Ascendas REIT - Large scale is the winning formula

Started in 2002 with just eight properties, A-REIT has successfully enlarged its property portfolio across five sub-sectors: Business & Science Parks, High-Tech industrial, Light Industrial, Logistics & Distribution and Warehouse Retail facilities. 47% of its portfolio has built-in rental escalation clauses. These properties enjoy above-sector average occupancy rate of 97.1%.

Acquisitions have underpinned A-REIT’s dividend growth. Its development capability provides an additional boost. Completion of development projects over the next 12 months will continue to contribute positively to income. Growth could also come from acquisitions of its sponsor’s Singapore assets (S$1.1b) and ample industrial properties in Singapore.

A-REIT has completed two rounds of cash calls this calendar year, raising a total of about S$700m. The proceeds have been deployed towards reducing debt and funding its existing developments. Its gearing has been reduced to 29.3% as of Aug-09. This clears any possible overhang on refinancing issues and frees up its capital for future growth.

REIT’s strong sponsor, balance sheet strength, resilient portfolio and growth potential underscore its P/B ratio of 1.05x. We find its share price underperformance hard to justify. We initiate with a Buy.

Sponsored Links

Ascendas REIT - Rasing funds through private placement

Embark on equity fund raising. Ascendas REIT (A-REIT) has launched a private placement of 185m new units at between S$1.63 to S$1.70 per unit, or 3.8% to 7.8% discount to volume-weighted average price on 7 Aug 09. The equity fund raising is expected to raise gross proceeds of S$301.6m, which will be used in the following manner:

S$175.4m will be used to fund the development of the hi-tech built-to-suit facility for SingTel

S$120.6m will be used to fund potential acquisition of income-producing properties and built-to-suit development opportunities in the pipeline the balance to be used for general corporate and working capital purposes

The book building process starts today and is expected to be completed by 12 Aug 09. Gearing is expected to be reduced from 35.7% as at 9 Aug 09 to 29.3% after the completion of the private placement. There will be an advanced distribution based on distributable income from 1 Jul 09 to the day before new units are issued.

Improved financial flexibility. A-REIT will redeem Commercial Mortgage Backed Securities (CMBS) of €144.0m (about S$300m) to be completed by 19 Aug 09. The CMBS is secured by the cash flows and mortgage on 17 properties. 14 out of the 17 properties worth about S$944m will be released from the security. Financial flexibility is enhanced with A-REIT having 30 unencumbered properties worth about S$1,868.5m.

Ascendas REIT - Private placement to raise S$301.6m

Seeking S$301.6m through private placement. The manager of AREIT is proposing the issuance of 185m units to institutional and other investors at S$1.63-1.70 apiece to raise gross proceeds of at least S$301.6m. The price range represents a discount of 3.8-7.8% to the volume weighted average price of S$1.7674 per unit for full-day trades on 7 Aug 09. The placement is being managed and underwritten by Cazenove and DBS. Assuming approval from the SGX, the new units are expected to trade from 20 Aug 09.

Proceeds to fund SingTel BTS and potential acquisitions/BTS. Proceeds from the private placement will be used to: 1) fund the development of a build-to-suit (BTS) facility for SingTel (about S$175.4m; 58% of gross proceeds) announced in May this year; and 2) fund potential acquisitions and/or build-to-suit opportunities (S$120.6m; 40% of gross proceeds); and 3) general corporate and working-capital purposes, and expenses incurred for the placement.
Asset leverage pared below 30%. Assuming the placement is fully taken up and net proceeds are fully utilised to cut debt, asset leverage will decline to 29.3% from 35.7%. This should give AREIT more financial flexibility to acquire or develop build-to-suit properties when opportunities arise.

Share base diluted by 11%; DPU diluted by 10%. Upon completion and assuming no other changes, AREIT’s share base of 1,685m units will expand by 11%, and DPU for FY10 will fall 10%. Dilution for FY11-12 is less severe at 3-4% as contributions from SingTel BTS and other development projects kick in.

Acquisitions look probable, once more. With an expanded share base, dividend yield at 7% makes acquisitions more probable, as physical property yields of industrial assets remain high at 7-8% and SIBOR remains low at under 1%.

