A-REIT – DBSV

Value from enhancements

• Commendable 1Q14 results – in line
  
• New acquisitions, development projects to underpin a steady growth momentum
  
• Acquisitions if any, will be a positive surprise
  
• Maintain BUY, TP lowered slightly to S$2.50
  

Highlights

Commendable 1Q14 results. A-REIT’s 1Q14 results were in line, with gross revenues and net property income growing 6% and 7% to S$150.9m and S$108.0m, respectively. This was largely due to the acquisition of The Galen, supported by an organic uplift in rents. Rental reversions remained positive at c9.6% compared to previously contracted rents while occupancy rates dipped slightly to 93.6% due to conversion of certain singletenanted properties into multi- tenanted properties. Weighted allin cost declined slightly to 3.09% (vs 3.32%) but is expected to remain stable going forward. Distributable income came in 11.3% higher at S$85.2m, translating to a DPU of 3.55 Scts for the quarter (+0.6% due to an enlarged share base).

Recent completions to contribute positively. to earnings. The recent completion of Unilever Four Aces Singapore (a built-tosuit facility) and the acquisition of A-REIT City @ Jinqiao are expected to start kicking in from 2Q14. We note that there is a S$13.5m rental guarantee on the latter, which will mitigate any earnings downside. A-REIT has commenced leasing of the space, which is currently 3% leased with a further 20% of the space under negotiation.

Developments, acquisitions to drive earnings growth in FY14-15F. A-REIT has an active good pipeline of development and asset enhancement projects (AEI), with an additional 3 AEIs at Techquest, LogisTech and Corporation Place unveiled, costing cS$25.4m and will complete in 2Q14. Together with its other developments, A-REIT has an additional S$190.8m in investments (new and uncompleted projects) that have yet to be funded. Growth momentum will pick up from end of FY14F as these projects are progressively completed from 2HCY13. Amongst the development projects, Nexus@one-north, the largest development project in its pipeline (completing in 3QCY13), is seeing improving take-up rates, with reported occupancy of close to 58%.

Recommendation

BUY with revised TP of S$2.50. Our TP is revised to S$2.50 as we raised our risk free rate assumption (2.6% vs 1.8%). We continue to like A-REIT for its stability and attractive yield of c6.1- 6.5%. Upside to earnings will be acquisitions, which the manager is currently reviewing.

.SI Refer to important disclosures
at the end of this report