A-REIT – CIMB
Fairly valued
• Maintain Underperform; results in line. 3QFY10 results met Street and our expectations. Our DPU estimates and DDM-based target price of S$2.02 (discount rate 8.4%) are intact. We maintain our Underperform rating in anticipation of negative rental reversions in the next financial year.
• Results met expectations. 9MFY10 DPU of 10.37 cts came in at the higher end of our expectations, at 80% of our full-year forecast. DPU for the quarter (3.27cts) shrank 19.3% yoy due to new units issued during its public and private equity issuance in Aug 09. Net property income of S$81.4m was up 10% yoy on additional rental income from completed projects, Expeditors Building and Plaza 8, in Sep 09, much lower utility expenses and property tax rebates. Qoq, property operating expenses increased 12% mainly due to higher ad-hoc maintenance and conservancy costs, and rising energy costs.
• Occupancy stable despite reducing “vulnerable tenants”. AREIT has been reducing the number of “vulnerable tenants”. For instance, it restructured its lease to TT International at 10 Toh Guan Road from a sale-and-lease back to a standard 3-year lease. The building contributes 2% to AREIT’s gross revenue. As at 31 Dec 09, 57.4% of the building was occupied by 38 tenants, including TT International. Assuming occupancy does not improve, the security deposit from TT International would be sufficient to top up rentals to their original level (of full occupancy) for the next 15 months. The remaining 42.6% of the space will be retrofitted for a prospective tenant under negotiation. Despite the restructuring, AREIT’s portfolio occupancy was stable at 96.5% (-0.3% pt qoq) as at end-Dec 09, with multitenanted buildings standing at 93.1% (-0.2% pt) and sale-and-leaseback buildings remaining fully occupied.
• Renewal rents still positive but slowing. AREIT’s rental renewals remained mostly positive (2.2-17.1%) except for Light Industrial (-3.1%) albeit at moderated rates of decrease. We do not expect big falls in the top line in the last quarter as AREIT has only 2.1% of gross revenue due for renewal for the rest of the year.