Defensive attributes!

We believe that current price for A-REIT reflects a drastic 40% vacancy levels in its MTB(Multi-Tenanted Buildings) portfolio, which in our view is unlikely to occur. Earnings visibility is boosted by the fact that c43% of A-REIT’s income is locked-in over the next 7.6 years, based on our estimates. At current price levels, investors are getting an attractive FY10-11 yield of 11% for a blue –chip backed reit with strong financial flexibility, good access to credit and an experienced management team which will steer the reit to emerge stronger post the current recession. Maintain BUY, TP S$1.51 based on DCF.

Emerging stronger post recapitalization. With fresh capital of S$408m in its coffers post its recapitalization efforts, A-REIT has emerged as one of the financially stronger reits with a low gearing of 33%(rising to c37% post inclusion of new development properties). Interest cover is still expected to remain high at 4.2x over FY10-11.

Earnings resilience expected. Even with a 15% increase in vacancies assumed in its Multi-tenanted Buildings (MTB) portfolio, A-REIT is expected to sustain yields of 11% over FY10-11F, supported by its portfolio of Sales & Leaseback (SLB) properties (43% of revenues) backed by an average 7.6 yrs.

40% vacancy levels assumed in stock price. Based on our estimates, the current stock price assumes a relatively drastic scenario of a 40% drop in occupancy levels in its MTB portfolio. We view that the likelihood of such a scenario occurring is unlikely given pro-active efforts from the reit in engaging tenants and government initiatives to help SMEs reduce business costs.

Maintain BUY, TP S$1.51. We maintain BUY on A-REIT, TP $1.51 maintained based on DCF. Barring any unforeseen circumstances, we believe that A-REIT should deliver a relatively stable FY10-11 yield of 11%.

Overhang removed

FY 3Q09 results showed sustained 14% growth in distributable income to S$53.9m, translating to 4.05 Scts per share. In addition, the reit is undertaking a recapitalization exercise of c.S$410.6m to repay loans and fund development commitments. Post equity raising, we believe that the reit will emerge stronger with a net gearing of c.37% with no major refinancing requirements in the next 2 years. In addition, AREIT is likely to continue to deliver a sustained c.10% DPU yield over FY10F – FY11F. As such, maintain BUY, TP S$1.51 based on DCF.

Healthy organic growth Net distributable income of S$53.9m (+14% y-o-y, +1% q-o-q) is within our expectation. This translates to an average DPU of 4.05 Scts per share.

Asking rents still up, occupancy levels dipped slightly to 97.2%. Asking rents for its properties continued to remain firm q-o-q. However, we estimate asking rents to soften 10%-20% over the coming 2 years in the bid to retain tenants in the face of a deteriorating economic outlook. In addition, our occupancy assumption is lowered to 85% from 90%, pegged to previously historical lows.

Equity raising: Placing out 353.9m shares, raising up to S$410.6m. AREIT separately announced an equity raising exercise to raise up to S$410.6m through issuing 353.9m shares @ S$1.16 per share (7% to VWAP). This amounts to c.26% of current total share base. Proceeds will be used to fund development commitments and repay ST loans. DPU is expected to decline by c. 19% in FY10 to 12.1 Scts from 15.0cts, taking into account the enlarged share base. We view this exercise as positive given (i) AREIT will emerge stronger with a low gearing of 37%, (ii) major financing requirements in 2009-2010 is completed.

Short-term pain for long-term gain

• On track. 3QFY09 results were in line with Street and our expectations. DPU of 4.05cts for the quarter grew 13.9% yoy, to form 25.7% of our forecast for FY09. Gross revenue of S$102.3m was up 27.6% yoy, boosted by continued strong rental reversions for Business and Science Parks (+60.6%) and Hi-Tech (+85.8%). YTD DPU of 12.0cts forms 75.9% of our full-year estimate.

