A-REIT – DBSV

Delivering as promised

• Stable operational performance

• Active pipeline of developments, asset enhancements, to sustain growth

• HOLD, S$2.30 TP is based on DCF metric

Stable operational performance. A-REIT’s 3QFY13 result was in line. Topline and net property income grew 14% and 11%, respectively, driven by a larger portfolio, while organic growth remained steady at 4.8%. Rental reversions remained strong (+18.5%) and outpaced the slight dip in portfolio occupancy rate to 94%. Operational outlook remains stable as the portfolio will continue to benefit from positive spreads between expiring and market rents (currently 24-50%), which should more than offset weaker occupancy rates amid a more subdued demand outlook. But cost hikes continue to threaten margins.

Active development pipeline, asset enhancement projects to supplement growth. At end Dec12, A-REIT had committed to S$430m worth of investments, of which S$217m is yet to be funded. We see opportunities to extract further growth from existing assets, especially through asset enhancement initiatives (AEI) to convert single-tenant buildings to multi-tenanted buildings, to enable A-REIT to lift underlying rents closer to market rates which are c.40% higher. The completion of AEI projects will support sustained growth in distributions.

HOLD, TP S$2.30. We like A-REIT for its defensive portfolio and strong execution track record. Our HOLD call is based on valuation grounds: A-REIT offers <10% upside to our revised TP of S$2.30 (rolled-forward valuation base).