A-REIT – DB

Hitting the industrial trail

Improving operating environment, solid execution

We continue to like AREIT’s defensive and well-diversified portfolio and solid execution of BTS projects. Enquiries have picked up with rents bottoming out amid the strong rebound in manufacturing. Our recent site visit revealed good progress with its ongoing development in CBP and a gradually improving operating environment for its other properties, which are generally highly specified and well located. Valuations are undemanding at 7.3% FY11e yield and 1.19x P/B for a market leader with an established track record. Buy.

Cementing its stronghold in Changi Business Park (CBP)

AREIT has been strengthening its foothold in CBP with the recent completion of Plaza 8 @ CBP and the acquisition of DBS Asia Hub. The partial BTS for Citibank is also progressing on schedule with completion expected in Feb next year (4QFY11). Its growing market share, coupled with limited new supply in the area and recovering demand has translated into rising pricing power. Signing rents are around S$3.50-3.70 compared to the low S$3.00 range a quarter ago. While the amenity centre is currently around 1/3 leased, we expect firm demand from F&B providers and other support services as the working population in CBP rises to c. 20-25,000.

Demand recovering; rents bottoming out

Industrial rents have turned around in 2Q, rising for the first time since 3Q08 as demand recovers. AREIT is seeing broad-based demand recovery across all segments with enquiries rising as tenants plan for expansion on the back of the strong rebound in manufacturing output, which rose 58.6% YoY in May. With demand/supply dynamics in other micro-markets comparatively weaker vis-à-vis CBP, rents are ticking up but at a slower pace. We expect overall occupancy rate for AREIT’s portfolio to stabilize and improve over the coming quarters.

Valuations undemanding; maintain Buy with DDM-pegged TP of S$2.23

AREIT is currently trading at 1.19x P/B vs LT avg of 1.33x and offering FY11E yield of 7.3% implying an attractive 489bps spread over the 10-year bond. We believe valuations are undemanding for an industrial market leader with high quality, well diversified portfolio and proven track record in BTS projects. Downside risks: reversal of growth trends impacting leasing demand, credit risk from tenants on long sale & leaseback leases, development risk and deterioration in credit markets