CIMB-GK Securities: Ascendas Reit - 16 Apr 2008

Ascending the ranks

• Portfolio reaches S$4.1bn, record occupancy levels of 98.7%. Revaluation gains of S$483.6m and additions from acquisitions, completed development projects and asset enhancements valued at S$290.6m expanded A-REIT’s portfolio to S$4.1bn in FY08. Record occupancy levels of 98.7% were achieved as at 31 Dec 07.

• Large supply in the pipeline; 59% pre-committed. Industrial supply in the pipeline is significant over 2008-09. However, with 59% of the pipeline already pre-committed, demand from the manufacturing sector and office users is likely to be sufficient to absorb the remaining supply. The outlook for industrial rents is positive, with rents likely to rise by up to 15% yoy in 2008.

• Upgrading DPU forecasts; target price raised to S$2.99 from S$2.60. We raise our FY08-10 DPU forecasts by 0.3-11.8% on higher yield assumptions for development projects and higher rental growth assumptions. Following this, our DDM-based target price for A-REIT (discount 6.7%) rises to S$2.99. Maintain Outperform.

Update

Increased asset portfolio with revaluation gains and property additions. In FY08, A-REIT’s asset base grew to 84 industrial properties for a total value of S$4.1bn via revaluation gains of S$483.6m and S$290.6m worth of acquisitions, development and asset enhancements. HansaPoint at Changi Business Park, which was completed in Jan 08, was valued at S$69.3m, 142% above its development cost of S$28.6m. HansaPoint was 100% pre-committed by the time of its completion.

Post-revaluation gains, asset leverage has been lowered to about 38%, increasing AREIT’s debt headroom and development capacity. At a cap of 10% of its total assets of S$4.1bn, A-REIT has about S$110.5m of development potential, after deducting its S$309.5m projects currently under development. A-REIT is also on track to achieve its S$5bn target asset size by end-2010.

Record high occupancy and double-digit rental growth. A-REIT’s overall occupancy touched a record high of 98.7% as at 31 Dec 07, up 2.6% pts from 96.1% one year ago. Renewal rates for its business and science park, and hi-tech segments grew 46.1% and 71.5% respectively over previous transacted rates.

Impending large supply in the pipeline... About 3.03m sq m GFA of uncompleted industrial projects had received approval for development as at end 4Q07. Potential industrial space in the two years could reach 1.2m sq m in 2008 and 1m sq m in 2009. This would be about 27% and 7% higher than the net new supply of 0.9m sq m in 2007, respectively. Of the new supply, 48% would be single-user industrial space and 52% multi-user space. Business and science parks form a significant 38% or 602,128 sq m of the upcoming multi-user developments over the next four years. This translates to an annual supply of 150,532 sq m, or 2.4x the average net new supply from 2005 to 2007.

..but demand from industrial end-users and office users should be able to digest supply. Notwithstanding the significant supply, 59% of the 3.03m sq m is estimated to have been pre-committed for occupancy upon completion. These pre-commitments are related to single-user developments (48%), which are typically developed by industrialists for their own use, and business and science park space (11%).

Tight office supply and growing R&D industries to drive rental growth. Although there is still an estimated 41% in the pipeline yet to be committed, demand from the growing R&D and knowledge-based industries in Singapore as well as spillover demand from the office sector is anticipated to be sufficient to absorb the supply.

Colliers International reported that occupancy of Grade A offices in most micro-markets had risen above 99% as at Dec 07. Moreover, office rents in all the micro-markets had risen by 55.7-94.9%. Average monthly gross rents in the Central Region (including Raffles Place, Shenton Way, City Hall, Orchard Road and Beach Road) ranged from S$9.81 to S$16.64 psf in the same period. In comparison, average monthly gross rents for hi-specification space ranged from S$2.79 to S$3.43 psf, only a third or less. Tight supply and rocketing office rents should continue to be strong push factors that would ultimately benefit A-REIT’s business and science parks as well as hi-tech space over 2008-09.

Positive outlook for industrial rents. Driven by strong demand, industrial rents had leapt in 2007. The hi-specification segment rose the most, by 39.5-55.9% yoy. Industrial rents are expected to grow further, supported by S$16.1bn of manufacturing investment commitments. Colliers International forecasts that industrial rents would rise by up to 15% yoy in 2008, auguring well for A-REIT’s portfolio.

