Fairly priced

• Resilient set of 2Q10 results
• Acquisitions likely further re-catalysts
• Downgrade to HOLD, TP S$1.90.

Resilient set of 2Q10 results. 2Q10 performance was in line with our projections. While gross revenues and net property income of improved to S$102.3m (+5% yoy) and S$81.1m (+12% yoy), performance remained flat on quarter. Distributable income came in at S$61m (15% yoy), translating to a DPU of 3.48 Scts. (Note: As AREIT have already paid 1.94 Scts/unit on 23rd Sept’09, unitholders will be getting 1.54 Scts adjusted for new placement units).

Financial metrics remained strong. Gearing remained low at c30%, which is estimated to increase to c 32% post completion of its Singtel Build to Suit (BTS) project. NAV stands at 1.60.

Certain level of portfolio growth has been priced in. Management guided that they are currently evaluating certain BTS opportunities. While A-REIT has the capacity to acquire and grow, given that it is currently trading at 1.2x P/BV, we believe that a certain level of this growth has been priced in. We have assumed S$120m worth of new properties in our forecasts.

Adjusting FY10-11F estimates upwards, TP to S$1.90 but downgrade to HOLD. We adjust our FY10 numbers slightly upwards to take into account (i) slightly higher net property income margin assumptions,(ii) earlier contribution from completion of its BTS in our numbers. This results in a 2-3% adjustment in our FY10 –11 DPU assumptions and target price. Downgrade to HOLD, given limited upside to our price target of S$1.90.

A-REIT to distribute 3.48 cents per unit for Q2, down 13.2% on-year

Ascendas Real Estate Investment Trust (A-REIT) is distributing 3.48 cents per unit, down 13.2 per cent on-year, for the second quarter ended September.

However, total distributable income is up 15.4 per cent at S$61.6 million, compared to the same period last year.

The drop in distribution per unit is largely attributed to share dilution after the private placement of new units in August this year.

A-REIT said its portfolio occupancy rate declined marginally to 96.8 per cent, from 97.1 per cent a quarter ago, due to the global recession. But it has managed to achieve positive rental reversion for the first six months of the financial year.

The company managed to turn in an 11.7 per cent on-year rise in net property income to S$81.1 million.

Market watchers said that the outlook for industrial rentals remains challenging. According to industry players, a turnaround may only begin in three to six months.

They said the industrial rental sector typically lags behind the economy by about 18 months, as companies need to raise their output significantly before they expand into new spaces.

Tan Ser Ping, CEO & executive director, Ascendas Real Estate Investment Trust, said: “Occupancy rate may not go up given the current sort of market conditions. In fact, it may moderate marginally in the next six months.

“But the net property income for the portfolio, we would expect it to be able to sustain, because the marginal decline expected in the occupancy rate is compensated or mitigated by the higher rental rate upon renewal.”

“We continue to be able to let out some of the vacated space and also more importantly, we have two new properties coming onstream – contributing to the portfolio income – and another big one coming onstream in the fourth quarter of the financial year.”

This year, A-REIT completed two development projects for S$123 million at about 7.3 per cent below budgeted development cost.

These include a logistics facility at the Airport Logistics Park of Singapore, and Phase 2 of Plaza 8 Changi Business Park. The two properties are expected to contribute to 2009’s third quarter revenue.

The company’s other development in progress, which is expected to be ready by next year, is a building at Kim Chuan Road that will be leased to SingTel for at least 20 years.

– CNA/sc

Ascendas Real Estate Investment Trust (A-Reit) on Monday reported a distributable income of S$61.6 million for the second quarter ended Sept 30. This is a 15.4 per cent increase from a year ago.

Laggard to A-REIT

Attractive yields and valuations despite strong rally. We raise our TP to S$0.64 from S$0.61 on the back of lower cost-of-equity assumption. CREIT will be reporting 3Q09 results on 27 Oct and we expect annualised DPU of 5.09¢, a 15.5% decline over FY08. The fall in DPU is due to the higher refinancing cost that was concluded at end-2008. Whilst stock price has doubled since March underpinned by its successful refinancing, CREIT still trades at attractive FY10 yields of 11.4%. Maintain BUY.

Defensive business structure is a relative strength. CREIT remains our top pick within the small cap S-REIT space. We favour it for its bondlike characteristics anchored by: 1) long tenant leases of 5.1 years; 2) high levels of bank-guaranteed security deposits of 16 months; 3) built-in portfolio rental escalation of 2% pa; 4) high occupancy and diversified tenant mix; and 5) 51% of portfolio sublet providing second layer of income support. Besides, its existing interest costs are hedged for the next three years, minimising interest rate fluctuation risks. CREIT does not have any debt expiring until Feb 2012.

Further devaluation – an unlikely event! CREIT’s portfolio was written down by 9% to S$880m following a 50bps increase in cap rate used by property valuers. This resulted in its gearing rising to 44% in 2Q09 from 40% in 1Q09, and a lower book value of S$0.62/share (S$0.74/share previously). CREIT’s portfolio was valued based on a cap rate of 6.75-7.75%. We believe the vulnerability of further rises in cap rate is low, backed by its built-in step-up rental leasing arrangements and low risk free instrument yields.

A laggard to A-REIT – room for further yield compression. CREIT’s dividends are well supported by rental guarantees and step-up rental agreements. Prior to the credit crisis, CREIT traded at 140bp yield premium over A-REIT. That gap now stands at 440bp, suggesting that it is very much a laggard play. At our TP of S$0.64, CREIT offers an attractive FY10 yield of 8%, a reasonable peg in our view. Recall: A-REIT offers a recursive yield of 6.5% at our TP estimate of S$2.05.

Lacking catalysts

Raising our target price to S$2.05 from S$1.72. Our DDM-backed target price reflects a lower cost-of-equity assumption of 8.2% (8.7% previously). We reduced our risk free rate assumption by 50bps due to continued low interest rates. A-REIT will be reporting 2QFY10 results on 19 Oct and we expect annualised DPU of 13.26¢, a 12.2% decline over FY09. The decline in DPU is attributed to the larger share base following its share placement exercise earlier this year. Maintain NEUTRAL. Recommend entry at S$1.80.

Occupancy expected to remain at healthy levels. Reflecting the stabilisation in global demand, occupancy rate for A-REIT’s multi-tenanted properties is expected to remain at 94%, unchanged over the preceding quarter. We expect overall portfolio occupancy to remain at 97% owing to the contribution from single tenanted buildings with long term leases. Through our channel checks, we have not heard of any recent tenancy defaults. Systemic hi-tech rents have been declining in tandem with office rents. However, as A-REIT’s hitech/ business park properties are still 20-30% below market spot rates, we expect rental reversion to remain positive.

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 29.3%. With a gearing of below 30%, 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.

Still trading above heyday yields of 6%. At current prices, A-REIT offers investors a stable dividend yield of 7% 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. Our TP of S$2.05 offers a yield of 6.5%, a reasonable peg in our view. We recommend buy on dips as stock has rallied 80% since Mar 09.