Industrial REIT

OCBC on 2 Aug 2012

Industrial landlords continued to deliver, meeting expectations for 2Q12. Going forward, we believe that industrial REITs will likely maintain their financial performances, driven by contribution from recent investments and healthy leasing activities in the industrial space. We also note that a few industrial REITs had cited the possibility of further positive rental reversions, as current market rents are still above the passing rents at some of their assets. As at 30 Jun, the subsector average occupancy rate stood at 98.4%, representing a 60-bp improvement QoQ, while the aggregate leverage was still comfortable at 33.5% (vs. 33.9% in 1Q). This reflects active portfolio and capital management by the REITs, as well as continued strong demand for industrial property. We maintain our OVERWEIGHT rating on the industrial REIT subsector. Cache Logistics remains our preferred pick, given its attractive FY12F DPU yield of 7.6% and robust portfolio.

Consistent set of results
Industrial landlords continued to deliver, meeting expectations for 2Q12. YoY growth in NPI ranging from 3.9-26.4% was seen among the REITs, bolstered by contribution from completed developments/ acquisitions, positive rental reversions and improved operational performances. Mapletree Industrial Trust was the top performer for the quarter, raking up 14.1% YoY increase in DPU. This was followed closely by Cambridge Industrial Trust and Ascendas REIT, with 13.9% and 10.3% growth respectively. Only AIMS AMP Capital Industrial REIT (AAREIT) and Cache Logistics Trust (CACHE) saw a sequential decline in DPU. However, this was due to the absence of distribution in retained income seen in 1Q by AAREIT. For CACHE, we note that it was attributable to an enlarged unit base arising from private placement to fund the acquisition of Pandan Logistics Hub, even though the property has yet to contribute to its income.

Positive outlook remains
Going forward, we believe that industrial REITs will likely maintain their financial performances. While most of the landlords acknowledge that the macroeconomic landscape has remained uncertain and volatile, they expect stable results from their portfolios, driven by contribution from recent investments and healthy leasing activities in the industrial space. A few industrial REITs also cited the possibility of further positive rental reversions, as current market rents are still above the passing rents at some of their assets.

Occupancy rate and gearing remained at healthy levels
Industrial REITs, we note, have also done well on their lease and capital management. The subsector average occupancy rate as at 30 Jun stood at 98.4%, representing a 60-bp improvement QoQ, while the weighted average lease to expiry held steady at 3.6 years. This reflects active portfolio management and continued strong demand for industrial property. In addition, the subsector aggregate leverage average was still comfortable at 33.5% (vs. 33.9% in 1Q). As such, we maintain our OVERWEIGHT rating on the industrial REIT subsector. Cache Logistics remains our preferred pick, given its attractive FY12F DPU yield of 7.6% and robust portfolio.