A-REIT – DBSV

Forward earnings should improve

At a Glance

• 4Q10 DPU of 2.73 Scts in line

• Forward quarters should exhibit earnings growth

• HOLD on premium valuation of 1.2x P/BV, TP maintained at S$2.11

Comment on Results

Topline holds steady. 4Q10 distributable income of S$51.1m (DPU of 2.73 Scts) was in line with our expectations. Lower topline of S$103.9m (-0.4% yoy, -1% qoq) was due to loss of income from One Senoko Avenue (asset enhancement works) and TT Int’l Building (lease restructuring activities). This was slightly offset by earnings from recently completed built-to-suit (“BTS”) projects. NPI margins were lower yoy due to the expiry of land rental and property tax rebates in Dec 2009. Interest costs was 44% higher yoy due to one-off charge for refinancing activities in 4Q09.

Portfolio occupancy of 95.7%. Tenants giving back space at Multitenanted buildings (“MTB”) caused occupancy rates to fall marginally to 91.2%. This was offset by an improved take-up for new space. Looking ahead, we expect portfolio occupancies to remain stable.

Earnings should start to improve in 1Q11, backed by contributions from recently completed acquisitions and stable renewal activities. With low gearing of c34%, we expect A-reit to opportunistically grow earnings through new BTS developments and from 3rd party sources. We have assumed S$150m worth of new assets in our FY11 numbers.

Recommendation

Maintain our HOLD call and TP of S$2.11. While we like A-reit, we maintain our hold call with valuation at 1.2 x P/BV, 33% premium to the sector average of 0.95x P/BV. But forward yields of 7% in our view, should limit share price downside.