A-REIT – CIMB

Intact for the year

• Results in line; maintain Neutral. 1HFY11 results met Street and our expectations. DPU of 6.67cts forms 47% of our full-year forecast of 14.2cts. If retained income of S$3.5m (pending approval for tax-transparency treatment) had been distributed, available DPU would have been 6.86cts. We add in S$97m of asset enhancement initiatives (AEI) as announced and lower our cost-of-debt assumptions. Our DPU estimates increase by 1-4% for FY11-13. We roll over our DDM target price to CY11, raising it to S$2.13 (from S$2.02) with an unchanged discount rate of 8.4%. We expect weakening occupancy rates to be compensated by higher yields after AEI and build-to-suit opportunities. Despite a still attractive yield of 6.8%, we believe its management premium and track record have been priced in, at a 34% premium to book value, particularly given still-weakening occupancy. Re-rating catalysts could include announcements of accretive acquisitions and development projects.

• Weaker qoq, with more conversions to multi-user buildings. Net property income of S$83.9m for 2QFY11 was down 3.9% qoq as property expenses increased with more single-user buildings (where tenants usually bear most property-related expenses) converted to multi-user facilities. Weakening occupancy despite positive macros is in line with our view of a lag time between the two. Buildings converted in the quarter included 12 Woodlands Loop, 3 Tai Seng Drive and 53 Serangoon North Ave 4.

• S$97m worth of new AEI at 8.5% yields. Management announced new AEI, totalling S$97m, which would reposition 1 Senoko Avenue, Techview and 10 Toh Guan Road for higher-value use. 1 Senoko Avenue would be redeveloped into a dedicated food hub with additional GFA of 34,519 sq m. Techview would be repositioned to court hi-tech users rather than manufacturing users which it used to house. Finally, 10 Toh Guan Road (previously occupied by TT International), would try to attract hi-tech users rather than its current logistics users. While regulatory approval is pending for Techview and 10 Toh Guan Road, management anticipates the three new projects to fetch an estimated weighted yield in excess of 8.5%, above its FY10 portfolio NPI yield of 7.3%.