Category: A-REIT
A-REIT – OCBC
Limited impact from negative rental reversions in 2010
Expect a challenging year ahead for industrial landlords. Going into 2010, we continue to remain cautious on the industrial landlords due to supply-side concerns (for factory space) and weak demand recovery due to the still-uncertain global economic recovery pace. While a portion of the upcoming supply may have been pre-committed, take-up rate of the remaining uncommitted space could still be a concern. Nevertheless, rents of warehousing space are expected to fare better than factory space as the outlook for warehousing space supply is better in comparison to the factory space.
A-REIT’s diversified portfolio structure mitigates negative impact. Despite our negative outlook on the industrial space, we believe that the impact on A-REIT can be mitigated by its diversified asset portfolio with its balanced exposure to different groups of industrial properties, balanced mix of single and multi-tenanted properties and diversified base of quality tenants. Even though some of the assets could face negative rental reversions going forward, we believe that the impact on its portfolio as a whole would not be significant because the NLA of expiring leases is small compared to the total NLA of A-REIT’s portfolio and the average existing rents of these expiring leases are not significantly higher than current market rents.
Opportunity for growth via property development. We expect property development to be a key area of growth for A-REIT in 2010. Based on AREIT’s deposited property value of S$4,559.7m, it has the capacity to take on as much as S$456m worth of development projects in accordance to the maximum 10% exposure limit of the property fund’s deposited property to property development under the MAS guidelines for property funds. With just one ongoing development project at the moment – Built-to-Suit (BTS) for SingTel with an expected development cost of S$175.4m, this leaves A-REIT with significant headroom of S$280.6m for new development projects.
Maintain HOLD; fair value S$1.76. No changes have been made to our estimates and we maintain our RNAV estimate of S$1.76 per share. Pegging our valuation at par to our RNAV estimate, we derive a fair value estimate of S$1.76 for A-REIT. We expect A-REIT to pay out DPUs of 12.86 cents and 12.90 cents in FY09/10 and FY10/11 respectively, translating to DPU yields of 6.73% for FY09/10 and 6.75% for FY10/11. With an expected total return of -1.3%, we maintain our HOLD rating on A-REIT. We advise investors to accumulate A-REIT at more attractive price levels around the range of S$1.60 to S$1.70.
REITs – CIMB
Big caps grow expensive
• We downgrade the SREIT sector to Neutral from Overweight on a more negative view of sector heavyweights, CMT (fund flows away to CMA), CCT (negative rental reversions), A-REIT (falling industrial occupancy) and MLT (limited organic growth). Nonetheless, we believe that share prices have more room for appreciation as the sector P/BV of 0.83x remains below its mean level of 0.92x since inception (2002) till now, even after the sharp recovery from trough levels in March.
• Acquisitions and development projects will take centre stage in 2010. We believe that easy credit conditions coupled with recapitalised balance sheets and compressing dividend yields will revive acquisitions and project development in 2010. However, these will likely be less accretive than those in pre-Lehman times due to: 1) cash calls made in 2009 by a number of sponsor-backed REITs; 2) a more conservative outlook on asset leverage by REIT managers, which would result in a smaller quantum of acquisitions, or further equity-raising for acquisitions; and 3) insignificant spreads of asset yields over dividend yields, resulting in marginally DPU-accretive deals
• Asset inflation could lead to sector re-rating. An easing credit environment is drawing more institutional buyers of properties into the market. If the competition for investment assets intensifies, asset inflation is a possibility in the medium term.
• Negative reversions could set in. Most REITs will take time to catch up with market rents and occupancy due to standard leases set in place. We expect office, industrial business park and prime retail rents and occupancy to deteriorate further later in 2010.
• Suntec REIT our top pick for 2010. Our top pick for the sector is Suntec REIT for catalysts coming from the opening of two new MRT stations at Suntec City, and the Marina Bay integrated resort. Suntec REIT’s valuation of 0.65x P/BV is below the sector average of 0.83x, and also below its closest peer CCT’s 0.75x. However, 2010 dividend yields are higher than the sector’s 7.4% and CCT’s 5.8%.
• AREIT our top short. AREIT remains the most expensive REIT in the sector at 1.2x P/BV. We believe all the positives have been priced in. Downside risk is high as the attraction of low quasi-office rents in the Business Park and Hi-Tech segments gradually diminishes with a sharp fall in office rents.
A-REIT – OCBC
An undeniable leader in industrial space
Strong asset portfolio. Ascendas REIT (A-REIT) is Singapore’s first and largest business space and industrial REIT, with a portfolio of 90 properties and book value of about S$4.7 billion. The key strength of A-REIT lies in its strong asset portfolio. We like A-REIT for its balance exposure to different groups of industrial properties, balance mix of single and multi-tenanted properties and diversified base of quality tenants.
Growth via property development. A-REIT’s expertise and engagement in industrial property development can also enhance shareholder value and further strengthen its asset portfolio. With just one ongoing development project at the moment, this leaves A-REIT with significant headroom of S$280.6m for new development projects.
Limited impact from negative rental reversions. Even though some of AREIT’s assets could face negative rental reversions going forward, we believe that the impact on its portfolio as a whole would not be significant because the NLA of expiring leases is small compared to the total NLA of A-REIT’s portfolio and the average existing rents of these expiring leases are not significantly higher than current market rents.
Gearing level remains comfortable. Its balance sheet has been strengthened after two fund raising exercises this year. A-REIT successfully lowered its gearing level to 30.5% at the end of Sep 2009. The current gearing ratio provides a comfortable buffer from management’s target gearing ratio of 40%.
DPU to fall due to placement dilution. We expect A-REIT to deliver DPU of 12.86 S-cents for FY09/10. This is 15.3% lower than the FY08/09 DPU due to the dilution impact from the two placement exercises in 2009. For FY10/11, we expect DPU to remain steady and turn in marginal growth of 0.3% YoY to 12.9 S-cents. These translate to DPU yields of 6.84% and 6.86% for FY09/10 and FY10/11, respectively.
Re-initiate A-REIT with HOLD; fair value estimate of S$1.76. We derive a fair value estimate of S$1.76 for A-REIT, which is pegged at par to our RNAV estimate. We like A-REIT for its stable dividend yield, diversified tenant base, long term leases and property development capability. Nevertheless, we reinitiate coverage on A-REIT with a HOLD rating on valuation ground. We advise investors to accumulate A-REIT at more attractive price levels around the range of S$1.60 to S$1.70.