Turning to development projects?

Comment on Results

• Gross revenue and net income available for distribution grew 15% yo-y to S$80.2m and $46.5m respectively, due to additional rental income from completed acquisitions. DPU increased 11% to 3.51 cents.

• As at 30 Sep 07, A-REIT has an aggregate leverage of 38.4%, with an average 91% of interest exposure fixed at a weighted average cost of 3.43% for a term of 4.2 years.

• A-REIT announced that it has committed to develop projects (i.e. Plot 8 Changi Business Park and an industrial facility at Pioneer Walk) at a total cost of S$277m.

Recommendation

• As the environment for third-party acquisitions gets increasingly more difficult in Singapore, we are positive on the move by A-REIT to undertake more development projects, which provide better yields.

• We have reduced our DPU forecast for FY08 and FY09 by 4% and 6% respectively, given that A-REIT has not made any announcements on income-yielding acquisitions in 1HFY08. As we have already assumed an acquisition pipeline of S$400m pa till 2010 in our valuation, the net impact of the inclusion of the development projects (phased over FY09 to FY11) and lower DPU is a slight increase of target price to S$3.18 (based on DCF valuation).

Market continues to expect strong growth

DPU growth slowed on fewer acquisitions. Ascendas REIT (AREIT) reported an unexciting 2Q08 results with revenue rising 15% YoY and 4% QoQ to S$80.2m. Distribution per unit (DPU) came in at 3.51 cents +11% YoY and +4% QoQ. This is slightly better than our forecast of 3.4 cents, and we are marginally adjusting our FY08F from 13.4 cents to 13.9 cents. We retain our FY09 estimate of 14.5 cents. The growth driver in the last quarter was from lease renewal and not from acquisition. This is clearly seen from the flat sequential growth of AREIT’s investment property portfolio. Its NPI margin remains at 75%, similar to the last 2 quarters, reflecting the difficulty in achieving greater efficiency for industrial assets.

Market getting very crowded. The industrial market space is getting very crowded. There are presently four listed industrial REITs, with JTC REIT expected to come into the market over the next 12-18 months. More importantly, there is very little to differentiate their growth strategies. This means that growth will get more difficult and less accretive. AREIT’s situation is compounded by market continuing to price in strong growth.

Taking greater risks to deliver growth. One way to avoid the price war with other REITs is to develop its own properties. Presently, AREIT has projects (both started and yet to start) worth about S$338m. This is about the maximum that it can take based on present REIT rules and its asset size of about S$3.3bn. Assuming that it takes about 1.5 years to complete these projects, this means that AREIT’s annual capacity for new development project is at best S$200-300m. We believe this is below market growth expectation and perhaps explains the share price weakness. Another possibility open to AREIT is via M&A with other smaller players (e.g. Cambridge or MacarthurCook). Whichever route AREIT takes, it means that the risk profile is likely to rise.

Maintain HOLD. The key worry for AREIT is its high price-to-book ratio of about 1.65x (down from 2.1x since our last report in July). With the industrial REIT space getting very crowded, we see a high risk of market being disappointed . Alternatively, AREIT should start to moderate expectations. Finally, in terms of valuation, we maintain our fair value of S$2.63 and HOLD rating.

Growing through acquisitions and office spillover

• In line with expectations. DPU grew 11% yoy to 3.5cts in 2QFY08, driven by higher rental income from completed acquisitions, improved overall occupancy and rental reversions. The YTD distribution payout represents 49% of our forecast of 14.2 cts, and 51% of consensus’ forecast of 13.6 cts for the full year.

• Business and Science Park segment boosts portfolio occupancy. Contribution from new acquisitions, increased occupancy rates and rents drove up 2Q08 gross revenue 14.8% yoy to S$80.2m. Overall portfolio occupancy moved 1.1%-pt to 98.3% in the period, primarily driven by occupancy levels in the Business and Science Park segment. This surged 9.8%-pt to 97.2% in 2Q08, up from 87.4% in 1Q08. Strong spillover demand from office users saw 2Q08 rents for the same segment rise 33% qoq to an average of S$40 psm per month, up from S$30 psm per month in 1Q08. With the office supply crunch unlikely to be significantly alleviated in the next two years, the Business and Science Park segment is likely to still lead strong rental reversions going forward.

• Expanding through development projects. A-Reit announced two development projects amounting to a total development cost of S$277 mil at Changi Business Park (CBP) and Pioneer Walk. The development at CBP comprises three business park buildings with a combined gross floor area (GFA) of 74,660 sqm – two built-tosuit (BTS) facilities and a multi-tenanted block with an amenity podium. The development project would be completed in phases through CY09 and CY10. The second development at Pioneer Walk comprises two blocks of ramp-up industrial facilities with a combined lettable area of 80,609 sqm. About 35% of the development has been pre-committed. Completion is expected by 2H08.

• Maintain Outperform. Our DPU forecasts and DDM-derived target price of S$2.90 remain unchanged, based on a cost of equity of 6.2%. For FY08 ytd, A-Reit has announced a total of S$359m of acquisitions and development projects while another S$61m worth of development projects await completion. We believe that AReit remains on target to achieve an asset size of S$5bn by CY10 via its development projects and a S$500m acquisition pipeline from sponsor Ascendas Land. The recent share price weakness and forward yields of up to 6.1% makes AReit
an attractive buy now.

A-Reit’s Q2 income for distribution up 15% at $46.4m

ASCENDAS Real Estate Investment Trust (A-Reit) said yesterday its second-quarter distributable income rose 15 per cent to $46.4 million, from $40.5 million a year earlier, as demand for the trust’s business space grew.

The better performance lifted A-Reit’s distribution per unit (DPU) to 3.51 cents, up 11 per cent from 3.16 cents paid for the previous corresponding period.

Net property income for Q2 ended Sept 30, 2007 increased 16 per cent to $60.1 million, from $51.9 million a year earlier.

A-Reit said its better performance was due to higher revenue resulting from higher occupancy and rents.

The occupancy rate for A-Reit’s portfolio reached 98.3 per cent in Q2. And rents at business and science parks and hi-tech industrial properties rose 32 per cent and 15 per cent respectively from Q1.

‘This can be attributed to the spillover effect from the tight CBD office market and our active asset management initiatives,’ said Tan Ser Ping, chief executive of the Reit’s manager.

For the half-year ended Sept 30, A-Reit’s distributable income rose 14 per cent to $91.1 million, while DPU rose 10 per cent to 6.88 cents.

Going forward, A-Reit said that with the economy strong, demand for business and industrial space, especially at business and science parks and hi-tech industrial properties, is likely to remain healthy.

The trust said: ‘A-Reit expects to be able to deliver a return for the second half of the current financial year that is in line with its performance in the first half of the financial year.’

A-Reit’s shares closed three cents lower at $2.39 yesterday. The stock price has fallen 10.5 per cent since the start of the year, compared with a 25.5 per cent climb in the Straits Times Index.