SingTel BTS in a nutshell. AREIT is developing a 9-storey hi-tech industrial building at Kim Chuan Road for SingTel. The total estimated development cost is S$175.4m, which includes construction and land costs, and the installation of mechanical and electrical equipment. The completed building will be leased to SingTel for an initial 20 years with annual rental escalations and an option to renew for a further 10 years on expiry. Completion of the building is expected in Apr 2010. Management expects an average net yield of 11% from the facility in the 20-year lease period.
Increased contributions and less severe expense assumptions. We account for dilution and add in potential contributions from SingTel BTS from FY2011. We also assume that S$120.6m of the proceeds will be used to acquire properties. Separately, we increase our net property income margin assumptions to 75% from 73% in view of strong cost-control initiatives in the last few quarters; and decrease our cost-of-debt assumptions to 4.3% from 4.7% as we believe lower asset leverage after the placement and continued low interest rates will result in a less demanding cost of debt for AREIT. Following our changes, our DPU estimates fall 8% for FY10 but rise 3-5% for FY11-12. Our DDM-based target price rises to S$1.74 from S$1.70 (discount rate of 8.4%).

Maintain Neutral with higher target price of S$1.74 (from S$1.70). Although the equity issuance did not come totally as a surprise, we were disappointed that no firm acquisitions or development works were announced in tandem.

As one of the market leaders in the SREIT space, we expect AREIT’s speedy move to capture ready equity to be followed by a second round of equity fund-raising by REITs to further strengthen their balance sheets in preparation for a sharp devaluation of asset values at year-end and uncertainties in capital markets.

AREIT is trading above its book value at 1.1x and offers a 7% dividend yield. While yields still look relatively attractive, we believe there are cheaper alternatives among the REITs while the outlook for the industrial sector has yet to turn sunny. Maintain Neutral.

Ascendas REIT: Mild dilution; sturdier balance sheet

Private placement to raise S$302m. A-REIT has announced a private placement for 185m new units at an issue price between S$1.63 and S$1.70 per unit to raise at least S$301.6m. The issue price range represents a 4% to 8% discount to VWAP on 7 Aug 09. Price target of S$1.72 remains, but stock downgraded to NEUTRAL (from BUY) given recent price rise. Our DDM-backed fair value is based on a cost-of-equity of 8.7% and 1.5% terminal growth rate.

58% of proceeds to fund SingTel BTS. A-REIT plans to utilize S$175.4m of the gross proceeds to fund the development of the hi-tech built-to-suit facility for SingTel. In May 09, A-REIT secured from SingTel the purchase of a site at Kim Chuan Road for the development of a 9-storey Built-To- Suit (BTS) hi-tech industrial building. SingTel will lease the entire property for an initial tenure of 20 years with annual rental escalation and an option to renew for another 10 years. The project is slated for completion in 1QCY10. Total development cost (incl. land cost, construction cost, electrical and mechanical enhancements) is S$175.4m, implying S$496/sqft for the 353,727 sqft GFA site. The remaining S$120.6m or 40% will be used partly or wholly fund potential acquisition of income-producing properties and built-to-suit development opportunities in the pipeline.

Mild DPU dilution but sturdier balance sheet with leverage below 30%. Pending the deployment of the net proceeds (totaling S$296m) to repay debt facilities, A-REIT’s gearing is expected to decline from S$1.64b to S$1.35b, resulting in the decline in leverage to 29.3% from 35.7%. We estimate annual interest expense savings of S$11m (~3.75% interest cost) on the back of a 10.9% increase in new units. The overall ramification from the placement works out to be mildly DPU dilutive of 0.3% to 5.6% between FY10-13. Stock currently trades at FY10 yields of 7.5%. We advise investors not to accumulate at current levels.

Ascendas REIT - Raising funds through private placement

Embark on equity fund raising. Ascendas REIT (A-REIT) has launched a private placement of 185m new units at S$1.63 to S$1.70 per unit, or 3.8% to 7.8% discount to the volume-weighted average price on 7 Aug 09. This is the second private placement this year. The equity fund raising exercise is expected to raise gross proceeds of S$301.6m, which will be used in the following manner:

• S$175.4m will be used to fund the development of the hi-tech built-to-suit facility for Singapore Telecommunications (SingTel),
• S$120.6m will be used to fund potential acquisition of income-producing properties and built-to-suit development opportunities in the pipeline, and
• Balance to be used for general corporate and working capital purposes.

The book building process started yesterday and is expected to be completed by 12 Aug 09. Gearing will be reduced from 35.7% to 29.3% after completion of the private placement. There will be an advanced distribution based on distributable income from 1 Jul 09 to the day before the new units are issued.

