A-REIT – OCBC
Limited impact from negative rental reversions in 2010
Expect a challenging year ahead for industrial landlords. Going into 2010, we continue to remain cautious on the industrial landlords due to supply-side concerns (for factory space) and weak demand recovery due to the still-uncertain global economic recovery pace. While a portion of the upcoming supply may have been pre-committed, take-up rate of the remaining uncommitted space could still be a concern. Nevertheless, rents of warehousing space are expected to fare better than factory space as the outlook for warehousing space supply is better in comparison to the factory space.
A-REIT’s diversified portfolio structure mitigates negative impact. Despite our negative outlook on the industrial space, we believe that the impact on A-REIT can be mitigated by its diversified asset portfolio with its balanced exposure to different groups of industrial properties, balanced mix of single and multi-tenanted properties and diversified base of quality tenants. Even though some of the assets could face negative rental reversions going forward, we believe that the impact on its portfolio as a whole would not be significant because the NLA of expiring leases is small compared to the total NLA of A-REIT’s portfolio and the average existing rents of these expiring leases are not significantly higher than current market rents.
Opportunity for growth via property development. We expect property development to be a key area of growth for A-REIT in 2010. Based on AREIT’s deposited property value of S$4,559.7m, it has the capacity to take on as much as S$456m worth of development projects in accordance to the maximum 10% exposure limit of the property fund’s deposited property to property development under the MAS guidelines for property funds. With just one ongoing development project at the moment – Built-to-Suit (BTS) for SingTel with an expected development cost of S$175.4m, this leaves A-REIT with significant headroom of S$280.6m for new development projects.
Maintain HOLD; fair value S$1.76. No changes have been made to our estimates and we maintain our RNAV estimate of S$1.76 per share. Pegging our valuation at par to our RNAV estimate, we derive a fair value estimate of S$1.76 for A-REIT. We expect A-REIT to pay out DPUs of 12.86 cents and 12.90 cents in FY09/10 and FY10/11 respectively, translating to DPU yields of 6.73% for FY09/10 and 6.75% for FY10/11. With an expected total return of -1.3%, we maintain our HOLD rating on A-REIT. We advise investors to accumulate A-REIT at more attractive price levels around the range of S$1.60 to S$1.70.