A-Reit property income up 11.7% for Q2

DPU falls as equity base grows after fund-raising, occupancy slips

ASCENDAS Real Estate Investment Trust (A-Reit) yesterday reported a net property income of $81.1 million for the second quarter ended Sept 30 – up 11.7 per cent from a year ago.

Distributable income also increased as a result, rising 15.4 per cent from the same period last year to $61.6 million.

But distributable income per unit (DPU) dropped as the unit base grew from equity fund-raising. A-Reit’s DPU for Q2 came to 3.48 cents, down 13.2 per cent from 4.01 cents a year ago.

On a proforma basis, adjusting for the increased number of units, DPU for Q2 last year would have been 3.02 cents. This would mean a gain instead of 15.2 per cent.

For the half year ended Sept 30, A-Reit’s net property income rose 13.7 per cent from a year ago to $161.8 million. Distributable income grew 16.6 per cent to $122.6 million.

The half-year DPU stood at 7.1 cents – 10 per cent less than the 7.9 cents a year ago. Again adjusting for new units issued, the proforma DPU last year would have been 6.09 cents, leading to a 16.6 per cent gain.

As at Sept 30, A-Reit’s portfolio comprised 90 properties with a total asset value of about $4.7 billion. During the quarter, it completed two development projects – a facility at the Airport Logistics Park and the second phase of Plaza 8 Changi Business Park.

Due to the recession, A-Reit’s portfolio occupancy rate slipped 0.3 of a percentage point from Q1 to 96.8 per cent in Q2.

But A-Reit managed to enjoy positive rental reversion for renewed leases at some properties. The rate of decline in new take-up rental rates also showed signs of moderation during the quarter, it said.

A-Reit’s aggregate leverage ratio as at Sept 30 was 30.5 per cent, an improvement over the 41.4 per cent last year. New funds amounting to around $300 million from a private placement in August helped bring its gearing down.

DMG & Partners Securities analyst Jonathan Ng said in a report yesterday: ‘We believe there is little need for management to further recapitalise its balance sheet, easing concerns that our forecast dividend yield would be diluted.’

A-Reit gained one cent to close at $1.94 yesterday.

Ascendas REIT – 2Q10 results review
Previous day closing price: $1.94
Recommendation: Hold (downgraded from Buy)
Target price: $2.02 (increased from $1.99)

In line with expectations
A-REIT’s NPI in 2Q10 grew 11.7% yoy, underpinned by positive rental reversions and lower
operating expenses. Distributable income grew 15.4% yoy to $61.6m while DPU declined 13.2%
yoy to 3.48 cts due to the dilutive impact of the equity cash calls this year. Of that, 1.94 cts has
been paid on 23 Sep, leaving 1.54 cts to be paid on 26 Nov (ex-date 27 Oct).

Resilient portfolio
The occupancy rate for its multi-tenanted portfolio fell slightly to 93.3% in 2Q10 from 94.0% in
1Q10. However, with more than half of the leases expiring in FY10 being renewed, we expect
portfolio occupancy to remain stable. A-REIT’s overall portfolio occupancy rate of 96.8% is still
above the market’s average of between 88-91%.

Positive rental reversion for business park space
Positive rental reversions for its business space moderated in 2Q10 (+23% vs +33% in 1Q10). We expect modest rental reversions in 2H10. Conversely, rentals for Light-industrial and Logistics spaces may face slight pressures. Nonetheless, annual rental escalations for some ofits long-term leases and contribution from the two completed development projects could mitigate any decline in rentals.

Little excitement on acquisitions front in FY10

Fast approaching our target price

Positives in the price

• Downgrade to Underperform from Neutral. We downgrade AREIT to Underperform as we believe positives from its resilient occupancy and management premium have been priced in. Although 2QFY10 results beat our expectations and we have raised our DPU forecasts, we believe its hefty P/BV premium to the sector reflects all its positives.

• Results above expectations. 2QFY10 results exceeded Street and our expectations due to lower-than expected expenses and higher-than-expected rental reversions. 2HFY10 DPU of 7.1cts forms 56% of our full-year forecast. DPU for the second quarter (3.48cts) shrank 13.3% yoy due to new units issued in its public and private equity issuance in Aug 09. Net property income of S$81.1m was up 11.7% yoy on continued strong rental reversions, the addition of two properties, significantly lower utility expenses and property tax rebates.

• Occupancy down moderately; reversions still positive. AREIT’s portfolio occupancy slipped 1.2% pts yoy to 96.8% as at end-Sep 09. This was primarily due to lower occupancy in multi-tenanted buildings, down 2.3% pts to 93.3%. However, the qoq decline was much smaller at 0.7% pt, indicating a bottoming out. The manager managed to renew the rents of existing tenants for all sectors except Light Industrial at 3-23% above previously contracted rates. New take-up, however, dropped 6-9% yoy for all sectors except Logistics/Distribution Centres.

• Changes to assumptions. We increase our assumption for net property income margins from 75% to 79% following guidance that expenses would stay consistent. We are also assuming a smaller occupancy decline going forward, and raise our rental growth assumption to 2% (from 1%) as existing rental rates remain below market rates. Separately, we factor in contributions from the SingTel build-to-suit project which is due for completion by March next year. Our DPU estimates increase by 2-16% for FY10-12. Our DDM-derived target price (discount rate 8.4%) rises accordingly to S$2.02 from S$1.74. Despite our higher target price, we believe AREIT’s premium P/BV of 1.2x over the sector average of 0.8x reflects all the positives. A recovery in occupancy and rents typically lags that of industrial indicators.

Resilient earnings

2QFY10 results above expectations. A-REIT reported a 13.2% YoY fall (-3.9% QoQ) in 2Q10 DPU to 3.48¢. Annualised DPU came in at 14.1¢, 6% above our FY10 forecast of 13.3¢ (9.3% above the Street’s 12.9¢ estimates). Net property income was up 11.7% due to positive rental reversion and contributions from new acquired properties and development projects. A-REIT will trade ex-2Q10 distribution on 27 Oct 2009. Our TP of S$2.05 offers a yield of 6.5%, a reasonable peg in our view. Maintain NEUTRAL.

Occupancy fell marginally; tenancy default risk low. Reflecting the stabilisation in global demand, A-REIT’s portfolio occupancy declined marginally to 96.8% from 97.1% in 2Q09. For its multi-tenanted properties, occupancy moderated to 93.3% from 94%. According to management, A-REIT has about 12,098 sqm of its 2m sqm of NLA (0.4% of gross monthly rental income) which could run the risk of default. Default risk from this tenant is almost negligible considering that A-REIT has about 12-month security deposits from the tenant. As of Sep 2009, outstanding accounts receivable past due for more than two months is about S$0.4m or 0.1% of gross revenue.

Focus on built-to-suit and other acquisition opportunities. Following its S$296m equity fund raising exercise, A-REIT has a sturdier balance sheet with a gearing of about 30%. At the current gearing level, we believe there is little need for management to further recapitalise its balance sheet, easing concerns that our forecast dividend yield would be diluted. A-REIT has indicated that about S$120m of its recent proceeds could be used partly or wholly fund potential acquisition and/or built-to-suit development opportunities.

Stock almost fully valued; await better entry level. At current prices, A-REIT offers investors a stable dividend yield of 6.8% for FY10 and FY11 – with dividends well supported by the long-term leases on single-tenanted buildings which accounts for 50% of revenue. Between 2005 and 2007, A-REIT traded at 6% forward yield. We recommend buy on dips as stock has rallied 80% since Mar 09. Recommend entry at S$1.85.