A-REIT – CIMB

Steady but limited upside

The fervent chase for yields has compressed AREIT’s yields to 5.6%, way below its long-term average and physical property yields. With elevated capital values inhibiting attractive acquisitions, we see a lack of compelling fundamental catalysts for further outperformance.

2Q13/1H13 DPU was broadly in line with consensus and our estimates, at 26/51% of our FY3/13 forecast. We tweak our DPU forecasts for slower take-ups on AEIs and developments on completion. But our DDM target price is higher due to a cut in disc. rate from 8.1% to 6.7%. Maintain Neutral on valuation grounds.

Stable quarter

Despite dilution from a 7.5% expansion of units after its placement, AREIT’s 2Q DPU rose 4.4% yoy due to contributions from development projects and acquisitions. This is a commendable showing given newsflow on a slowing industrial and manufacturing environment. Same-store portfolio occupancy inched up to 96.6% from 96.4%, thanks to pick-ups in light industrial and logistics as business parks and hi-tech industrial saw marginal qoq slippage. Rental reversions remained strong at 9.5-13.3% and should remain positive, with market rents 16-35% above rental due for renewal.

More renewals in FY14-5

With only 5.8% due for renewal for the rest of FY13, lease expiries will be more substantial in FY14 (25.5%) and FY15 (21.9%). Of these, 70-73% will come from single-tenanted buildings. While this could provide rental upside due to the potential conversion of single-tenanted buildings to multi-tenanted ones, risks could come from downtime due to slower leasing of returned space on lease expiry.

Maintain Neutral

AREIT has been a choice hiding ground in the current chase for yields. But there are no compelling fundamental catalysts for further outperformance as elevated capital values hinder attractive acquisitions and there could be downtime from slower leasing when leases expire. Forward yields are among the highest for large-cap S-REITs but way below industrial property yields and the long-term average.