A-REIT – DMG
Delivers another steady quarter
3QFY10 results in-line with expectations. A-REIT reported a 13.5% YoY gain (-6.0% QoQ) in 3QFY10 DPU to 3.27¢. Annualised 9MFY10 DPU came in at 13.6¢, marginally above our FY10 forecast of 13.3¢ (Street’s forecast 13.2¢). Net property income was up 9.7% due to positive rental reversion and contributions from new acquired properties and development projects. A-REIT will trade ex-3Q10 distribution on 22 Jan 2010. We fine-tune our FY10 DPU estimate to 13.62¢ from 13.26¢ to account for marginally higher occupancies. We correspondingly raise our TP to S$2.11 from S$2.05. At our TP, A-REIT offers a yield of 6.5%, a reasonable peg in our view. Maintain NEUTRAL.
Occupancy fell marginally; tenancy default risk low. Reflecting the stabilisation in global demand, A-REIT’s portfolio occupancy declined marginally to 96.5% from 96.8% in 2QFY10. For its multi-tenanted properties, occupancy moderated to 93.1% from 93.3%. According to management, AREIT has about 12,098 sqm of its 2m sqm of NLA (0.4% of gross monthly rental income) which could run the risk of default. Of this, 2,416 sqm had since been repossessed and re-let with no negative financial impact. In the current quarter, A-REIT has taken legal actions against a tenant occupying 8,843 sqm (0.5% of portfolio NLA) of space and contributing 0.2% of monthly gross revenue.
Focus on built-to-suit and other acquisition opportunities. Following its S$296m equity fund raising exercise, A-REIT has a sturdier balance sheet with gearing of about 31%. Management has indicated that they will continue to scout for opportunistic acquisitions and/or built-to-suit development projects for high-credit quality tenants.
Stock almost fully valued; trading near peak valuations. At its current price, A-REIT offers investors a stable dividend yield of 6.8% for FY10 and FY11 – with dividends well supported by the long-term leases on single-tenanted buildings which accounts for 50% of revenue. Between 2005 and 2007, A-REIT traded at heyday yields of 6%, implying minimal upside from current valuations. Should we factor a more bullish yield peg of 6%, A-REIT’s recursive fair value would be S$2.27, an upside of only 13%. Maintain NEUTRAL. Buy on dips.