Industrial REITs: 3Q11 results roundup

OCBC

 Quarterly growth within expectations. Industrial REITs ended the financial quarter ended 30 Sep on a positive note, with all companies registering healthy YoY growth in their financial performances. On the aggregate level, we note that REITs under this sub-sector reported a 28.6% YoY and 5.2% QoQ growth in distributable income, reflecting the still buoyant market. Unsurprisingly, contribution from new investments and positive rental reversions were among the key growth drivers, as a number of companies have been actively involved in acquisitions/asset enhancement works over the past year, and have passing rents lower than the market rates. These results were generally in line with market expectations, except for Ascendas REIT (BUY, FV: S$2.23) and Sabana REIT (NOT RATED) which outperformed our and consensus projections, respectively.

Positive operating performance. On the operational level, industrial REITs also put up a strong showing. Overall portfolio occupancy came in at a high range of 94.5-100%, displaying the resilient nature of the industrial rental market (relatively unchanged from 94.3-100% range in the prior quarter). As at 30 Sep, we note that the weighted average lease expiry for the REITs stood at 2.5-6 years, which is still healthy in our view. The only noteworthy concern we felt was AA-REIT's (NOT RATED) hefty 41.9% leases by NLA that were expected to expire in FY13. However, we understand from its management that it will focus on renewing the leases for underlying subtenancies of the master leases expiring in the period. In fact, progress has already been made, as the percentage lease expiry was reduced to 35.7%, based on a 'look through' basis (which includes subleases).

Leverage still at healthy level. Aggregate leverages of industrial REITs as at 30 Sep were between 23.8% and 41.3%. Sabana REIT, we note, had the lowest debt-to-asset level, but is expected to increase to 33.5% upon the completion of the proposed acquisitions in 3Q11. This is also the case for Ascendas REIT, which should see its leverage rise from 31.5% to 34.5% after funding all its committed investments. Only AA-REIT leverage is expected to fall below the 30% mark after the sale of 31 Admiralty Road. Mapletree Logistics Trust (MLT), on the other side of the spectrum, had the highest leverage. However, interest cover of 6.3x (with all loans being unsecured) is still comfortable, in our view. We maintain our OVERWEIGHT view on the industrial-REITs subsector, with Cache Logistics Trust and MLT as our preferred picks due to their high yields and resilient portfolio.