A-REIT : DBS

FY07 results were in line

Comment on Results
A-REIT reported FY07 results that were in line with our expectations. Gross revenue and net income grew 25% and 15% y-o-y to S$283.0m and S$163.8m respectively. Distribution per unit (DPU) increased 9.2% y-o-y to 12.75 cents.
This improvement was due to the additional rental income from the acquired properties, higher occupancy of 96.6% as compared to 95.0% a year ago and organic growth of 2.7%.

Outlook
According to CBRE, there is an increase in capital value and rental rates by around 5% for all industrial space in 1QCY07. We remain positive on hi-tech space and Business and Science Park where demand is expected remain strong given the limited supply and increasing rental rates of office space in the Central Business District. Of note, A-REIT has 45% of its portfolio in the Hi-tech and Business and Science Park sectors. With both the stepped rental increase for the long-term leases and the positive rental reversions for the short-term leases, A-REIT is expected to continue to benefit from organic growth. Some 57% of under-rented leases are due for renewal in FY08.

Recommendation
A-REIT targets an asset size of S$5.0bn by 2010, with S$400.0m p.a. worth of acquisitions and development required. Hence, we have reduced our acquisition pipeline from S$500.0m p.a to S$400.0m p.a. from 2008 to 2010. Based on DCF Valuation rolled over to FY08), we have a target price of S$2.69. This derives a total return, including yield, of 17%. Upgrade our recommendation to Buy from Hold.