Improved financial flexibility. A-REIT will redeem Commercial Mortgage Backed Securities (CMBS) of €144.0m (about S$300m) to be completed by 19 Aug 09. The CMBS is secured by the cash flows and mortgages on 17 properties. Fourteen of the 17 properties worth about S$944m will be released from the security. Financial flexibility is enhanced with A-REIT having 30 unencumbered properties worth S$1,868.5m.

Developing built-to-suit facility for SingTel. A-REIT will develop a ninestorey hi-tech industrial building with a gross floor area of 353,600sf at Kim Chuan Road at a cost of S$175.4m. SingTel will lease the completed building for an initial tenure of 20 years with annual rental escalation and an option to renew for another 10 years on expiry. The building is expected to be completed and operational in 2Q10.

We have cut DPU forecast for FY11 by 6.7% to 11.2 cents. We have also factored in contributions from the built-to-suit facility for SingTel starting 1QFY11.

Downgrade to HOLD. Share price has gained 29.4% ytd. Upside is limited after factoring in dilution from the private placement. Our fair price of S$1.81 is based on the dividend discount model (required rate of return: 7.7%; growth: 2.5%).

Ascendas REIT - Resilience from long-term leases

Ascendas REIT (A-REIT) reported distributable income of S$61.0m (+17.9% yoy) and DPU of 3.62 cents (-6.9% yoy), same as our forecast. Sustaining positive rental reversion. A-REIT benefitted from positive rental reversion for multi-tenanted buildings (MTB) although at a slower pace, particularly for business & science parks and hi-tech industrial properties. Leases for single-tenanted buildings (STB) also generated growth through built-in step-up increases in rentals.

Overall portfolio occupancy remained resilient at 97.1%. There was slight erosion for occupancy at MTB from 95.3% at Mar 09 to 94.0% at Jun 09. However, occupancy for STB was almost unchanged at 97.1%. The weighted average lease to expiry for the portfolio was five years, which provided resilience.

Growth from built-to-suit development projects. A-REIT will develop a nine-storey hi-tech industrial building with a gross floor area of 353,600sf at Kim Chuan Road at a cost of S$175.4m. Singapore Telecommunications will lease the completed building for an initial tenure of 20 years with annual rental escalation and an option to renew for another 10 years on expiry. The building is expected to be completed and operational in 2010.

Minimal refinancing risk. A-REIT has secured S$200m three-year unsecured revolving credit facility to refinance Commercial Mortgage-Backed Securities (CMBS) of S$300m due in Aug 09. It has incorporated a S$1b medium term note programme. The first issuance of S$150m of two-year note was completed in May 09 and was utilised to reduce reliance on shortterm revolving credit facilities. A second issuance of S$125m is in the process of finalisation. The next major refinancing is a term loan of S$300m due in Mar 10.

We maintain our earnings forecast as 1QFY10 results were in line with our expectations. Maintain BUY. Our target price is S$1.93 based on a dividend discount model (required rate of return: 7.7%; growth: 2.5%).

Ascendas REIT: A Good Start

1QFY10 results above expectations. A-REIT reported a 6.9% YoY fall (+12.1% QoQ) in 1Q10 DPU to 3.62¢, above ours and consensus estimates. Annualised DPU came in at 14.48¢, 8.8% above our FY10 forecast of 13.3¢ (10.5% above the Street’s 13.1¢ estimates). Revenue was up 10.7% due to positive rental reversion and contributions from new acquired properties and development projects. A-REIT will trade ex-1Q10 distribution on 29 Jul 2009. We have raised our DDM-backed target price to S$1.72 (S$1.57 previously) to reflect a lower cost-of-equity assumption of 9% (9.7% previously). Maintain BUY.

Earnings resilience expected despite increasing tenants in arrears. Our recent channel checks on A-REIT suggest more industrial tenants in arrears in rental payments given the recessionary economic conditions. Management confirmed that about 1% of its NLA (~ S$3m annual revenue) is highly vulnerable to full-fledged default. In any case, A-REIT has already received S$2.1m in security deposits from these tenants. On a portfolio basis, A-REIT is backed by 6 months of security deposits, mitigating downside DPU risks. While earnings impact may be muted, we believe the loss of a single major tenant may be fairly damaging to the perception of A-REIT’s stable of assets.

Occupancy at healthy levels. Reflecting the slowdown in global demand, occupancy rate for A-REIT’s multi-tenanted properties declined marginally to 94.0% from 95.3%. However, overall portfolio occupancy remains high at 97.1% (97.8% in 4QFY09) due to the contribution from single tenanted buildings with long term leases. We expect positive rental reversion, albeit at a slower pace, for the Business & Science Parks and Hi-Tech Industrial properties as these properties are 30% under-rented.

