Ascendas REIT - Ending the year on a good note

FY09 results in line. FY09 distributable income of S$210.9m was up 12.6% yoy. FY09 DPU of 15.18cts was in line with Street and our expectations, forming 97% of our estimate. Full-year revenue of S$396.5m grew strongly by 23% yoy from positive rental reversions in multi-tenanted buildings and stepped increases for single-tenant buildings. Portfolio occupancy as at Mar 09 was 97.8%, down marginally from 98.4% one year ago. However, occupancy of its multi-tenanted buildings improved qoq to 95.3% in Mar 09 from 94% in Dec 08, indicating positive tenant-retention efforts.

Renewal rates still in positive region. AREIT continued to report positive renewal rates (vs. last contracted rates, typically three years ago) for its multi-tenanted properties, with Business and Science Park remaining the strongest at 41.3%. However new take-up vs. the last quarter was mixed: double-digit declines for Business & Science Park, and Hi-Tech sector, but increases for its Light Industrial and Logistics sector. Despite the positive reversions, management stressed that emphasis would be placed on maintaining occupancy, retaining customers and containing operating costs.

Increasingly expensive; downgrade to Neutral from Outperform. We reduce our interest expense assumptions for FY10 from 4.7% to 4.3% as: 1) 90% of its total debt has been hedged, with limited exposure to fluctuating interest rates; and 2) expected all-in cost after Aug 09 refinancing is low at 3.83%. We also reduce our net property income margins from 75% to 73% as we expect development projects completing over the next two years to have lower margins in the first year of operation due to fitting out, and possibly weaker occupancy levels. As a result of our changes, our DPU forecasts for FY10 and FY11 decline by 1-4%.

We also introduce our FY12 DPU forecast of 12.7cts. Our DDM-derived target price (discount 8.7%) decreases correspondingly from S$1.67 to S$1.63. AREIT’s share price has gained 39% since its last low of S$1.06 on 9 Mar 09. Our new target price reflects our view that AREIT will track market performance with 11% upside potential. P/BV at 0.91x looks expensive relative to its industrial peers MLT (0.51x) and CREIT (0.39x). Downgrade to Neutral on valuation grounds.

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