Industrial properties continue to remain resilient

2QFY13 DPU in line with expectations. Ascendas REIT (AREIT) reported 2QFY13 DPU of 3.53S¢ (+0.4% YoY), equivalent to 25.2% of our FY13 DPU estimate. Revenue and net property income came in at S$143.3m and S$102.9m respectively. The rise in NPI by 13.6% YoY was mainly due to additional contribution of newly acquired properties since September 2011. Going forward, we expect AREIT to register continual growth in DPU, mainly from 1) additional contribution from the new properties acquired and 2) positive rental reversion contributed by low rates due for renewal in the coming quarters. Although the global economical climate continues to remain positive for the REITs sector as a whole, we believe AREIT which is trading at 1.33x P/B and a FY13 forecasted dividend yield of 5.6%, is fairly priced at the moment. In the face of these valuations, we downgrade our call on AREIT to NEUTRAL with a revised DDM based (COE: 7.8%; TGR: 2.0%) TP of S$2.67.

Consolidation of portfolio in the near term. As highlighted by management, given a relatively tight industrial property market in Singapore at the moment, acquisition of good quality industrial properties is becoming more challenging. Going forward, apart from the acquisition of a business park in Jinqiao, Shanghai and the two development projects (Unilever Four Acres and Nexus) in Singapore, AREIT aims to consolidate its portfolio and grow through asset enhancements. Properties in the portfolio to undergo AEIs in the subsequent quarters include 9 Changi South Street 3, Xilin Districentre Building D, Tech Block II, 1 Changi Business Park Ave 1 and 31 Ubi Road 1.

Investors gaining more interest in industrial space. Since the beginning of the year, as the government of Singapore implemented various measures to curb upward pressure on residential properties, interests in industrial properties have gained significantly. Since then, cap rates of this group of properties have been compressed from 6.5-7.3% in 1Q12 to the current 6.0-6.5%. Going forward, we expect industrial properties to remain stable despite a slowdown in Singapore's economy.

Fairly valued at this moment. Going forward, although we believe REITs as a sector would continue to benefit on the back of high liquidity, prolonged low interest rate environment and a strong Singapore currency; we believe AREIT is currently fair valued at the moment as it trades at 1.33x P/B with a forecasted FY13 dividend yield of 5.6%. At this juncture, we downgrade our call on AREIT to NEUTRAL with a revised TP of S$2.67.

Commanding a premium for safety

• 1HFYMar13 results in line; forms 51% of our full year forecast

• New asset enhancement initiatives; further commitment of S$235m to bring gearing to 35%

• Premium valuations, HOLD, TP S$2.24

Highlights

2Q13 results in line with our expectations. Ascendas REIT (AREIT) reported 18% and 14% y-o-y growth in topline and net property income to S$143.3m and S$102.9m respectively. The strong performance was due to additional rental income from its recently completed acquisitions and development projects, supported by positive underlying organic growth (c+5% yoy). Distributable income came in at S$79.1m (+16% y-o-y), translating to a DPU of 3.53 Scts (+6% y-o-y). Sequential performance was relatively stable. At half-time, A-REIT delivered a DPU of 7.06 Scts, forming 51% of our full year forecast.

Our View

Portfolio continues to deliver steadily. Operationally, average occupancy levels continue to remain stable at 96.6% while rental reversions remained healthy at 12.8% (vs 11.6% in 1Q13) compared to previously contracted rates. We expect A-REIT’s operational performance in the coming quarters to remain steady, cushioned by expiring rental rates that are 18-52% below current market levels.

New asset enhancements unveiled, a further S$235.2m to be funded. A-REIT unveiled a further 2 asset enhancement works at Ultro Building (retrofitting and upgrading premises as a Business Park) and Aztech Building (Conversion to a high tech industrial), costing S$19m. These 2 AEI works are expected to deliver strong returns given current low passing rents that are c40-100% below market levels. While earnings impact is unlikely to be significant, this together with its other investments totaling S$450m (S$235.2m yet to be funded), are expected to deliver a steady growth profile of 2-3% p.a. as these projects progressively complete over 2HFY13-FY14.

Collaterized securities are now “in the money”. A-REIT had issued S$300m worth of collaterized securities in 2010, with a conversion price of cS$2.27 and is currently in the money. We understand that the manager has not received any conversion notice and we have not factored this in our estimates. However, we estimate a c5% dilution to our forecasts (cFY14F yield will decline to 5.4%) if 100% conversion is assumed.

Recommendation

HOLD Call maintained, TP S$2.24. A-REIT has been a prime beneficiary for yield-hungry capital markets in recent times. In our view, valuations appear rich at prospective FY13-14F yields of 5.6-5.7% and P/BV ratio of1.3x. Implied cap rate of 5.0% in our view, appears to be pricing in too much growth than we believe it can achieve given its sizeable and mature portfolio. HOLD call maintained, TP S$2.24 based on DCF.

Steady but limited upside

The fervent chase for yields has compressed AREIT’s yields to 5.6%, way below its long-term average and physical property yields. With elevated capital values inhibiting attractive acquisitions, we see a lack of compelling fundamental catalysts for further outperformance.

2Q13/1H13 DPU was broadly in line with consensus and our estimates, at 26/51% of our FY3/13 forecast. We tweak our DPU forecasts for slower take-ups on AEIs and developments on completion. But our DDM target price is higher due to a cut in disc. rate from 8.1% to 6.7%. Maintain Neutral on valuation grounds.

