A-REIT : DBS

3QFY07 results were in line

3QFY07 results were in line. Gross revenue and net income available for distribution grew 16% and 7% y-o-y to S$71.1m and S$41.0m respectively. This improvement was mainly due to the additional rental income from completed acquisitions. Property expenses grew 23% as a result of higher electricity costs from the aggregation of energy costs for nine properties in the portfolio and an increase in the number of properties in the portfolio. Interest expense grew 100% due to additional debt drawdown. Distribution per unit (“DPU”) grew 6% y-oy to 3.20 cents.

Update on acquisitions and developments. To date, A-REIT announced committed investments of S$425m in FY07 of which S$214m is still pending completion. Efforts have also been taken by A-REIT to enhance its existing assets (i.e. increase of 3,527 sqm space for The Alpha Building which is expected to complete by Sep 07 and the increase of GFA by around 352 sqm for Telepark Building), which in turn has created higher yields for the assets. Moving forward, A-REIT would continue to focus on built-to-suit development projects, which creates greater value to unitholders as acquisition costs will be lower if assets are acquired from the market. A-Reit still has an additional capacity of S$173.0m to utilise.

Maintain Hold. With the limited new supply of office space in the CBD area, there is potential of a positive spillover effect on demand for Business & Science Park and high-tech industrial sectors. We raised our target price to S$2.68 based on 10-year DCF valuation, which has assumed S$500.0m acquisitions pipeline per annum from 2007 to 2010. Maintain Hold as upside is limited at 5%.