A-REIT – DMG

No surprises; delivers another steady quarter

1QFY11 results inline with expectations. A-REIT reported 1QFY11 DPU of 3.37¢ (-6.9% YoY; +23.4% QoQ), representing 25% of our FY11 DPU forecast of 13.7¢. Net property income rose 8.2% YoY contributed mainly from a larger portfolio base and positive rental reversion. A-REIT will trade ex-1Q11 distribution on 22 July. At our TP of S$2.11, A-REIT offers a yield of 6.5%, a reasonable peg in our view. Maintain NEUTRAL.

Occupancy remained stable; positive rental reversion. Reflecting the stabilisation in global demand, A-REIT’s portfolio occupancy remained stable at 95.6% in 1QFY11. For its multi-tenanted properties, occupancy was unchanged at 91.5%. A-REIT saw positive rental reversion for the renewal leases for properties in the Business & Science Parks and Hi-Tech Industrial of between 3.4% and 3.7%.

Focus on built-to-suit and other acquisition opportunities. With a gearing of about 34%, A-REIT has ample dry powder to undertake acquisition and development projects. Management has indicated that they will continue to scout for opportunistic acquisitions and/or built-to-suit development projects for high-credit quality tenants and well-located income producing properties to ensure sustainable yield accretive returns. A-REIT is currently developing a partial built-to-suit business park facility in Changi Business Park for Citibank. Upon completion in 4QFY11, Citibank will lease at least 50% of the building for a period of 6 years with annual rental escalation and option to renew for two further terms of 3 years each.

Stock almost fully valued; maintain NEUTRAL. We maintain our FY11 DPU forecast of 13.7¢ as dividends are well supported by the long-term leases. AREIT trades at an FY11 yield of 6.8%. Should we factor a more bullish yield peg of 6%, A-REIT’s recursive fair value would be S$2.28, an upside of 14%. Maintain NEUTRAL. Buy on dips.