A-REIT – CIMB
Stable performance
• Meeting expectations in the first quarter. A-REIT’s 1Q10 results met consensus and our expectations. Net property income of S$80.7m (+15.8% yoy) and distributable income of S$61.0m (+17.9% yoy) was reported, with growth attributed mainly to an enlarged portfolio base of 89 properties vs 86 properties one year ago. DPU declined 7% yoy to 3.62cts, due to increased number of units after its rights issue. DPU for the first quarter forms 28% of our forecast of 12.8cts for FY10.
• Occupancy down marginally, but reversions holding up. Portfolio occupancy was down 70bp qoq to 97.1% as at end-Jun. This was mainly attributed to a decline in the occupancy rate for its multi-tenanted properties which came down to 94.0% from 95.3% a quarter ago. A-REIT’s Business and Science Park segment and Hi- Tech segment continued to have positive reversions, although at a slower pace, as rents of expiring leases remain significantly below market rental rates. After renewing 689,115sf of net lettable area (NLA) in 1Q10, A-REIT is left with 9.4% of its gross revenue due for renewal for the rest of the financial year, down from 14.1% due at the beginning of the financial year.
• Tenant risk updates. A-REIT estimates that about 129,167sf (0.6% of total NLA) of NLA accounting for S$0.14m (0.4% of total monthly revenue) of gross revenue is occupied by tenants that are considered vulnerable. However this risk is mitigated by S$1.08m of security deposits held by A-REIT. In the quarter, 88,330sf of space accounted for 0.64% of A-REIT’s gross revenue from 13 International Business Park has been reposed as the master tenant, LabOne, was unable to fulfil its lease obligations. A-REIT has 8 months of security deposit which will be used to pay rent due while the space is being marketed. 36.9% of the space has since been leased at rates not lower than the existing rate and another 16.8% of space is in active negotiation with a prospective tenant.
• Maintain Neutral at unchanged target price of S$1.68 (discount 8.5%). We expect occupancy levels to continue to weaken due to the uncertain outlook of industrial indicators. However, increased contributions of AREIT’s built-to-suit development projects completing over FY10 and built-in rental growth for its leaseback arrangements will moderate the decline in revenue.