Stable quarter

Despite dilution from a 7.5% expansion of units after its placement, AREIT’s 2Q DPU rose 4.4% yoy due to contributions from development projects and acquisitions. This is a commendable showing given newsflow on a slowing industrial and manufacturing environment. Same-store portfolio occupancy inched up to 96.6% from 96.4%, thanks to pick-ups in light industrial and logistics as business parks and hi-tech industrial saw marginal qoq slippage. Rental reversions remained strong at 9.5-13.3% and should remain positive, with market rents 16-35% above rental due for renewal.

More renewals in FY14-5

With only 5.8% due for renewal for the rest of FY13, lease expiries will be more substantial in FY14 (25.5%) and FY15 (21.9%). Of these, 70-73% will come from single-tenanted buildings. While this could provide rental upside due to the potential conversion of single-tenanted buildings to multi-tenanted ones, risks could come from downtime due to slower leasing of returned space on lease expiry.

Maintain Neutral

AREIT has been a choice hiding ground in the current chase for yields. But there are no compelling fundamental catalysts for further outperformance as elevated capital values hinder attractive acquisitions and there could be downtime from slower leasing when leases expire. Forward yields are among the highest for large-cap S-REITs but way below industrial property yields and the long-term average.

Industrial Bulwark: Unfaltering Momentum

2Q-1H FY3/13 results inline. 1HFY3/13 revenue at SGD285m, was 55% of ours and 52% of consensus estimate. 2QFY3/13 revenue at SGD143m, was 28% of ours and 26% of consensus estimate. 1HFY3/13 DPU at 7.06 SG-cts (+7.3% YoY) was 54% of ours and 50% of consensus estimates. 2QFY3/13 DPU at 3.53 SG-cts (flat QoQ, +4.4% YoY) was 27% of ours and 25% of consensus estimates. Aggregate leverage inched down to 32.5% from 32.7% last quarter. After funding of committed capital expenditure, aggregate leverage is expected to be 34.8%. All-in-financing costs for 2QFY3/13 averaged 3.15% with an average term of debt of 4.2 years.

Stable portfolio continues to deliver. Occupancy rate (same-store basis) for th e portfolio and multi-tenanted buildings (MTB) improved to 96.6% and 93.4% respectively from 96.4% and 92.8% a quarter ago. 2QFY3/13 weighted average lease to expiry was 3.9 years, with only 5.8% of income due for renewal for the remaining FY3/13. Positive rental reversion on renewal range between 9.5%-13.3% throughout all segments of the portfolio boosting NPI margin (71.8%) and yields (6.6%)

New Asset Enhancement Initiatives. The former Aztech Building and Ultro Building will be undergoing refurbishment works till 2Q13 and 4Q13 respectively. We expect rental upside of 117% for Aztech (SGD 2.73 psf/mth from SGD1.25 psf/mth) and 56% for Ultro (SGD3.90 psf/mth from SGD2.50 psf/mth on completion. We raise our FY3/13-3/15 DPU by 0.9%-3% in view of the enhancements and better-than expected rental reversions from renewals.

Yields can be compressed by another 40bps. We continue to like AREIT for its stable DPU yield, healthy lease expiry (not more than 25.5% of income expiring per annum) and debt maturity profile (not more than SGD400m maturing per annum). In addition, only 19.8% of A-REIT’s NLA is used for conventional manufacturing, which is a plus given that the per annum net demand for factory space has been modest compared to warehouses and business parks. From our estimates, the implied cap rate for A-REIT is 5.4%. If we take this cap rate as the floor for FY3/14 DPU yield, we believe that yields can be further compressed by another 40bps from our forecasted FY3/14 DPU of 5.8%. Reiterate BUY with a DDM-derived TP of SGD2.65.

STRONG BUT NOT COMPELLING

• Another divestment of property
  
• Expecting stable performance
  
• Valuation not very compelling
  

Divestment of Block 5006 Techplace II

Ascendas REIT (A-REIT) has been actively involved in capital recycling activities YTD in a bid to optimize its portfolio yield. Following the proposed sale of 6 Pioneer Walk in Jun, we note that A-REIT had on 24 Aug announced the divestment of another property, Block 5006 Techplace II, for S$38m. According to management, the proforma impact on A-REIT’s FY12 NPI and DPU would be approximately S$1.46m and 0.01 S cents respectively, assuming the divestment was completed on 1 Apr 2011. However, based on our estimates, the proceeds are likely to relieve its interest burden and may potentially add 0.01 S cents to its FY14F DPU.

Maintain caution on business/science park segment

For the rest of FY13, we believe A-REIT will deliver a stable set of performance, supported by full-year contributions from its past investments. We are only cautious on its significant exposure (34% by valuation) to the business/science park segment. According to CBRE’s latest Real Estate Research Report, the occupancy rate for this segment had declined for three consecutive quarters to reach 91.7% in 2Q12, while its rents had declined four straight quarters to hit S$3.70 psf/month. For the rest of 2012, CBRE projects the downward pressure on occupancy and rents to continue, with a 6% correction in rents expected for 2H12. Hence, we are maintaining caution on AREIT’s business/science park space. On a positive note, we understand that the current market rents are 16-35% higher than the average passing rents for the areas due for renewal. As such, we believe A-REIT will still put in a stable set of results.

Maintain HOLD

We are tweaking our estimates for FY13-14 to reflect the divestment. Our fair value is now revised to S$2.28 from S$2.27 previously.However, at current price level, we believe A-REIT’s P/B ratio is not very compelling at 1.25x. Its FY13F DPU yield of 5.9% is also lower than the industrial REIT subsector average of 7.2%. Maintain HOLD.