AREIT – UOBKH

Growing through acquisitions and office spillover

• In line with expectations. DPU grew 11% yoy to 3.5cts in 2QFY08, driven by higher rental income from completed acquisitions, improved overall occupancy and rental reversions. The YTD distribution payout represents 49% of our forecast of 14.2 cts, and 51% of consensus’ forecast of 13.6 cts for the full year.

• Business and Science Park segment boosts portfolio occupancy. Contribution from new acquisitions, increased occupancy rates and rents drove up 2Q08 gross revenue 14.8% yoy to S$80.2m. Overall portfolio occupancy moved 1.1%-pt to 98.3% in the period, primarily driven by occupancy levels in the Business and Science Park segment. This surged 9.8%-pt to 97.2% in 2Q08, up from 87.4% in 1Q08. Strong spillover demand from office users saw 2Q08 rents for the same segment rise 33% qoq to an average of S$40 psm per month, up from S$30 psm per month in 1Q08. With the office supply crunch unlikely to be significantly alleviated in the next two years, the Business and Science Park segment is likely to still lead strong rental reversions going forward.

• Expanding through development projects. A-Reit announced two development projects amounting to a total development cost of S$277 mil at Changi Business Park (CBP) and Pioneer Walk. The development at CBP comprises three business park buildings with a combined gross floor area (GFA) of 74,660 sqm – two built-tosuit (BTS) facilities and a multi-tenanted block with an amenity podium. The development project would be completed in phases through CY09 and CY10. The second development at Pioneer Walk comprises two blocks of ramp-up industrial facilities with a combined lettable area of 80,609 sqm. About 35% of the development has been pre-committed. Completion is expected by 2H08.

• Maintain Outperform. Our DPU forecasts and DDM-derived target price of S$2.90 remain unchanged, based on a cost of equity of 6.2%. For FY08 ytd, A-Reit has announced a total of S$359m of acquisitions and development projects while another S$61m worth of development projects await completion. We believe that AReit remains on target to achieve an asset size of S$5bn by CY10 via its development projects and a S$500m acquisition pipeline from sponsor Ascendas Land. The recent share price weakness and forward yields of up to 6.1% makes AReit
an attractive buy now.