Bulk of refinancing secured

• Performance on track. A-REIT’s 2QFY09 results were in line with Street and our expectations. DPU of 4.01cts for the quarter grew 14.2% yoy, forming 26% of our forecast of 15.4cts for FY09. Gross revenue of S$97.3m was up 21.3% yoy due to continued strong rental reversions from Business and Science Park and Hi-Tech segments, as well as additional revenue contribution from completed acquisitions. These include 8 Loyang Way 1 (SKP) in May, 31 International Business Park (Creative) in June and completion of Pioneer Hub BTS in August. 1H09 DPU of 7.9cts was also in line with expectations, forming 51.3% of our full-year estimate.

• Refinancing for bulk of FY10-11 debts secured. The management announced that it had secured a $200m bilateral loan from its relationship bank that could be used for its refinancing of its nearest major debt of S$300m CMBS due in Aug 09. Tenure of the loan is three years. Borrowing spreads was attractive at under 120bps. Additionally, management also expects to refinance its term loan facility of S$300m due in March 2010 with its existing relationship bank for a tenure of two years. All-in cost of A-REIT’s total debt of S$1.9bn as at 30 Sep 08 stood at 3.25%, up marginally from 3.16% from the last quarter. Asset leverage stood at 41.4% in
the same period.

• New S$25.6m BTS at Airport Logistics Park of Singapore (ALPS). The management announced that it has secured a new BTS project from Expeditors Singapore Pte Ltd. A-REIT will develop a logistics facility at the ALPS for the tenant for S$25.6m. The 11,430sqm facility is expected to complete by Dec 09 and will be leased to Expeditors for a period of 5 + 5 years. Assuming a net development yield of 9%, we estimate a positive increase of 0.3% to the DPU with this addition.

• Maintain Outperform, increased target price of S$2.17. We add to our model the new BTS development and increase our earlier revenue contribution assumptions from FY09 acquisitions to 60% up from 40% to reflect more precise timing of contribution. Our DPU estimates for FY09-11 increases by 0.3-2.1% Our DDMderived target price (discount 8.7%) increases marginally to S$2.17 from S$2.16. Maintain Outperform.

Resilient even in turbulent times

Story: Ascendas REIT (AREIT) released 2Q08 results that were within expectations. Gross revenues and NPI grew 21% yoy to S$97.3m and 72.6m respectively. Main contributors were from (i) positive rental reversions from expiring leases and (ii) additional rental income from various 3rd party completed acquisitions and development projects; HansaPoint@CBP which received TOP in Jan’08. Distributable income also increased 16% to $53.3m, translating to a DPU of 4.01cts.

Point: Moving forward, we expect outlook to turn challenging on the back of potential slowdown in Singapore’s economy, leading to softening demand for industrial space. While we expect some moderation in rents and occupancy levels moving forward, AREIT should still be able to ride out these turbulent times given that (i) long lease expiry portfolio of 5.5 years, of which 49% are Sale-Lease Back Buildings that were mostly signed on as long term leases, and (ii) prudent capital management that should limit the impact of rising interest rates on DPU. As such, we are adjusting our rental & occupancy rates (-5 to 10%) and interest rates assumptions (+50bps). Imputing the above changes, our DPU forecast for FY09F-FY11F are to 15.6 Scts (0%), 15.0 Scts (-10.5%)and 15.1 Scts (new estimate) respectively.

Relevance: AREIT currently offers at an attractive DPU yield of c.10% over FY09 – FY11, backed by quality properties located in major industrial hubs in Singapore. Maintain BUY, TP$2.10 based on parity to our RNAV estimate.

Ascendas-Reit Q2 net rises 14.8% to $53.3m on additional rental income

ASCENDAS Real Estate Investment Trust (A-Reit) yesterday reported net distributable income of $53.3 million for its second quarter ended Sept 30, 2008. This is 14.8 per cent higher than a year ago.

Fuelled mainly by additional rental income from completed acquisitions and development projects, gross revenue rose 21.3 per cent year-on-year to $97.3 million.

Distributable income per unit (DPU) was 4.01 cents, up 14.2 per cent from the same period last year. Based on the six months to Sept 30, annualised DPU stands at 15.8 cents. This translates to an annualised yield of 8.4 per cent based on the $1.87 closing price of units on Sept 30.

The ‘sustainable financial results’ were achieved amid a ‘turbulent global financial market and a slowing economy,’ said A-Reit manager Ascendas Funds Management (S) chief executive Tan Ser Ping.

First-half gross revenue, net distributable income and DPU all increased from a year earlier.

With credit concerns growing in the market, A-Reit said that it remains committed to prudent capital management.

For instance, it has entered into fixed-rate hedging for 76.7 per cent of its debt for the next 3.93 years at a weighted average cost of 3.25 per cent. It is also getting a $1 billion medium term note programme ready in November to diversify funding sources.

For A-Reit’s portfolio of 88 properties with a total book value of around $4.5 billion, the overall occupancy rate was 98 per cent at Sept 30.

As current average passing rents within the the portfolio remain lower than market spot rents, A-Reit expects to see positive rental reversion for most leases due for renewal in the rest of the financial year.

Barring any further deterioration in the external economic environment, the manager believes A-Reit is well-placed to deliver a DPU for the current financial year ‘in line with its recent performance’.

A-Reit’s unit price ended 16 cents lower at $1.51 yesterday.

Holding fort

• Two built-to-suit (BTS) projects completed and near 100% occupancy. Two of A-REIT’s BTS development projects have been completed and are nearly fully taken up. Indicative average gross rents suggest net yields of 9%, in line with our initial estimate.

• Changes in assumptions. As the global financial turmoil plays out, we expect slowing global and domestic economies to result in declining occupancy rates at AREIT’s multi-tenanted buildings. We have also cut our acquisition assumptions, and increase the cost of debt used in our model for FY10-11.

• Downgrading DPU forecasts; target price lowered to S$2.16 from S$2.60. Our FY09 DPU forecast remains unchanged while our FY10-11 forecasts have been lowered by 7-15%, reflecting our reduced earnings estimates. Following our adjustments, we have a new DDM-based target price of S$2.16 (discount 8.7%). This represents a total yield of 38.5% from a 9.2% forward yield and potential price upside of 29.3%. We remain convinced that with its spread-out debt maturity, optimal asset leverage, “A3“ credit rating, and strong sponsor in Ascendas, A-REIT will be able to access funds for refinancing. We continue to like its quality assets,
diversified tenant base and visible earnings. Maintain Outperform.