A-REIT – DMG

Earnings below expectations due to one-off fees

4QFY10 results below with expectations. A-REIT reported 4QFY10 DPU of 2.73¢ (-15.5% YoY; -16.5x% QoQ), representing 20% of our FY10 DPU forecast of 13.62¢. A-REIT registered an FY10 DPU of 13.1¢. Earnings were below ours and street’s forecasts due mainly to the one-off upfront fees for certain loans that were amortised. Had these fees been amortised over the tenure of the loan, A-REIT’s 4QFY10 DPU would have been 0.35¢ higher, at 3.08¢ instead. This would have brought its FY10 DPU in-line with ours and street’s forecasts. A-REIT will trade ex-4Q10 distribution on 23 Apr 2010. At our TP, A-REIT offers a yield of 6.2%, a reasonable peg in our view. Maintain NEUTRAL.

Occupancy fell marginally; redevelopment of 1 Senoko Avenue. Reflecting the stabilisation in global demand, A-REIT’s portfolio occupancy declined marginally to 95.7% from 96.5% in 3QFY10. For its multi-tenanted properties, occupancy moderated to 91.2% from 93.1%. Following the repossession of 1 Senoko Avenue, this property will be redeveloped in two phases to fully utilize its permitted plot ratio (from the current 0.6x to 2.5x) and will target potential tenants in the food processing industry.

Focus on built-to-suit and other acquisition opportunities. With a gearing of about 32%, A-REIT has significant dry powder to undertake acquisition and development projects. 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. A marginal revaluation deficit of S$53.7m (-1.1%) was booked. This has no impact on the distribution. Management has guided for a flat year in FY11. We maintain our FY11 DPU forecast of 13.7¢ as dividends are well supported by the long-term leases. A-REIT trades at an FY11 yield of 6.9%. Should we factor a more bullish yield peg of 6%, A-REIT’s recursive fair value would be S$2.28, an upside of 15%. Maintain NEUTRAL. Buy on dips.