Soft occupancy remains a concern

What has changed?

• Ascendas Real Estate Investment Trust (AREIT) announced its 4Q FY10 results on 19 April 2010. The distribution per unit (DPU) of 2.73¢, down 16.6% QoQ, was 10.8% below our forecast.

Impact

• Net-property income (NPI) was 8.7% below our forecast on lower-than expected revenue (due to a lower overall occupancy rate of 95.7% as at 31 March 2010 versus 96.5% as at 31 December 2009, and the decommissioning of 1 Senoko Avenue for redevelopment) and higher-than-expected expenses due to the expiry of the property-tax rebates, and higher utilities and ad-hoc maintenance charges.

• After fine-tuning our assumptions, we have revised up our DPU forecasts by 0.5% for FY11 and 1% for FY12. We have also revised down our net-property income (NPI) forecasts by about 1%, but have also adjusted downward our finance-cost assumptions by about 8% after the manager locked in its borrowing costs for the next 3.1 years at 3.94% p.a. (fixed rate). It also redeemed €165m of CMBS ahead of its expiry in 2012, and issued S$300m of 2015 exchangeable collateralised securities (ECS) at a coupon of only 1.6%.

Valuation

• We have raised our six-month target price, based on parity with our RNG valuation (a finite-life Gordon Growth model) slightly, to S$1.68 (from S$1.66). We have not changed our effective cap-rate assumption of 7% (consisting of an assumed discount rate of 8.5% and an internal growth rate of 1.5%).

Catalysts and action

• We maintain our 4 (Underperform) rating for AREIT, which trades at a price to to NAV (as at 31 March 2010) of 1.26x. We regard the FY11 DPU yield of 7.0% as rich, considering that the prevailing cap rate for the portfolio is also about 7%. We believe AREIT has room for some acquisitions, but with an overall occupancy rate (91.2% for its multi-tenanted properties versus 93.1% in previous quarter) that still appears delicate (in our opinion) and some refinancing requirement for FY11, we expect the manager to tread cautiously during this recovery phase.

Earnings below expectations due to one-off fees

4QFY10 results below with expectations. A-REIT reported 4QFY10 DPU of 2.73¢ (-15.5% YoY; -16.5x% QoQ), representing 20% of our FY10 DPU forecast of 13.62¢. A-REIT registered an FY10 DPU of 13.1¢. Earnings were below ours and street’s forecasts due mainly to the one-off upfront fees for certain loans that were amortised. Had these fees been amortised over the tenure of the loan, A-REIT’s 4QFY10 DPU would have been 0.35¢ higher, at 3.08¢ instead. This would have brought its FY10 DPU in-line with ours and street’s forecasts. A-REIT will trade ex-4Q10 distribution on 23 Apr 2010. At our TP, A-REIT offers a yield of 6.2%, a reasonable peg in our view. Maintain NEUTRAL.

Occupancy fell marginally; redevelopment of 1 Senoko Avenue. Reflecting the stabilisation in global demand, A-REIT’s portfolio occupancy declined marginally to 95.7% from 96.5% in 3QFY10. For its multi-tenanted properties, occupancy moderated to 91.2% from 93.1%. Following the repossession of 1 Senoko Avenue, this property will be redeveloped in two phases to fully utilize its permitted plot ratio (from the current 0.6x to 2.5x) and will target potential tenants in the food processing industry.

Focus on built-to-suit and other acquisition opportunities. With a gearing of about 32%, A-REIT has significant 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.

Stock almost fully valued; trading near peak valuations. A marginal revaluation deficit of S$53.7m (-1.1%) was booked. This has no impact on the distribution. Management has guided for a flat year in FY11. We maintain our FY11 DPU forecast of 13.7¢ as dividends are well supported by the long-term leases. A-REIT trades at an FY11 yield of 6.9%. Should we factor a more bullish yield peg of 6%, A-REIT’s recursive fair value would be S$2.28, an upside of 15%. Maintain NEUTRAL. Buy on dips.

Forward earnings should improve

At a Glance

• 4Q10 DPU of 2.73 Scts in line

• Forward quarters should exhibit earnings growth

• HOLD on premium valuation of 1.2x P/BV, TP maintained at S$2.11

Comment on Results

Topline holds steady. 4Q10 distributable income of S$51.1m (DPU of 2.73 Scts) was in line with our expectations. Lower topline of S$103.9m (-0.4% yoy, -1% qoq) was due to loss of income from One Senoko Avenue (asset enhancement works) and TT Int’l Building (lease restructuring activities). This was slightly offset by earnings from recently completed built-to-suit (“BTS”) projects. NPI margins were lower yoy due to the expiry of land rental and property tax rebates in Dec 2009. Interest costs was 44% higher yoy due to one-off charge for refinancing activities in 4Q09.

Portfolio occupancy of 95.7%. Tenants giving back space at Multitenanted buildings (“MTB”) caused occupancy rates to fall marginally to 91.2%. This was offset by an improved take-up for new space. Looking ahead, we expect portfolio occupancies to remain stable.

