A-REIT – DBSV

Valuations hitting a new peak

• 4Q13 results in line
  
• Developments, acquisitions to drive earnings growth in FY14-15F
  
• HOLD, TP raised to S$2.60
  

Highlights & Our views

Stable operational performance. A-REIT’s 4Q13 results were in line, with topline and net property income growth of 8.2% and 5.2% to S$145.4m and S$100.1m, respectively. This was largely due to contributions from its new investments, supported by an organic 2.7% uplift in its portfolio rents. Rental reversions remained robust, at c.14.5% (14% for FY13) due to low passing rents while occupancy rates were stable at c94%. Distributable income came in c5.5% lower after accounting for performance fees of S$68.8m. DPU for the quarter was 3.06 Scts. Rental reversions in the coming year are expected to remain decent due to positive spread between passing and market rents, which currently stands at c9-35%.

Developments, acquisitions to drive earnings growth in FY14-15F. A-REIT continues to keep an active pipeline of development and asset enhancement projects (AEI). As of Dec’12, the trust has an additional S$201.5m in investments (new and uncompleted projects) that have yet to be funded. We see opportunities to extract further growth from its existing assets, especially from various AEIs. In addition, contribution from recently acquired “The Galen” property will start contributing in the coming quarters. Phased completions of its various development and AEI projects in the subsequent quarters will see growth momentum picking up from end of FY14F. Our estimates have been updated for the recent placement and acquisitions and in addition, we have assumed an additional S$150m of acquisitions @ 6.5% yield by the end of FY14F.

Recommendation

Valuations hitting a new peak, HOLD, TP raised to S$2.60. Given its size, liquidity and established track record, we believe AREIT will continue to benefit from the liquidity-driven inflows into the S-REIT sector. The counter typically trades at a premium to S-REIT peers but is now at an historical high, which we believe is fair. Our TP is raised to S$2.60 due to higher acquisition assumptions and slightly lower discount rates. However, given that the total return is <10% to our TP, our call remains a HOLD.