A-REIT – DBSV

Prime asset, prime valuations

Highlights

• 4QFYMar12 DPU of 3.5 Scts was slightly ahead. Gross revenues and net property income increased 19% and 13% y-o-y to S$134.4m and S$95.1m respectively. FY12 was a fruitful investment year, where the REIT invested close to S$946m in development & asset enhancement projects and new assets into growing its portfolio. As a result, distributable income in 4Q12 was 19% higher at S$72.9m (DPU of 3.5 Scts). Full year DPU of 13.56 Scts formed 103% of our FY12 estimates.

• 6.9% lift in NAV to S$1.88. A-REIT also reported a revaluation gain of close S$222m, resulting in a lift in NAV to S$1.88, largely due to improving rentals and occupancies, and supported by a 10bps cap rate compression compared to 31st March 2011.

Our View

• Sound operational outlook; ability to pass on cost increases to tenants a key positive. We note that NPI margin of 71% (vs 74% a year ago) was marginally lower. This was due to higher utility costs incurred on an expanded portfolio, while the conversion of several buildings into multi-tenanted buildings eroded effective portfolio margins. Margins should remain relatively stable from hereon as the manager should be able to pass on some of these costs to tenants through raising service charges as per rental agreements.

• Portfolio performance to remain steady. Portfolio occupancy remained high at 96.4%for its multi-tenanted buildings. Overall occupancy (excl new acquisitions which averaged c.76.6%) was stable at 92.8% (vs 92.2% a year ago), while rental reversions remained positive at 5.2%-15.7% across all sub-segments. We see minimal leasing risks in FY13, mitigated by an average long WALE of 4 years and having only 13% of topline up for renewal, which is further diversified across various industrial segments. In addition, we see earnings risks from negative rental reversions to be low for this year, as market rentals are a healthy 16-32% above expiring rents.

• Debt expiry profile is well spread out. Gearing at c.36% is within management's target of 35-40%. The manager reported that they have issued a new 12 year ¥10bn denominated MTN @ 2.55% p.a., further lengthening its debt maturity profile.

Recommendation

• Maintain HOLD with TP slightly raised to S$2.17. We tweaked our estimates up to reflect higher reversionary rents and occupancy rates in 2012. While we like A-REIT's FY13-14F yields of close to 7.0%, we are maintaining our HOLD rating given limited upside to TP.