Sunday, January 18, 2009

Ascendas Reit: Accounting for recession

Following the previous post, I estimate their yield after adjusting their revenue downwards to account for the recession. Aim is to see if we take assume a conservative scenario, do we still have a margin of saftey.

I get a DPU of 10.9c. At Friday's price of $1.27, this is an 8.6% yield.

If they had not issued the shares, and instead taken out a loan for the 400M at 7% (like Cambridge did) giving an additional 28M interest payments a year (added to the 57M), and we still had the same revenue cuts as below, then their DPU would have been about 10.8c per share. About the same I guess.

Assumptions and calculations for downward revising of revenue are below. Analysts call this a 'stress test'. I call it some 'calculations on the back of an envelope'.

How much should I decrease their revenue by?
  • Firstly, some tenants may go bust. A report by CIMB says that in the 2004 recession, defaults were 1.8%.
  • I'm going to use 4%.
  • Most of their larger tenants are make up 2% of their revenue, so the above represents two tenants going belly up (and AReit being unable to re-rent out their buildings for 1 year).
  • Secondly, rentals may be revised downwards. But most of their tenants are on long leases. See the green bars for the lease expiry as of Mar 08:
  • 16% and 15% of their lease revenue expires in 09/10 respectively (total of 31% over 2 years). I'm going to conservatively assume that to keep their customers, they cut the rent 20% for them. This would mean that by 2010, rend is reduced by 7%.
  • So we have an 11% discount in total (4% + 7%).
What effect does this have on DPU?

Using the final calculations from the previous post:

Revenue: 363 (reduced by 11%)
Interest costs: 45
Non-Interest costs: 135
Profit for distribution: 183 (divided by 1679 shares gives DPU of 10.9c).

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