Trading at attractive yields. At current prices, A-REIT offers investors a stable dividend yield of 8.5% for FY10 and 8.7% for FY11 – with dividends well supported by the long-term leases on single-tenanted buildings which accounts for 50% of revenue. We recommend buy on dips as stock has rallied 48% since Mar 09.

Ascendas REIT - Occupancy vs Valuations

Overall occupancy in the AREIT portfolio as at end March 2009 held at 97.8% (vs 97.2% in December 2008), with occupancy in the group’s multi-tenanted buildings (which comprise circa 52% of the portfolio) marginally improving over the quarter to 95.3% (versus 94.0% in December 2008). While AREIT indicated that the industrial market was in the early stages of a cyclical correction, risks remain for an increase in vacancy by a couple of percentage points in its multi-tenanted buildings. Management indicated that every 5% decline in multi-tenanted occupancy would see net property income fall by 3.5%, cutting DPU by S¢0.62. Management suggested that the risks to DPU as a consequence of lower occupancy could potentially be mitigated by 1) positive reversions in certain industrial sectors, eg, passing rents in their light industrial buildings were S$1.17/psf pm, vs market rents of S$1.71/psf pm. 2) While demand remains slow there is evidence of some new leasing demand. 3) A full year contribution of income from development properties completed in the last fiscal year. From our perspective, rising new supply poses an over-riding concern given the weaker outlook for demand. Net demand in the industrial factory space contracted 315,382sf in 1Q09, down from net take-up of 1.5mn sf in 4Q08. Future supply is high, with 18.2-20.2mn sf expected to be completed in 2009 and 11.3-16.8mn sf to be competed in 2010. This is compared to the ten-year average supply of 6.5mn sf and the 15-year average of 9.1mn sf.

Following a modest gross revaluation deficit (3.2% of asset valuations, with the net revaluation a 2.5% decline on the portfolio valued at S$4.4bn), management conceded that downside risks remained to underlying asset values, though it suggested the risks were modest. Management said that the portfolio’s capitalisation rates were circa 7.0%. At NAEF management suggested that a 25bps increase in cap rates would result in a S$0.09/unit fall in NAV, while a 100bps rise in cap rates would result in a S$0.33/unit fall in NAV.

Ascendas REIT’s DPU yield has averaged 6.3% since 2004 (equivalent to 345bp over the average risk free rate). Today AREIT’s FY10F yield is circa 8.0%, producing a 530bp spread over the current risk free rate. While seemingly attractive, the increased spread reflects lower growth expectations, in our view: during 2005-08, AREIT saw average annual compound growth in its DPU of 13.9%, versus our expectations for a fall of 21.1% over FY08-11F, in part due to the rights issue. We believe our asset-based approach to valuing AREIT incorporates the cashflow risks of both negative reversions and higher vacancy risk, and believe such “spread analysis” is overly simplistic. We retain our REDUCE rating with a price target of S$1.24/unit.

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%).

Ascendas REIT - Demand concerns remain

Manufacturing output contracted 26.1% y-y in 1Q09, with double-digit declines in industrial production in most sectors (ex biomedical), suggesting that industrial landlords will be faced with declining rents, and, ultimately, downward pressure on asset prices. Net demand in the industrial factory space contracted 315,382sf in 1Q09, down from net take-up of 1.5msf in 4Q09. According to the Ministry of Trade and Industry, Singapore lost 19,900 jobs in the manufacturing sector in 1Q09. While recent data from the URA suggest that industrial factory supply is being marginally delayed, future supply is nevertheless high with 18.2-20.2mn sf expected to be completed in 2009 and 11.3- 16.8mn sf to be competed in 2010. This is compared to the ten-year average supply of 6.5mn sf and 15-year average of 9.1mn sf, with the vacancy on our numbers likely to broach 10%, adversely affecting rental expectations. We retain our view that industrial rents are likely to fall 31.7%, to about S$1.33/psf per month.

