A-REIT – CIMB

Industrials looking up

• Results in line; upgrade to Neutral from Underperform. FY10 DPU of 13.1cts was in line with Street and our expectations, forming 101% of our estimate. We make moderate adjustments to incorporate actual occupancy rates in the last quarter. Our DPU estimates decrease by 2% for FY11-12. We also introduce a DPU forecast of 14.8cts for FY13. Our DDM-based target price (discount rate 8.4%) is intact at S$2.02. AREIT offers a forward dividend yield of 7.3%. With a strong economic recovery, we believe the outlook is looking up for industrialists, auguring well for its portfolio. We upgrade the stock to Neutral in view of this. AREIT also offers some hedge against inflation with 32.5% of its leases structured with CPIpegged adjustments. Nonetheless, it is expensive against peers at a 26% premium to book value.

• FY10 net property income of S$320m was up 7.9% yoy from positive rental reversions (1-3% p.a.) in multi-tenanted buildings and step-up increases for singletenant buildings. Even more positive was take-up by new tenants, which had risen significantly qoq for Business & Science Parks (+13.8% qoq) and Light Industrial (+9% qoq). Portfolio occupancy as at Mar 10 moderated to 95.7%, down from 97.8% last year. Business Parks’ occupancy dipped 6.7% pts from last year. However, this was in part due to the late completion of DBS Asia Hub and Plaza 8 @ CBP where tenants were still fitting out.

• Rental income to increase organically and through acquisitions. Revenue contributions from FY11 are expected to climb with the following: 1) acquisitions of DBS Asia Hub and 31 Joo Koon Circle last year, with the sales only completing in Mar 2010; 2) full contributions from development projects completed late last year: 71 Alps Avenue, Plaza 8 @ CBP and 38A Kim Chuan Road; 3) anticipated improved occupancy; and 4) step-up increases in sale-and-leaseback leases. Management guides that sale-and-leaseback acquisitions as well as build-to-suit buildings remain possible in Singapore in the coming year. Although it remains interested in overseas acquisitions, there is nothing on the horizon yet. Current asset leverage is comfortable at 31.6%, with debt headroom of S$1.2bn if we assume asset leverage of 45%.