A-REIT – DBS

A-reit delivers again

• 3.62 Scts DPU, higher than expectations
• Portfolio occupancy levels likely to remain stable
• Maintain BUY, TP S$1.73 based on DCF- total return of 18%, backed by a stable 8% dividend
yield

1Q10 results ahead of projections. Distributable income grew by 18% to S$61m, (DPU of 3.62 Scts) ahead of projections, largely due to a better than expected operational performance. A stronger than expected net property income margin of 79% and portfolio occupancy of 97% vs projections of 92% were the main factors.

Pre-possessing an asset – 13 International Business Park. A-reit repossessed the property, as the anchor tenant was unable to fulfill lease obligations. Limited impact on earnings as (i) the property accounts for c1% of topline, (ii) it is backed by an 8-month security deposit, and (iii) A-reit has since released c37% of the space at higher rates and is in advance negotiations for another 18%.

Adjusting occupancy assumptions upwards. Having concluded 1/3 of expiring leases for the year, A-reit has exceeded expectations by keeping portfolio occupancy relatively stable at 97% and with only a slight moderation in occupancy for its multi-tenanted buildings (MTB) portfolio (down 1pct to 94%). Looking ahead, with only c9.4% of its income up for renewal for the remaining FY10, and backed by recovering economic outlook, we expect forward rental renewal negotiations to improve. As such, we raise our occupancy assumptions for MTB properties from 85% to 90%, leading to higher DPU estimate of 12.8 SCts-13.0 Scts.

Maintain BUY, TP adjusted to S$1.73 based on DCF. We favor A-reit for its ability to deliver sustained positive returns to unitholders. Current price translates to an attractive FY10-
11F yield of c8%.