Ascendas REIT

Falling occupancy + positive reversions + completed development projects = flat NPI. Management admits that the outlook for the industrial market remains poor. It expects occupancy of its sale-and-leaseback buildings to hold at 100%, while that of its multi-tenanted buildings to decline. The decline is attributed to the downsizing of existing tenants, rather than complete relocations. AREIT estimates a retention rate of 70% for existing tenants for FY10 (80% in FY09), and assumes that space given up will not be taken by new tenants. This would result in a 5% fall in portfolio occupancy.

Positive reversions. Current average market rents for Business & Science Parks and the Hi-Tech segment have declined 15% (to S$3.50 psf/month) and 10% (to S$2.70 psf/month) from Dec 08, respectively. Despite a narrowing gap between passing rents and market rents, management believes that rentals for both segments could still benefit from positive reversions of 10-15%. Management rationalises that there remain incentives for most tenants to accept moderate increases in rents given a favourable rental gap and costs of relocation.

Development projects. AREIT completed three development projects in FY09: Pioneer Hub, 15 Changi North Way and 3 Changi Business Park Crescent. These would contribute to the current year’s topline. The multi-tenanted building and amenity centre in Changi Business Park, and Expeditors’ build-to-suit project at Airport Logistics Park will be completed in 2009.

Main concern is economic recovery, rather than supply. About 3.5m sq m of industrial space is expected to enter the market over the next three years This represents a 3% increase p.a. based on a stock of 35.3m sq m as at Mar 09. In mitigation, take-up for about half of the Business & Science Park segment has been pre-committed while more than half of the Hi-Tech and Light Industrial supply will be built by industrialists for their own use. Management’s main concern is economic conditions, which determines the demand for industrial space.

Future acquisitions. Although acquisitions are possible with property yields in excess of 8% and borrowing costs of 4%, management is more inclined to be conservative in view of unpredictable access to capital. For the same reason and other operational reasons, it sees the probability of M&As among industrial REITs as limited.

Maintain Neutral and target price of S$1.63. Guidance of flat net property income is more conservative than our own estimates which have assumed moderate growth of 4.7%. However, our assumption for average of debt for FY10 is higher than guidance (4%), at 4.3%. Overall, we believe our assumptions reflect a realistic performance for AREIT this year.

P/BV for AREIT has risen to 1.0x, a premium over the sector average of 0.6x. At this level, we believe AREIT is fully valued. Maintain Neutral and DDM-based target price of S$1.63 (discount 8.7%).

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