Ascendas REIT: Will it be the M&A aggressor?

DPU growth slowed on fewer acquisitions. Ascendas REIT (AREIT)
reported its 1Q08 results with revenue rising 13.7% YoY and 4.5% QoQ to
S$77.3m. Distribution per unit (DPU) was reported at 3.37cents, +9.1%
YoY and only 2.1% QoQ, in line with our forecast of 3.35 cents. The marginal
DPU growth is mainly attributed to the acquisition of 1 asset worth S$11.2m
over the last quarter.
No guidance for acquisition in FY08. The key earnings driver for AREIT
has been its aggressive strategy to acquire assets. AREIT acquired S$488m
of assets in FY07, S$656m in FY06 and S$1,000m in FY05. AREIT has not
given any guidance with respect to target acquisitions in FY08, but based
on the already announced contracts and S&P agreements, it has a further
S$148m to complete. This brings the YTD potential acquisition to only
S$159.2m. For FY08, we forecast that it could potentially acquire about
S$300m-S$400m of assets.
Market competition is intensifying. The main reason is that the industrial
market space is getting very crowded. There are presently four industrial
REIT players in the market, i.e. AREIT, Mapletree Logistics Trust, Cambridge
Industrial Trust and most recently MacarthurCook Industrial REIT (listed
last quarter). Another industrial REIT i.e. JTC REIT will probably be listed
over the next 12 to 18 months. More importantly, there is very little difference
between these REITs as they all adopt the same acquisition-led growth
strategy. And the implication is that growth for all the industrial REITs will
get more and more difficult. The ability to grow notwithstanding, the market
continues to expect these REITs to continue to grow rapidly as reflected by
their respective Price to Book value of 1.4-2.0x. We see the next leg of
growth to likely come from M&A between the REITs. The key issue is who
is likely to be the aggressor.
Maintain HOLD. The key worry for AREIT is its high Price/Book ratio of
about 2.1x. More importantly with the industrial REIT space getting very
crowded, we see a high risk of market being disappointed unless they are
able to merge or acquire a competitor. Finally in terms of valuation, we have
allowed for AREIT's asset size to increase from its current S$3.3b to S$5.0bn
over the next 2 years. On this target asset size basis, our fair value is
S$2.63. We maintain our HOLD rating