Since 2004, Ascendas REIT’s DPU yield has been an average of 6.3%, equating to a 345bp spread over the average ten-year government bond of 2.88%. Currently, AREIT’s FY10F yield is 8.2%, vs the current ten-year government bond of 2.6%, delivering a spread of 720bp vs the historical average of 345bp. The historical low yield spread between AREIT's DPU yield and the prevailing risk-free rate, in our view, reflects the market’s growth expectations of the REIT over the period driven by rental reversions and acquisitions. We note that during 2005-08, AREIT saw average annual compound growth in its DPU of 13.9%. While we believe AREIT’s growth prospects are different than those it experienced during 2005-09 (we forecast DPU to fall 21.1% over FY08-FY11, in part due to the rights issue), there is inevitably a temptation to extrapolate past trends. If one adopts the historical yield spread of (345bp) to the current risk-free rate of 2.6%, this would imply a yield of 6.057% (vs its current FY10F yield of 8.2%), equating to what we would describe as an inflated unit price of S$2.10/unit given the market outlook. We believe our asset-based approach to valuing AREIT incorporates the cashflow risks of both negative reversions and higher vacancy risk, and believe such “spread analysis” is overly simplistic.

We have revisited our earning numbers and have marginally raised our DPU forecasts for FY09-FY11 on the back of income expectations from recently completed development properties. In addition to the marginally higher earnings, we have rolled forward our intrinsic net asset valuation to FY11F and determine an NAV of S$1.24/unit. (Previously March year-end FY10, value of S$1.17/unit). We maintain our REDUCE call.

We believe the key risks remain the performance of the Singapore manufacturing and logistics sector, which would affect our forecasts for occupancy, rents and capitalisation rates, following the recent equity-raising. We expect AREIT to be adversely affected by the deteriorating economy, although we believe investors seeking liquidity in the REIT sector could offer unit price support.

Ascendas Real Estate Investment Trust - Steady as She Goes

Initiating coverage of Ascendas REIT with an EW rating and S$1.70 price target: A-REIT is our new sector top pick, with 11% upside. We like A-REIT for its high dividend yield of 8.5% for F2010e and 8.7% for F2011e, supported by long-term leases, a diversified tenant base, and its ability to generate inorganic growth via development of built-to-suit properties. A-REIT is now our sector top pick, given its high dividend yield compared with other large cap peers, limited risk of further capital raising, and recent underperformance (since STI low in March 09) that we believe to be unjustified. At current levels, A-REIT is trading at a 12m forward yield premium of 2.6% and 2.8% to CCT and CMT – high compared with the historical yield premium of 1.7% and 1.0%, respectively.

Long-term leases provide stability: A-REIT’s portfolio of sale and lease-back (SLB) properties, which are typically occupied by single tenants, contributes ~50% to net portfolio income, we estimate. These leases typically run for 5-15 years with annual step-up clauses and provide A-REIT with income stability.

Development capability supports dividends: Since its IPO in 2002, A-REIT has completed or is currently in the process of completing a total of 11 properties worth ~S$650mn. Built-to-suit properties have higher yields than acquired properties and long-term tenants that give stability to the portfolio. A-REIT has executed its previous built-to-suit properties well, we believe, and should continue to attract tenants seeking built-to-suit properties.

Risks to our call – Positive: Vacancy levels rise more slowly than expected; A-REIT announces new development projects. Negative: Faster-than-expected rise in vacancies and fall in rentals; loss of a large tenant in one of A-REIT’s single-tenanted buildings.

Ascendas REIT - Buy: A Laggard Play

Reiterate Buy — A-REIT stock price has lagged in the current rally. Following the recent run-up of the other S-REITs, A-REIT now offers one of the highest and relatively defensive yields – approximately 9.6% – among the large-cap S-REITs.

Lower occupancy but reversion still higher — A-REIT will continue to maximize occupancy and retain customers. With the economic downturn, retention ratio has fallen from 80% last year to the current 70% as its tenants downsize. However, on average A-REIT’s portfolio is still achieving rental reversion at 10- 15% higher than preceding rental.

Adjust earnings in reflect BTS project — We have raised our earnings by 2.4% for FY2010E to reflect the Built-to-Suit (BTS) project for SingTel at Kim Chuan Rd. The building with an expected GFA of 354,000 sq ft is expected to cost S$175.4m and will be completed by 1Q10. SingTel will lease the building on a 20-year lease with an option to renew for another 10 years with an annual rental escalation.

Effect of cap rate increase on Gearing — Management indicated that a 25bps increase in cap rate will lower asset value 3.5% and increase gearing by 1.2%. A-REIT’s gearing as at end Mar 09 was 35.5%. Based on our estimates, A-REIT would be able to maintain a relatively stable gearing of 35-37% over the next two years assuming no acquisitions. We believe decline in asset value will be mitigated given 50% of its portfolio is on long-term leases and that the completing development projects were acquired at relatively high yields.