1Q results marginally ahead; a steady start to the year

1Q results marginally ahead; outlook continues to improve

AREIT’s 1Q results were marginally ahead of expectations, underscoring its steady organic growth profile underpinned by a well-diversified portfolio. Operating outlook continues to improve with rents bottoming out and occupancy rates stabilizing. Execution of BTS projects has been solid and it is well positioned for acquisitions with its strong balance sheet and significant financial flexibility. Maintain Buy on undemanding valuations at 6.8 % FY11 yield.

1QFY11 DPU of 3.37cts (+3.4% YoY, +23% QoQ) slightly above DBe of 3.26cts

Revenue rose 10.9% YoY and 9.3% QoQ underpinned by contributions from new acquisitions (eg. DBS Asia Hub, 31 Joo Koon) and positive rental reversions, driving an 8.2% YoY rise in NPI. Overall portfolio occupancy was stable QoQ at 95.6% (91.5% for MTBs). AREIT successfully leased & renewed leases amounting to 0.77m sf during the quarter, out of which c.0.5m pertained to renewals with new leases growing a strong 2.6x YoY. AREIT continued to enjoy positive rental reversions of 3-4% for business park and hi-tech industrial space although a moderation from last quarter’s 8-10% rise. Apart from logistics space, rents for new take-up fell 6-9% QoQ due to differences in specifications and user size.

On track to meet our FY11 DPU forecast of 13.6cts (+4% YoY)

Around 11.8% of AREIT’s revenue is due for renewal for the rest of the year and with demand recovering and rents turning up, we believe it is on track to meet our FY11 forecast. In 1Q, it continued to attract demand from new tenants across the board, especially in transport & storage and electronics. With expiring rents still below current market rents, AREIT should continue to benefit from positive rental reversions and a gradual improvement in occupancy rate. Balance sheet remains firm with gearing at 34.1% and no major refinancing this year. The partial BTS project for Citibank in CBP remains on track for completion in early next year.

Undemanding valuations; maintain Buy with DDM-pegged TP of S$2.23

AREIT is currently trading at 1.27x P/B (vs LT avg of 1.33x) and offering FY11e yield of 6.8% implying an attractive 444bps spread over the 10-year bond compared to the LT average spread of 428bps. Risks: reversal of growth trends impacting leasing demand, credit risk from tenants on long sale & leaseback leases, development risk and deterioration in credit markets

Time For Portfolio To Improve

Quick Comment: Ascendas Real Estate Investment Trust (A-reit) 1Q11 headline earnings were in-line, with NPI and distributable income both 25% our full-year estimates. However, results were bolstered by S$4.8m of non-recurring income which was comprised predominantly of liquidated damages. Excluding the non-recurring income, A-reit’s 1Q11 would marginally miss our estimate, at 23% of our full year distributable income. Going forward, we expect A-reit’s underlying operations to start improving on the back of a pick up in occupancy and bottoming industrial rents. We maintain our Equal-weight rating for A-reit and expect it to trade in-line with the sector given the lack of positive catalysts.

Organic Growth Now More Important: Post the acquisition/completion of DBS Asia Hub, 31 Joo Koon and 38A Kim Chuan, we see limited opportunity for material acquisitions or Built-to-suit opportunities and further upside to A-reit’s earnings will have to come from improvements in the underlying portfolio. We think MTB occupancy at 91.5% will start to track higher, as we believe occupancy at buildings like 3 Changi Business park (56.9%), Ubi Biz Hub (79.2%), 3 Tai Seng Drive (76.7%) and Xilin Distri Centre (83.1%) will improve over the course of the year as economic activity in Singapore continues to stay buoyant. Industrial rents are bottoming, and rental reversions could start turning more positive going forward.

Maintain Equal-weight: A-reit has risen 5.8% in the last month and is now yielding 6.9% for FY11e (March year end). We believe A-reit is fairly valued, trading slightly below its historical average dividend yield of 7.8%. Positive sentiment from stronger than expected Singapore economic growth recently announced is, in our opinion, already reflected in the price and we do not see any near term positive catalyst for the stock.

1Q DPU boosted by one-off items

1Q11 DPU boosted by one-off items. Ascendas REIT (AREIT) reported 1Q FY10/11 gross revenue of S$113.6m, up 10.9% YoY and 9.3% QoQ. Net property income of S$87.3m also rose 8.2% YoY and 13.8% QoQ. A-REIT will pay out 3.37 S cents to unitholders, down 6.9% YoY because of an enlarged unit base (+11.2%) over the previous year. On a QoQ basis, DPU actually jumped 23.4% but we note that this is largely due to one-off items. To recap, one-off upfront fees for loans dented 4Q DPU by a magnitude of 0.35 S cents. This quarter’s DPU also included favorable non-recurring items of about S$4.8m (approximately 0.26 cents). Stripping out these items for both 1Q11 and 4Q10, DPU rose a marginal 1% QoQ.

