Chairman's Message (Extracted from Annual Report 2010)
FY09/10 was a remarkable year. The extreme challenges brought about by the implosion of the global financial market were relatively short-lived. However, the consequent impact on the global economic order may linger on for years to come.
Singapore, being one of the world's most open economies, was not spared the tumult, resulting in a contraction of 2.0% in GDP in 2009.
Throughout this difficult period, A-REIT remained focused on its core strategies, but re-calibrated its approach to adapt to the changing market conditions. This has produced a commendable set of financial results for the year.
On behalf of the Board, I am pleased to present A-REIT's 8th annual report for the financial year ended 31 March 2010. I am glad to report a successful year in which the strategies pursued by the Manager have delivered stable and predictable distributions for the Unitholders of A-REIT . This achievement is commendable especially in the light of the global economic uncertainties.
A-REIT's distributable income increased by 11.4% to S$234.9m compared to S$210.9m in the previous financial year. The main contributing factors include a positive rental reversion on the renewal of expiring leases in the portfolio, full year's revenue contribution from investments completed in FY08/09, one-off cost savings arising from the various rebates offered by the Government in 2009, and the lower cost of utilities. The portfolio grew to 93 properties from 89 properties last year and total assets under management amounted to S$4.9bn as at 31 March 2010, up from S$4.5bn a year ago, an increase of about 6.7% after taking into consideration a devaluation of S$53.7m on the portfolio following the annual revaluation exercise.
Let me now elaborate on some of the enduring values backing our core strategies:
Enduring Value 1: Disciplined Investment
The Manager's disciplined investment strategy has resulted in enhanced returns per investment dollar from development activities and the selective acquisition of quality income producing properties. During the financial year, A-REIT completed two acquisitions worth S$131.0m and completed three development projects worth about S$293.0m.
The three development projects at 71 Alps Avenue, Plaza8 @ CBP and 38A Kim Chuan Road, were completed on schedule and within budget, and delivered a gain of 3.9% upon their respective revaluation. Since commencing its development strategy in 2006, A-REIT has achieved an unrealized capital gain of $130.9m (approximately 21.5% over development cost) on the nine development projects undertaken so far.
In view of the limited supply of business space in Changi Business Park over the next 2 years, A-REIT commenced construction of a partial built-to-suit business park property for Citibank N.A. which is expected to complete in 1Q 2011. Citibank N.A. has committed to take up 50% of the space upon completion for a period of 6 years with options to extend.
A-REIT will continue to pursue quality and sustainable yield accretive acquisitions and engage selectively in development (especially built-to-suit) opportunities for enhanced returns.
Enduring Value 2: Proactive Capital and Risk Management
We persevere in proactive capital and risk management of A-REIT's finances in order to optimize its capital structure. A-REIT issued a total of S$275m fixed rate notes in April and July 2009 as part of the S$1bn multi-currency Medium Term Note program established on 20 March 2009 to diversify its sources of funding.
In addition, it raised new equity of approximately S$301.6m (issue price was above NAV and at a 6.8% discount to the adjusted volume weighted average price of the market day immediately prior to the launch) in August 2009 to fund the development of 38A Kim Chuan Road and the acquisitions of DBS Asia Hub and 31 Joo Koon Circle.
In March 2010, in view of the significant refinancing requirements within the S-REIT sector in 2012, the Manager strategically embarked on an early redemption of A-REIT's Commercial Mortgage Backed Securities ("CMBS") of €165m (S$350m) due in May 2012. The early redemption was at a discount to par and was partly refinanced with a new 7-year Exchangeable Collateralised Securities ("ECS") issue of S$300m with a put option in 2015 and a coupon rate of 1.6% p.a. The ECS is convertible to ordinary A-REIT units at S$2.45 per unit, which is over 50% above the current NAV.
Consequently, the weighted average term to maturity of A-REIT's debt portfolio has increased from 2.2 years a year ago to 4.0 years as at 31 March 2010. Aggregate leverage was 31.6% as at 31 March 2010 with 100% of A-REIT's total debt hedged into fixed rate for the next 3.1 years. Though we have observed an easing of credit spreads in the past financial year compared to FY08/09, they are, nevertheless, still higher than pre-crisis levels. Weighted average interest cost increased from 3.67% to 3.94% in FY09/10.
The proactive management of A-REIT's capital structure has strengthened our balance sheet, diversified our sources of funding, and contained our cost of borrowing. We will continue to strike a balance between certainty in our capital structure and the cost of capital, in order to achieve optimal returns for our Unitholders.
Enduring Value 3: A Resilient Portfolio Performance
As at 31 March 2010, A-REIT's overall portfolio occupancy stands at a healthy 95.7% after taking into account a net increase of about 94,000 sqm (4.2%) of new space; occupancy for multi-tenanted buildings is 91.2%. The portfolio continues to enjoy positive rental reversion in renewal rates across most sub-sectors, albeit at a lower rate compared to the previous financial year. This positive result can be attributed to active lease management and to the fact that current market rental rates are higher than the passing rental rates of those leases being renewed. This is particularly true for the Business & Science Parks and Hi-Tech Industrial sub-sectors. Moving forward, the Manager will continue to focus on maintaining occupancy and retaining customers to ensure a stable return on A-REIT's existing portfolio.
Looking Ahead
The financial markets rebounded significantly since April 2009 and the economic climate improved in the past financial year. However, while the near term outlook appears to be positive, considerable uncertainties remain given the high unemployment, muted growth dynamics, large budget deficits and regulatory uncertainty in certain developed and developing countries.
We will build on A-REIT's position as the leader in business space and industrial properties and will continue to focus on our core activities, including:
Continuously improving our products and services
Motivating and rewarding our employees and
Pleasing our customers
The Manager will continue to explore potential investment opportunities in Singapore and evaluate regional markets on a prudent and selective basis to ensure yield-accretive and stable returns for its stakeholders.
Barring unforeseen circumstances, the Manager aims to at least maintain the current level of net income for A-REIT in this new financial year.
In Appreciation
A-REIT's success would not have been possible without the concerted effort of many parties. First, I would like to thank my fellow Board members for their invaluable advice and contributions throughout the year. Mr Benedict Kwek and Mr Swee Kee Siong retired from the Board in September 2009 after serving diligently since the inception of A-REIT in 2002. On behalf of the Board and Management, I would like to thank them for their significant contributions to A-REIT since its IPO . Their invaluable counsel and wisdom shared over the past 7 years have helped to steer A-REIT into becoming what it is today - the largest business space and industrial REIT in Singapore.
Please also join me in welcoming Mr Koh Soo Keong, Mr Henry Tan Song Kok and Mrs Monica Tomlin, who were appointed to our Board in September 2009 as independent directors. Their background and experience add considerable strength to our Board. We are also very grateful to our tenants and business partners for their unwavering support, which has been the basis of the success of our Trust over all these years.
On behalf of all Unitholders, I also would like to extend our sincere appreciation to the hardworking team at AFM (the Manager of A-REIT ) for their dedication and discipline in pursuing the core strategies that underlie the success of our Trust. Last but not least, I would like to thank you, our Unitholders, for your trust and confidence in us, and for your investment in A-REIT.
With unwavering focus on our enduring values and core strategies, I am confident that we will be able to capitalize on the opportunities that are available in a challenging business environment and continue to deliver another year of stable performance.
