2.10.