AREIT – DBS

Overhang removed

FY 3Q09 results showed sustained 14% growth in distributable income to S$53.9m, translating to 4.05 Scts per share. In addition, the reit is undertaking a recapitalization exercise of c.S$410.6m to repay loans and fund development commitments. Post equity raising, we believe that the reit will emerge stronger with a net gearing of c.37% with no major refinancing requirements in the next 2 years. In addition, AREIT is likely to continue to deliver a sustained c.10% DPU yield over FY10F – FY11F. As such, maintain BUY, TP S$1.51 based on DCF.

Healthy organic growth Net distributable income of S$53.9m (+14% y-o-y, +1% q-o-q) is within our expectation. This translates to an average DPU of 4.05 Scts per share.

Asking rents still up, occupancy levels dipped slightly to 97.2%. Asking rents for its properties continued to remain firm q-o-q. However, we estimate asking rents to soften 10%-20% over the coming 2 years in the bid to retain tenants in the face of a deteriorating economic outlook. In addition, our occupancy assumption is lowered to 85% from 90%, pegged to previously historical lows.

Equity raising: Placing out 353.9m shares, raising up to S$410.6m. AREIT separately announced an equity raising exercise to raise up to S$410.6m through issuing 353.9m shares @ S$1.16 per share (7% to VWAP). This amounts to c.26% of current total share base. Proceeds will be used to fund development commitments and repay ST loans. DPU is expected to decline by c. 19% in FY10 to 12.1 Scts from 15.0cts, taking into account the enlarged share base. We view this exercise as positive given (i) AREIT will emerge stronger with a low gearing of 37%, (ii) major financing requirements in 2009-2010 is completed.