A-REIT – DBSV

Growth story remains intact

• Management at post-results luncheon meeting affirms healthy operational outlook

• Investments to bear fruit in coming quarters. Maintain FY13-14F earnings growth of c2-4%.

• Maintain HOLD and DCF-based TP S$2.14

Operational outlook remain healthy. A-REIT’s operational performance in 3Q12 was in line with expectations. 9MFY12 earnings formed 76% of our forecasts. Portfolio occupancy remained steady at 95.6% (multi-tenanted buildings at 92.3%), with a slight sequential dip after the consolidation of recently acquired Corporation Place (79.6% occupancy) and 3 Changi Business Park (95% occupancy). Looking ahead, leasing risk is limited with WALE of 4.1 years and only 16% of topline due for renewal. Renewals are also diversified across various industrial segments. In addition, current market clearing levels are at a healthy 18-34% margin above expiring rent levels.

Investments to kick-start earnings growth over FY13-14F. Having invested c.S$712m (S$238.4m yet to be deployed) in growing and enhancing its portfolio, A-REIT is expected to reap the fruits come FY13-14F as these projects reached completion. The manager is also currently looking at a couple of opportunities to grow the REIT, but maintain disciplined in its acquisition approach. China remains in focus, targeting to grow its exposure to 20% of total asset over the longer term. Property types will be for valued added industries (software, corporate HQs) instead of manufacturing.

Capital management. The manager remains disciplined and kept gearing at comfortable 34.1% (heading towards estimated 38% upon completion of investments). However, management does not rule out equity fund raisings for potential acquisitions, if any that are DPU accretive to unitholders.

HOLD call on valuation grounds, maintain DCF-based TP S$2.14. While we like A-REIT’s defensive and well-diversified portfolio and strong execution track record, upside to our target price appears limited from current level. Forward yields of 6.6-6.9% should limit share price downside.