Valuation and recommendation

Upgrading DPU forecasts; target price raised to S$2.99 from S$2.60. We are increasing our FY08-10 DPU forecasts by 0.3-11.8%, to reflect: 1) higher yield assumptions of 9% (up from 7%) for development projects; 2) adjustments for the delayed effect of income contributions from these projects; and 3) higher rental growth assumptions of up to 15% for the business and science park segment and up to 10% for the hi-tech segment, in view of potential strong rental reversions in FY09. Following this, our DDM target price for A-REIT (discount 6.7%) rises to S$2.99.

A-REIT is trading at an implied yield of 5.8%, below the valuations of its peers, Mapletree Logistics Trust and Cambridge Industrial Trust. However, this also implies greater ease for A-REIT to acquire assets with higher property yields than its trading yields, and to achieve its target size of S$5bn by end-2010.

We continue to like A-REIT for 1) its development capabilities that would render higher yields of 8% to 10%, compared to acquisition yields that range from 6% to 7%; 2) conservative capital management (88% of its debt is on fixed interest rates at a weighted average cost of 3.39% and weighted average term of 3.9 years); 3) low asset gearing of 38%; 4) stable income streams with long weighted average lease periods of 6.3 years; and 5) the absence of forex risks as it does not have overseas assets. Potential price upside of 29% and yield returns of 5.9% imply prospective total returns of 34.9%.

Major Shareholders: Citibank Noms S'pore Pte Ltd 22.5%, Ascendas Land (Singapore) Pte Ltd 19.2%.

CIMB-GK Securities: Ascendas Reit - 14 Mar 2008

Taking over the helm

Ascendas acquires Goodman’s stakes in A-REIT

A-REIT announced that its parent Ascendas Pte Ltd, through its wholly-owned subsidiaries, had made a double acquisition, by:
1) Purchasing the Goodman Group’s 40% equity stake in Ascendas-MGM Funds Management Limited, the manager of A-REIT, for an undisclosed cash consideration on a willing-buyer willing-seller basis.
2) Purchasing Goodman’s 6.28% direct stake of 83,241,801 units in A-REIT for about S$158.16m on a willing-buyer willing-seller basis.
The acquisition of the shares and units is expected to be completed within 10 business days from the signing of the agreements.

The impact

Goodbye, Goodman! Upon the completion of the share and unit sales, Goodman will fully relinquish its co-manager role in Ascendas-MGM Funds Management Limited and holdings in A-REIT. Ascendas would then have a 26.77% holding in A-REIT. A-REIT's manager, Ascendas-MGM Funds Management, would become a wholly-owned subsidiary of Ascendas and will be renamed Ascendas Funds Management (S) Limited.

May open doors to overseas acquisitions. This is a long-awaited move which will leave Ascendas with full control of A-REIT. We see this as positive for A-REIT, potentially opening doors to acquisitions out of Singapore from its parent, Ascendas. Ascendas has at least two overseas funds that may form part of the acquisition pipeline. They are the Ascendas ASEAN Business Space Fund, and the China Industrial and Business Park Fund, both of which acquire and develop industrial properties in their respective regions. However, any acquisition is more likely to happen in the medium to long term, as A-REIT has committed to some S$338m worth of development projects and has already signed MOUs to acquire S$201m worth of properties over 2008-10.

Valuation and recommendation

Upgrade to Outperform from Neutral; but lowered target price to S$2.60 (from S$2.83). Our target price has been reduced to S$2.60 from S$2.83, in line with a higher cost of equity assumption used in-house. The discount rate in our DDM valuation has been raised to 6.7% from 6.2%.

We are, however, upgrading A-REIT to Outperform after the 15% decline in its share price since late January, vs. the market’s 3% drop. We also like Ascendas’s positive move to take full control of the helm. A-REIT has several things going for it, including: 1) conservative capital management (88% of its debt is on fixed interest rates at a weighted average cost of 3.39% and weighted average term of 3.9 years); 2) low asset leverage of 38.9%, well below the regulatory limit of 60%; 3) venture into development projects which offer property yields higher than the 6-7% yields for completed industrial buildings; 4) high rental reversions for its business park as a result of demand spilling over from the office sector; and 5) strong income streams secured on long leases averaging 6.2 years.