A-REIT – DMG

A Good Start

1QFY10 results above expectations. A-REIT reported a 6.9% YoY fall (+12.1% QoQ) in 1Q10 DPU to 3.62¢, above ours and consensus estimates. Annualised DPU came in at 14.48¢, 8.8% above our FY10 forecast of 13.3¢ (10.5% above the Street’s 13.1¢ estimates). Revenue was up 10.7% due to positive rental reversion and contributions from new acquired properties and development projects. A-REIT will trade ex-1Q10 distribution on 29 Jul 2009. We have raised our DDM-backed target price to S$1.72 (S$1.57 previously) to reflect a lower cost-of-equity assumption of 9% (9.7% previously). Maintain BUY.

Earnings resilience expected despite increasing tenants in arrears. Our recent channel checks on A-REIT suggest more industrial tenants in arrears in rental payments given the recessionary economic conditions. Management confirmed that about 1% of its NLA (~ S$3m annual revenue) is highly vulnerable to full-fledged default. In any case, A-REIT has already received S$2.1m in security deposits from these tenants. On a portfolio basis, A-REIT is backed by 6 months of security deposits, mitigating downside DPU risks. While earnings impact may be muted, we believe the loss of a single major tenant may be fairly damaging to the perception of A-REIT’s stable of assets.

Occupancy at healthy levels. Reflecting the slowdown in global demand, occupancy rate for A-REIT’s multi-tenanted properties declined marginally to 94.0% from 95.3%. However, overall portfolio occupancy remains high at 97.1% (97.8% in 4QFY09) due to the contribution from single tenanted buildings with long term leases. We expect positive rental reversion, albeit at a slower pace, for the Business & Science Parks and Hi-Tech Industrial properties as these properties are 30% under-rented.

Trading at attractive yields. At current prices, A-REIT offers investors a stable dividend yield of 8.5% for FY10 and 8.7% for FY11 – with dividends well supported by the long-term leases on single-tenanted buildings which accounts for 50% of revenue. We recommend buy on dips as stock has rallied 48% since Mar 09.