Category: A-REIT
A-REIT – BT
A-Reit posts 3.5% rise in Q1 distributable income
ASCENDAS Real Estate Investment Trust (A-Reit) has posted a 3.5 per cent rise in distributable income to $63.1 million for its first quarter ended June 30, up from $61 million a year earlier.
The period saw net property income climb 8.2 per cent year-on- year to $87.3 million and gross revenue up 10.9 per cent at $113.6 million.
But distribution per unit (DPU) for Q1 – which had a bigger unit base – fell 6.9 per cent to 3.37 cents, from 3.62 cents a year ago. The Q1 DPU was up 3.4 per cent compared with a proforma DPU of 3.26 cents a year ago, which included new units issued in the August 2009 placement, in lieu of base management fee in December 2009 and June 2010 and for payment of acquisition fee in June 2010.
Net property income growth could have been higher if not for higher operating expenses attributed to the enlarged portfolio, higher utilities expenses, and the end of land rent rebates given by the government in 2009.
‘We are pleased to commence the financial year with a 10.9 per cent growth in gross revenue contributed mainly by the larger portfolio base from a year ago,’ said Tan Ser Ping, chief executive officer of A-Reit’s manager, Ascendas Funds Management (S) Limited.
Occupancy rate for the portfolio in Q1 has remained stable at 95.6 per cent.
Also, rental reversion on lease renewal continued to be positive for the Business & Science Parks and Hi-Tech Industrial properties in the first quarter.
Jonathan Ng from DMG & Partners Research said: ‘We maintain our FY11 DPU forecast of 13.7 cents as dividends are well supported by the long-term leases.’
A-Reit is currently developing a partial built-to-suit business park facility in Changi Business Park for Citibank.
As at June 30, 2010, A-Reit’s portfolio consists of 92 properties and a total asset value of about $4.9 billion.
A-Reit’s manager aims to at least maintain the previous financial year’s level of net income for FY2010/11.
The counter closed two cents higher yesterday at $2 per share.
A-REIT – DB
Hitting the industrial trail
Improving operating environment, solid execution
We continue to like AREIT’s defensive and well-diversified portfolio and solid execution of BTS projects. Enquiries have picked up with rents bottoming out amid the strong rebound in manufacturing. Our recent site visit revealed good progress with its ongoing development in CBP and a gradually improving operating environment for its other properties, which are generally highly specified and well located. Valuations are undemanding at 7.3% FY11e yield and 1.19x P/B for a market leader with an established track record. Buy.
Cementing its stronghold in Changi Business Park (CBP)
AREIT has been strengthening its foothold in CBP with the recent completion of Plaza 8 @ CBP and the acquisition of DBS Asia Hub. The partial BTS for Citibank is also progressing on schedule with completion expected in Feb next year (4QFY11). Its growing market share, coupled with limited new supply in the area and recovering demand has translated into rising pricing power. Signing rents are around S$3.50-3.70 compared to the low S$3.00 range a quarter ago. While the amenity centre is currently around 1/3 leased, we expect firm demand from F&B providers and other support services as the working population in CBP rises to c. 20-25,000.
Demand recovering; rents bottoming out
Industrial rents have turned around in 2Q, rising for the first time since 3Q08 as demand recovers. AREIT is seeing broad-based demand recovery across all segments with enquiries rising as tenants plan for expansion on the back of the strong rebound in manufacturing output, which rose 58.6% YoY in May. With demand/supply dynamics in other micro-markets comparatively weaker vis-à-vis CBP, rents are ticking up but at a slower pace. We expect overall occupancy rate for AREIT’s portfolio to stabilize and improve over the coming quarters.
Valuations undemanding; maintain Buy with DDM-pegged TP of S$2.23
AREIT is currently trading at 1.19x P/B vs LT avg of 1.33x and offering FY11E yield of 7.3% implying an attractive 489bps spread over the 10-year bond. We believe valuations are undemanding for an industrial market leader with high quality, well diversified portfolio and proven track record in BTS projects. Downside risks: reversal of growth trends impacting leasing demand, credit risk from tenants on long sale & leaseback leases, development risk and deterioration in credit markets
A-REIT – DBSV
Let the numbers do the talking
• Improving leasing demand outlook with rentals inching up in FY1Q11
• Offers FY11-12 DPU growth of c5% p.a. fueled by new asset contributions
• Favorable risk-reward ratio at current levels, Upgrade to BUY, TP maintained at S$2.11
Leasing activities picking up with rentals inching up. We gather that leasing enquires have picked up momentum in recent months with increasing business volumes. As such, the manager has also begun to move asking rents up in discussions with prospective tenants or during renewals. Rentals for business parks space is understood to have inched up 3-5% qoq to cS$3.50-S$4.00 psf per month while rents for Hi-Tech and Logistics warehouses firmed to an average of S$2.60-2.90 and S$1.00-1.40 respectively. This will mean minimized risk of negative rental reversions in FY11-12 given that current transacted rents are above expiring rents for each industrial subsector. As such, we have renewed confidence that A-REIT should be able to deliver sustained earnings in the coming quarter.
Contributions from larger portfolio in FY11. REIT has taken delivery of over S$429m worth of development properties/acquisitions over the course of 2H10, which will start contributing to earnings from 1Q11. As the manager is on the lookout for acquisition & development opportunities to undertake in the coming quarters, we have assumed an additional S$150m worth of new asset acquisitions over the course of FY11 in our forecasts.
