Reliable performer

• In line. A-REIT’s 1Q09 results were in line with consensus and our expectations. DPU grew 15.5% yoy to 3.89cts, forming 25% of our forecast of 15.4cts for FY09. Earnings in the quarter were powered by full contributions from Goldin Logistics Hub, HansaPoint@ CBP, SenKee Logistics Hub Phase 2, Acer Building, Sim Siang Choon Building, Science Hub & Rutherford, CGGVeritas Hub, and supported by the newly completed acquisitions of 8 Loyang Way 1 and 31 International Business Park. Revenue increased 19.6% yoy to S$92.5m.

• Strong organic growth. A-REIT’s portfolio in the quarter benefited from strong rental and occupancy growth. Renewal rates for its Business and Science Park segment and Hi-Tech segment grew 63.9% and 44.4% yoy respectively, while portfolio occupancy increased by 1.4% pts yoy to 98.6%.

• High pre-commitments for development projects. Pre-commitments for three development projects that would be completed between 2009 and 2012 were also high, at 80% for Changi LogisPark (North), 86.5% for Pioneer Hub, and 100% for Plaza 8 (Changi Business Park) Phase 1 and 75% for Phase 2.

• Maintain Outperform, albeit with lower target price of S$2.60 (from S$3.10). Our DDM-derived target price has been lowered to S$2.60 on the back of a higher discount rate of 9.6% (up from 6.7%), as we align our cost-of-equity assumptions with our house rates. Other estimates are unchanged as we remain positive on AREIT’s income stability from long leases (weighted average lease to expiry of 5.5 years), strong rental reversions for its Business and Science Park and Hi-Tech segments, built-in rental growth for its leaseback arrangements as well as upcoming contributions from A-REIT’s built-to-suit developments. Maintain Outperform.

1QFY09: Steady double-digit growth

A-REIT reported gross revenue of S$92.5m in 1QFY09, an increase of 19.6% yoy. Overall occupancy reach 98.6% at Jun 08, compared to 97.2% last year. It achieved strong growth of 63.9% and 44.4% for renewal rates for Business & Science Park and Hi-Tech Industrial properties respectively against preceding contract rates. It acquired 8 Loyang Way 1 for S$25m and 31 International Business Park for S$246.8m during the quarter and currently has a portfolio of 86 properties valued at S$4.5b. A-REIT announced DPU of 3.89 cents for 1QFY09, an increase of 15.4% yoy. This represents annualised yield of 7.4%.

Developing build-to-suit offices at suburban locations. A-REIT utilise development projects to enhance return for unitholders. It is developing a partial build-to-suit distribution facility at Plot 7 & 8 Changi LogisPark with Zuellig Pharma as the anchor tenant. The project is expected to be completed in 2QFY09. A partial build-to-suit ramp up high specification industrial facility at Pioneer Walk is expected to be completed in 2/3Q FY09. The development is already 86.5% pre-committed and key tenants are Tyco and Ameriod. A-REIT is developing two build-to-suit facilities and a multi-tenanted block with combined floor space of 803,600sf at Plot 8 Changi Business Park. Phase 1 comprising two build-to-suit facilities is fully committed to Citigroup and is expected to be ready in 4QFY09.

Maintain BUY. A-REIT provides FY08 distribution yield of 7.7%, an attractive spread of 4.3% over 10-year Singapore government bond yield at 3.4%. Our target price is S$3.00 based on two-stage dividend discount model.

A-Reit: Q1 distributable income of $52m

ASCENDAS Real Estate Investment Trust (A-Reit) yesterday reported net distributable income of $51.8 million for the first quarter ended June 30, 2008 – 15.9 per cent higher than for the corresponding period last year.

This follows a 19.6 per cent growth in gross revenue from the year-ago period to $92.5 million. The increase was due mainly to additional rental income from completed acquisitions and a development project.

The distribution per unit (DPU) for the quarter is 3.89 cents, up 15.4 per cent from the year-ago period. The DPU, to be paid out on Aug 27, represents an annualised yield of 7 per cent based on the closing price of $2.21 per A-Reit unit on June 30.

A-Reit had 86 properties with a total book value of around $4.5 billion as at June 30. Acquisitions in Q1 comprised 8 Loyang Way 1 for $25 million and 31 International Business Park for $246.8 million.

The portfolio’s overall occupancy rate stood at 98.6 per cent, against 97.2 per cent a year ago. For the business and science park and hi-tech industrial properties, renewal rates rose 63.9 per cent and 44.4 per cent respectively versus preceding contract rates.

This is due to ‘the continued healthy demand for quality suburban industrial and business space as well as the active leasing and investment activities conducted by the manager and its property management team’, said A-Reit manager Ascendas Funds Management (S)’s CEO and executive director Tan Ser Ping.

A-Reit’s weighted average borrowing cost for the portfolio was 3.16 per cent. To diversify funding sources, it recently took on a three-year committed revolving credit facility for $200 million, and is also incorporating a medium-term notes issuance facility.

Citing a CB Richard Ellis study, A-Reit said yesterday that rents and occupancy rates for hi-tech and business park space could continue to increase, but at a slower pace.

A-Reit also mentioned that it is difficult to gauge how much the Asian economy could be hit by the possible US recession and global inflationary pressure.

‘Despite the cautious outlook for the economy and barring any unforeseen events, the manager expects to be able to deliver, for the coming year, a DPU that is in line with its recent performance,’ A-Reit’s release stated.

The release also said that the A-Reit manager remains committed to pursuing quality and sustainable yield accretive investments, and expects results from asset management and investment strategies to underpin steady performance.

A-Reit’s units closed trading yesterday at $2.10, down one cent.

Forum takeaways
From the Nomura Asia Equity Forum: A-REIT confirmed it sees significant rental reversionary potential in its industrial portfolio, specifically business/science park buildings. While appreciative of the risks of a slowing economy, occupancy remains well over 90%, with the three-year lease structure underpinning cashflow surety.

Anchor themes
Higher warehouse supply, at 5.3mn sf in 2008F and 2.3mn sf in 2009F (versus the five-year average of 1.7mn sf) at a time of slowing economic activity (2008F GDP growth of 3%) is likely to adversely impact rental expectations and valuations.

Strong rental reversions are likely to underpin REIT cashflows. That said, increased concerns over the ability to refinance debt have seen REITs trade below book. In such an environment, investors need to focus on underlying asset values, with REITs with well-located assets beneficiaries of rising expectations of M&A activity.

Industrial demand still firm