A-REIT – DB

1Q results marginally ahead; a steady start to the year

1Q results marginally ahead; outlook continues to improve

AREIT’s 1Q results were marginally ahead of expectations, underscoring its steady organic growth profile underpinned by a well-diversified portfolio. Operating outlook continues to improve with rents bottoming out and occupancy rates stabilizing. Execution of BTS projects has been solid and it is well positioned for acquisitions with its strong balance sheet and significant financial flexibility. Maintain Buy on undemanding valuations at 6.8 % FY11 yield.

1QFY11 DPU of 3.37cts (+3.4% YoY, +23% QoQ) slightly above DBe of 3.26cts

Revenue rose 10.9% YoY and 9.3% QoQ underpinned by contributions from new acquisitions (eg. DBS Asia Hub, 31 Joo Koon) and positive rental reversions, driving an 8.2% YoY rise in NPI. Overall portfolio occupancy was stable QoQ at 95.6% (91.5% for MTBs). AREIT successfully leased & renewed leases amounting to 0.77m sf during the quarter, out of which c.0.5m pertained to renewals with new leases growing a strong 2.6x YoY. AREIT continued to enjoy positive rental reversions of 3-4% for business park and hi-tech industrial space although a moderation from last quarter’s 8-10% rise. Apart from logistics space, rents for new take-up fell 6-9% QoQ due to differences in specifications and user size.

On track to meet our FY11 DPU forecast of 13.6cts (+4% YoY)

Around 11.8% of AREIT’s revenue is due for renewal for the rest of the year and with demand recovering and rents turning up, we believe it is on track to meet our FY11 forecast. In 1Q, it continued to attract demand from new tenants across the board, especially in transport & storage and electronics. With expiring rents still below current market rents, AREIT should continue to benefit from positive rental reversions and a gradual improvement in occupancy rate. Balance sheet remains firm with gearing at 34.1% and no major refinancing this year. The partial BTS project for Citibank in CBP remains on track for completion in early next year.

Undemanding valuations; maintain Buy with DDM-pegged TP of S$2.23

AREIT is currently trading at 1.27x P/B (vs LT avg of 1.33x) and offering FY11e yield of 6.8% implying an attractive 444bps spread over the 10-year bond compared to the LT average spread of 428bps. Risks: reversal of growth trends impacting leasing demand, credit risk from tenants on long sale & leaseback leases, development risk and deterioration in credit markets