A-REIT – DBSV

AEI to optimize yields

• Positive leasing efforts to boost occupancy levels in coming quarters

• S$97m enhancement works underpin earnings growth in longer term

• Maintain HOLD and raised TP to S$2.19 as we roll forward valuation to FY12.

DPU of 3.3Scts in line. A-REIT reported higher topline and net property income of S$111.1m (+8.6% yoy, -4.0%qoq) and S$83.9m (+3.5% yoy, -4% qoq) respectively, helped by contributions from completed development projects and acquisitions. Performance on a sequential basis was slightly lower due to a one-off gain reported in 1Q11. Distributable income in 2Q11 was S$63.1m (+2.5%yoy) but retained S$1.4m pending tax clearance from the authorities. DPU of 3.3 Scts was 5.2% lower due to a larger unit base but will have been 0.3% higher on a pro-forma basis.

Stable portfolio occupancy of 95.3%, expected to improve come 3Q11. While A-REIT multi-tenanted buildings have seen slight decline in average occupancy levels in recent quarters, we expect a rebound come 3Q11 due to positive results from newly secured leases from the manager’s active releasing efforts (estimated to increase by 1% qoq).

S$97m planned for enhancement works (“AEI”) to underpin higher asset yields in medium term. Plans include major construction works to increase the properties’ average net lettable area as well as refurbishment & repositioning of the properties for higher value use. The manager targets a weighted average return of 8.5% from these AEI plans when completed from 1Q12 onwards.

HOLD call maintained, TP S$2.19. We lowered our FY11-12 earnings by 2% as we adjust our revenue recognition from the above AEI works. TP is raised to S$2.19 as we roll forward our valuation to FY12. However, given limited upside from current level, we maintain our HOLD call. A-REIT currently offers a prospective FY11-12 yield of 6.4-6.7%.