A-REIT – DMG

Delivers another steady quarter

3QFY11 results inline with expectations. A-REIT reported 3QFY11 DPU of 3.29¢ (+0.6% YoY; -0.3% QoQ). Annualized 9MFY11 DPU came in at 13.3¢, marginally below our FY11 DPU forecast of 13.7¢. A-REIT had retained S$4.5m derived from a finance lease granted to a tenant, pending discussion with IRAS on tax treatment of this income. Had this income been distributed, DPU would have been 0.24¢ higher. Net property income rose 2.0% YoY contributed mainly from a larger portfolio base. We raise our FY12-13 DPU by 2-6.5% to account for higher rental assumptions and a new BTS project. We correspondingly raise our TP marginally to $2.20. At our TP of S$2.20, AREIT offers a yield of 6.2%, a reasonable peg in our view. Maintain NEUTRAL.

Occupancy improved. Reflecting the stabilisation in global demand, A-REIT’s portfolio occupancy has improved to 95.6% in 3QFY11 (95.3% in 2QFY11). For its multi-tenanted properties, occupancy has also improved to 91.1% (90.5% in 2QFY11). In 3QFY11, A-REIT saw negative rental reversion for the renewal leases for properties in the Business & Science Parks, Hi-Tech Industrial and Logistics & Distribution Centres of between -2.5% to -9.2%, mostly due to large floor plate discount. We expect positive rental reversion in the following quarters as expiring leases are mostly under-rented.

Focus on built-to-suit and other acquisition opportunities. A-REIT also announced that it has embarked on a built-to-suit logistics facility development at estimated cost of S$35.9m. We estimate accretion to FY13 DPU to be just 0.3%.

Stock almost fully valued; maintain NEUTRAL. We maintain our FY11 DPU forecast of 13.7¢ as dividends are well supported by the long-term leases. At its current price, A-REIT offers investors a stable dividend of 6.4% for FY11, but minimal upside compared to pre-crisis yields of 5.3%.