A-REIT – DBSV

Let the numbers do the talking

• Improving leasing demand outlook with rentals inching up in FY1Q11

• Offers FY11-12 DPU growth of c5% p.a. fueled by new asset contributions

• Favorable risk-reward ratio at current levels, Upgrade to BUY, TP maintained at S$2.11

Leasing activities picking up with rentals inching up. We gather that leasing enquires have picked up momentum in recent months with increasing business volumes. As such, the manager has also begun to move asking rents up in discussions with prospective tenants or during renewals. Rentals for business parks space is understood to have inched up 3-5% qoq to cS$3.50-S$4.00 psf per month while rents for Hi-Tech and Logistics warehouses firmed to an average of S$2.60-2.90 and S$1.00-1.40 respectively. This will mean minimized risk of negative rental reversions in FY11-12 given that current transacted rents are above expiring rents for each industrial subsector. As such, we have renewed confidence that A-REIT should be able to deliver sustained earnings in the coming quarter.

Contributions from larger portfolio in FY11. REIT has taken delivery of over S$429m worth of development properties/acquisitions over the course of 2H10, which will start contributing to earnings from 1Q11. As the manager is on the lookout for acquisition & development opportunities to undertake in the coming quarters, we have assumed an additional S$150m worth of new asset acquisitions over the course of FY11 in our forecasts.

Favorable risk-reward ratio, upgrade to BUY. We see value emerging at current levels as the stock now trades at – 1 S.D of its historical yield band of 6% and currently offers FY11-12F DPU yields of 7.4-7.7%, above S-REIT peers average of 6.8%, which we find attractive. With an upside of 13% backed by a further yield of 7.4-7.7%, we upgrade A-REIT to a BUY, TP S$2.11 maintained.