Stable portfolio performance. Portfolio occupancy slipped marginally to 95.6% at end Jun versus 95.7% at end Mar and 96.5% at end Dec. Occupancy of its multi-tenanted buildings clocked in at 91.5% versus 91.2% three months ago and 93.1% six months ago. Occupancies remained above market averages across asset types. The manager secured 41,619 sqm of lease renewals and 29,919 sqm of new leases during the quarter, achieving positive rental reversions in two of four sub-sectors. 11.8% of property income remains due for renewal this financial year. Guidance was cautiously optimistic noting positive data points in Singapore are offset by increasing uncertainty in the global macroeconomic outlook. Nonetheless, with low lease expiry for this year, a diversified portfolio, and a weighted average lease to expiry of 4.9 years, A-REIT said it saw “a high degree of predictability and sustainability of earnings”‘.

Most expensive industrial S-REIT. As of 30 Jun, A-REIT has an aggregate leverage of 34.1%, which is fairly comfortable in our view. A-REIT is currently trading at a 26.6% premium to book (as of 30 Jun). Based on 1Q11 DPU, it also trades at an annualized yield of 6.7% (or 6.2% after stripping out one-off items). In comparison, other industrial REITS are trading at an average 7.6% discount-to-book and an average trailing yield of 8.6%. While we believe A-REIT may deserve a premium because of its size and the quality of its portfolio, valuations do not seem compelling at the moment. With a change in analyst coverage, we will be reviewing our assumptions and this may affect our FY11 and FY12 estimates. As such, we put our previous HOLD rating and S$1.85 fair value UNDER REVIEW. A-REIT will trade ex-distribution on 22 Jul

Strength in diversity

At a Glance

• DPU of 3.37 Scts in line with expectations and a good start for the year

• Portfolio occupancy remains stable at 95.1%

• BUY, TP S$2.11 offers a total return of 12%, backed by resilient yields of 6.9-7.2%.

Comment on Results

Resilient set of 1Q11 results. 1Q11 DPU of 3.37 Scts was in line with our expectations. Gross revenues and net property income improved to S$113.6m (+11% y-o-y) and S$87.3m (+8% y-o-y) respectively, mainly due to contributions from recently completed acquisitions & development projects. Distributable income came in at S$65.3m (7% y-o-y) but retained S$2.2m pending tax clearance from the authorities; DPU was 7% lower yoy due to a large unit base (but would be +3% yoy on a proforma basis). The trust is committed to pay 100% of its earnings for FY11.

Portfolio occupancy remained at 95.1%, positive rental reversions to continue in coming quarters. Average occupancy levels at its multi-tenanted buildings (“MTB”), which make up an estimated 56% of income, remain stable at 91.5% but is expected to improve in the coming quarters as the manager is in talks with prospective tenants to take up the vacant spaces. Rental income will improve with continued positive rental reversions as average asking rents remain above expiring rents.

Recommendation

BUY, TP S$2.11 offers total return of 12%. We continue to like A-reit for its diversified exposure and stable yields of c6.9-7.2%, which are attractive. Further re-rating catalysts in our view, would stem from the manager announcing further acquisitions/development projects opportunities which they are currently considering.

No surprises; delivers another steady quarter

1QFY11 results inline with expectations. A-REIT reported 1QFY11 DPU of 3.37¢ (-6.9% YoY; +23.4% QoQ), representing 25% of our FY11 DPU forecast of 13.7¢. Net property income rose 8.2% YoY contributed mainly from a larger portfolio base and positive rental reversion. A-REIT will trade ex-1Q11 distribution on 22 July. At our TP of S$2.11, A-REIT offers a yield of 6.5%, a reasonable peg in our view. Maintain NEUTRAL.

Occupancy remained stable; positive rental reversion. Reflecting the stabilisation in global demand, A-REIT’s portfolio occupancy remained stable at 95.6% in 1QFY11. For its multi-tenanted properties, occupancy was unchanged at 91.5%. A-REIT saw positive rental reversion for the renewal leases for properties in the Business & Science Parks and Hi-Tech Industrial of between 3.4% and 3.7%.

Focus on built-to-suit and other acquisition opportunities. With a gearing of about 34%, A-REIT has ample dry powder to undertake acquisition and development projects. Management has indicated that they will continue to scout for opportunistic acquisitions and/or built-to-suit development projects for high-credit quality tenants and well-located income producing properties to ensure sustainable yield accretive returns. A-REIT is currently developing a partial built-to-suit business park facility in Changi Business Park for Citibank. Upon completion in 4QFY11, Citibank will lease at least 50% of the building for a period of 6 years with annual rental escalation and option to renew for two further terms of 3 years each.

Stock almost fully valued; maintain NEUTRAL. We maintain our FY11 DPU forecast of 13.7¢ as dividends are well supported by the long-term leases. AREIT trades at an FY11 yield of 6.8%. Should we factor a more bullish yield peg of 6%, A-REIT’s recursive fair value would be S$2.28, an upside of 14%. Maintain NEUTRAL. Buy on dips.