A-REIT – CIMB

Time to take profit

• Broadly in line; downgrade to Underperform from Neutral. 9MFY11 results met Street and our expectations. DPU of 10cts (-4%) forms 69% of our FY11 forecast of 14.4cts. After accounting for a new development project just announced, lengthening the timing of new contributions, and lowering non-taxable deductible items, our DPU estimates fall by 2-5% for FY11-13. Our DDM target price (discount rate 8.4%) dips correspondingly to S$2.09 from S$2.13. While the industrial outlook appears to be stabilising, intensifying competition from existing and upcoming industrial REITs and funds could make it increasingly challenging for AREIT to grow much more in Singapore. As such we downgrade to Underperform. AREIT’s recent share price surge is an opportune time for investors to take profit and switch to Cache Logistics for more value.

• Default cases slowing down. Despite stable gross rental income and declining property expenses, net property income of S$83m in 3QFY11 was still down 1% qoq. However, this was to some extent a positive thing as AREIT’s lower other income was largely due to reduced liquidation damages received in the form of forfeited security deposits from defaulting tenants (including LabOne, TT International and Autron), pointing to dwindling default cases. Portfolio occupancy also improved: 95.6% from 95.3% in 2Q11 for the entire portfolio and 91.1% from 90.5% for multi-tenanted properties. New take-up rates increased 1-12% from the last quarter across the portfolio except for Hi-tech space (-14%). However, renewal rates were down 3-9% across the sectors, except Hi-tech (+6%). Management is committed to distributing YTD retained income of S$4.5m which would add 0.22cts to 4Q11 DPU.

• New S$35.9m development project. AREIT has commenced a new S$35.9m build-to-suit logistics facility in Changi. Completion is expected by Mar 12. We have assumed 9% yields and income contribution only in FY13.