• Private placements to raise S$400m. Separately, management announced an equity fund-raising via private placements and preferential offerings of up to 354m new units at an issue price of S$1.13-1.16 to raise gross proceeds of S$400m. Sponsor Ascendas will maintain its aggregate unitholding at 27.1%. The private placements conducted via accelerated book-building will be completed by market close on 16 Jan 09. Gross proceeds will be used to repay part of AREIT’s debt and fund current and/or future development projects.

• Strengthened balance sheet, asset leverage lowered to 33.7%. Although the equity raising is within expectations, the timing comes as a surprise as refinancing with bank debt is not an immediate problem. Despite the short-term pain of DPU dilution and share overhang, AREIT will be in a better position to sit out an extended recession with improved asset leverage of 33.7%, down from 42.2%. Fears of breaching asset leverage and the pulling off of short-term revolving lines will be assuaged with its lower gearing.

• Forecasts adjusted for dilution; target price lowered to $1.67 (from S$2.17). After the placement, FY09 DPU would drop 0.3% to 15.71cts from 15.76cts. We expect the full impact of dilution in FY10-11, when DPU would decline by 16% and 15% respectively. Yields in FY10 based on our assumed price of equity of S$1.16 would be 11%, vs. yields of 10.2% at the current share price. Following our DPU adjustments, our DDM-derived target price (discount 8.7%) has been lowered to S$1.82. Further, to account for a likely share overhang in the short term, we lower our target price to S$1.67, which is its estimated NAV after dilution. Maintain Outperform given its relative upside to the STI.

A-Reit private placement raises $299m

ASCENDAS Reit (A-Reit), which is looking to raise $400 million through an equity fund-raising exercise, said in a late night announcement yesterday that the private placement tranche has been fully subscribed.

The private placement of 258 million units at $1.16 each means that a total of $299 million has already been raised.

Earlier in the day, A-Reit said its $400 million fund-raising involves a private placement and preferential offering of up to 353.93 million new units. This will be at an issue price of between $1.13 and $1.16 per new unit, it said, representing a discount of between 7 and 9.4 per cent.

A-Reit yesterday also reported net property income (NPI) of $74.2 million for its third quarter ended Dec 31, 2008, an increase of 20.9 per cent compared to a year ago.

Income available for distribution was $54 million for the quarter, an increase of 14.4 per cent year on year while distribution per unit (DPU) was 4.05 cents per unit, an increase of 13.8 per cent.

On the net proceeds from the equity fund raising, A-Reit said this will be used to fund development projects, as well as to reduce its aggregate leverage and strengthen its balance sheet.

About $200 million will be used to partly or wholly fund committed development projects and/or future development projects, while about $100 million, together with an existing $200 million committed bank credit facility, will be used towards the full repayment of A-Reit’s $300 million commercial mortgage-backed securities maturing in August.

Another $89.9 million will be used towards the partial repayment of outstanding revolving credit facilities of about $438.1 million outstanding as at Dec 31, 2008.

At end December, A-Reit had secured borrowings repayable in one year of $300 million, and secured borrowings repayable after one year of $745 million.

Unsecured borrowings repayable in one year amounted to $438 million while unsecured borrowings repayable after one year amounted to $432 million.

Tan Ser Ping, CEO of the Reit manager, said: ‘We are confident of meeting all our debt-refinancing requirements over the next two years. With the completion of the equity fund raising, A-Reit will be in a strong position to take advantage of growth opportunities which have arisen due to the current market dislocation.’

Mr Tan did add that 2009 is expected to be a difficult year given the global financial and economic crisis. Still, only 1.6 per cent of A-Reit’s portfolio’s leasable area is up for renewal for the rest of the financial year.

The overall occupancy of A-Reit’s portfolio of 88 properties is also 97.2 per cent. A-Reit said that a total of 41,766 square metres of space had been renewed in the third quarter.

Total new leases (including expansions) for the quarter were 20,671 sq m, of which 23.7 per cent was in Hi-Tech Industrial sector and 50.6 per cent was from the logistics and distribution centres.

At the close of trading yesterday A-Reit units ended at $1.26 per unit, down 10 cents.