Favorable risk-reward ratio, upgrade to BUY. We see value emerging at current levels as the stock now trades at – 1 S.D of its historical yield band of 6% and currently offers FY11-12F DPU yields of 7.4-7.7%, above S-REIT peers average of 6.8%, which we find attractive. With an upside of 13% backed by a further yield of 7.4-7.7%, we upgrade A-REIT to a BUY, TP S$2.11 maintained.
Industrial REITs – OCBC
On stronger footing
Stronger balance sheets. The industrial REIT sub-sector is in much a stronger position, in our view, compared to a year ago. REITs including A-REIT, Mapletree Logistics Trust, AIMS AMP Capital Industrial REIT [AAREIT, NOT RATED] and Cambridge Industrial Trust [NR] have all raised fresh equity within the past year or so. The sub-sector is on average geared at 33.5% debt-to-assets versus the broader S-REIT average of 30.6%. While the level of debt has decreased generally, there are still pockets of industrial REITs with higher leverage. Leverage levels range from 25% (Cache Logistics Trust, NR) to 42.6% (Cambridge).
Expecting some stability. The managers for the most part presented a cautiously optimistic outlook going forward – both in terms of a bottoming out of asset values and of rents. This is in line with the expected GDP growth of 7-9% in Singapore this year. Colliers expects the recovery in the exports and manufacturing sector to “support an expansion in demand from manufacturers”. This, along with the return of institutional funds, could drive “rents, land and capital values of singleuser factories and warehouses [up] to 10 percent in the next 12 months”. The demand-supply picture varies by asset type, but we do expect a stable-to-positive year for rents and asset values this year, barring significant shifts in the economic environment Big growth plans. Acquisitions are back on the table with transactions worth S$1.25b done in the last seven months; we could potentially see MLT, A-REIT and Cache grow their portfolios further. Balance sheet strength and ability to access capital competitively remains the key sticking point. The subsector has also indicated a new focus on development projects, which has been A-REIT’s domain until now. Asset enhancements and divestments appear to be popular strategies as well.
Valuation. In terms of forward yield, industrial REITs trade at a premium of 100 basis points to the broader sector. Interesting, industrial REITs are actually trading at a lower 5% discount-to-book versus 13% for S-REITs on average. There is significant divergence in valuations within the sub-sector: while A-REIT is trading at a 22% premium to book value, on the other extreme, AAREIT trades at a 32% discount to book. We think this is partially because of continued investor caution towards smaller industrial REITs. Nevertheless, if second-tier industrial REITs can present two to three quarters of sustained earnings performance and deliver on their strategic plans, we could see the valuation gap narrow. We have a NEUTRAL rating on the broader S-REIT sector.
SREITs – OCBC
1Q10 results review; downgrade sector to NEUTRAL
1Q CY2010 results review. Four out of the eight S-REITs under our coverage reported earnings in line with our estimates. CapitaCommercial Trust (CCT) and Frasers Centrepoint Trust (FCT) beat our DPU estimates by 7.8% and 6.7% respectively. CCT benefited from positive rent reversions and lower property tax that drove a 11% YoY increase in net property income. FCT, meanwhile, beat our estimates (and the manager’s own guidance) on the back of a strong performance from Northpoint post asset enhancement works. Conversely, A-REIT and LMIR Trust missed our earnings expectations for 1Q CY10; with A-REIT missing our DPU estimates because of one-off upfront fees for loans. As a gauge, in 4Q CY09 five REITs reported results in line, three above our expectations and none below.
Guidance was ‘cautiously optimistic’, and growthoriented. Several managers indicated an intention to optimize yield and grow the portfolio both organically (asset enhancement initiatives, including CapitaMall Trust (CMT) and Ascott Residence Trust (ART)) and inorganically (acquisitions, including Mapletree Logistics Trust (MLT)). With this focus on growth, we believe S-REIT’s balance sheet capacity and ability to raise capital will remain key valuation differentiators. It may also be the first time the relatively young S-REIT sector will see REITs refresh their portfolios through divestments and re-developments in a big way (Cambridge Industrial Trust [NOT RATED] has been leading the pack as it de-leverages its balance sheet). Another price differentiator, in our opinion, will be the manager’s skill in optimizing yield through asset works: CMT and FCT, for instance, have a proven track record in this area in our view.
Volatility in the near term. Year-to-date performance of the S-REIT index is slightly negative (-0.7%) at 613.58 points. The recent volatility in the market has led to ~100 basis point movements in yields – we think this volatility will continue as macro-economic concerns, this time in Europe, take a front seat again. In our view, investors may consequently ascribe a higher risk premium (that is, higher yields and lower price-to-book ratios) to the S-REIT sector in the near-term. Nonetheless, we see selective opportunities to pick up strong REITs at attractive valuations (on a longer time horizon), after careful scrutiny of return versus risk. In an uncertain environment, we prefer REITs with a strong earnings outlook and strong balance sheets. We tilt slightly defensive in our top picks and favor FCT, MLT and ART with estimated total returns of 19%, 19.8%, and 21.7% respectively. Downgrade broader sector to NEUTRAL on a more cautious view.