Earnings should start to improve in 1Q11, backed by contributions from recently completed acquisitions and stable renewal activities. With low gearing of c34%, we expect A-reit to opportunistically grow earnings through new BTS developments and from 3rd party sources. We have assumed S$150m worth of new assets in our FY11 numbers.

Recommendation

Maintain our HOLD call and TP of S$2.11. While we like A-reit, we maintain our hold call with valuation at 1.2 x P/BV, 33% premium to the sector average of 0.95x P/BV. But forward yields of 7% in our view, should limit share price downside.

Ascendas Reit’s Q4 DPU dips

ASCENDAS Real Estate Investment Trust (A-Reit) saw a 1.4 per cent dip in its distribution per unit (DPU) for the fourth quarter ended March 31, from 2.77 cents to 2.73 cents.

For the financial year, the Reit saw an 11.4 per increase in its DPU from 11.76 cents to 13.10 cents.

These comparisons were based on the proforma DPUs from the previous financial year, which took into account the units issued from the placement in August and units issued in lieu of the 20 per cent base management fee in May and December last year.

Net income available for distribution for the year also rose 11.4 per cent from $210.9 million to $234.9 million. Net property income grew by $24 million to $320 million, an 8 per cent increase.

Out of the $24 million, $9.1 million had been from one-off items in revenue and property operating expenses, such as a land rental rebate of $1.2 million and a property tax rebate of $2.7 million.

‘We are pleased to conclude the financial year with improvements in A-Reit’s operational metrics despite the challenging economic environment in 2009,’ said Tan Ser Ping, chief executive officer and executive director of Ascendas’ manager, Ascendas Funds Management (S) Limited.

‘Occupancy rate for the portfolio moderated to 95.7 per cent from 96.5 per cent a quarter ago. Nonetheless, occupancy for the various sectors continued to be higher than market average.’

A-Reit’s multi-tenanted properties also declined from 93.3 per cent to 92.1 per cent.

During the financial year, Ascendas completed three development projects and two acquisitions – DBS Asia Hub and 31 Joo Koon Circle.

The two acquisitions, which were completed at the end of March this year for a total of $131 million, are estimated to provide a full year net property income contribution of about $9 million for the next financial year.

As at March 31, A-Reit had a portfolio of 93 properties with a total asset value of about $4.8 billion.

The Reit’s counter closed one cent lower in trading yesterday, at $1.98.

Results dragged by higher costs

Results dragged by higher costs. Ascendas REIT’s (A-REIT) 4Q FY09/10 results came in below our expectations. Gross revenue fell 0.4% YoY to S$103.9m, attributable to the decommissioning of 1 Senoko Avenue. Net property income fell by a larger 4.2% to S$76.8m due to lower revenue, higher operating expenses with the expiry of the property tax rebate and land rental rebate, and higher utilities expenses. The valuation of A-REIT’s property portfolio was written down by S$53.7m following its annual revaluation exercise. DPU of 2.73 S-cents has been declared for 4Q FY09/10 and this is 17.8% below our forecast DPU of 3.32 S-cents. But the variance was largely attributable to the one-off upfront fees for its loans that slashed away 0.35 S-cents from DPU, as well as the higher operating expenses.

Mix signals from operating data. Portfolio occupancy rate declined to 95.7% at the end of March (end Dec 09: 96.5%) but was largely due to the addition of new business park space from the recently completed tower block at Plaza8@CBP. Affected by the economic slowdown, some tenants had also reduced their floor areas upon their lease renewals, which also contributed to the decline in occupancy rate. On a positive note, A-REIT secured more new tenants in 4Q FY09/10 and has continued to see a pickup in leasing enquiry. While management believes that rents are bottoming out, any increase would only be visible after 2-3 quarters, depending on economic growth. Nevertheless, A-REIT should continue to enjoy positive rental reversions in FY10/11 as the expiring rents are still below the current market asking rents.

Embarking on new AEIs. A-REIT plans to redevelop 1 Senoko Avenue to target potential tenants in the food processing industry. Further value can be extracted from this property by raising its plot ratio from the current 0.6x to 2.5x. The development will take place in two phases and complete in 18 months. For 10 Toh Guan Road, A-REIT plans to remove the existing Automated Storage and Retrieval System and reposition the property for higher value usage.

Maintain HOLD. There is no cause for concern despite the below expectation results as this was largely due to the oneoff upfront fees. While we have raised our forecasts for operating expenses, our cost of debt has also been lowered from 4.2% to 3.94% (A-REIT’s weighted average all-in funding cost). As a result, the net impact is an increase in our FY10/11 DPU estimate to 13.8 S-cents (previously 12.9 S-cents), which translates to a DPU yield of 7%. Our fair value has also been raised to S$1.85 (previously S$1.76). With a potential total return of just 0.1%, we maintain our HOLD rating on A-REIT.