A-REIT – DBSV

Room to manoeuvre

• 4QFYMar14 results in line
  
• Organic growth underpinned by positive rental reversions; Aperia acquisition on track in 1QFY15
  
• Maintain BUY, TP raised to S$2.47
  

Highlights

4Q14 results in line. A-REIT’s 4Q14 DPU of 3.55 Scts (+5.3% y-o-y) brings DPU for the full year to 14.2 Scts, within our estimates. 4Q14 topline and net property income came in 8% and 12% higher y-o-y at S$156.5m and S$112.3m, respectively. This was largely due to contributions from an expanded portfolio (105 properties v 102 properties a year ago), supported by organic growth of c.1.9% y-o-y. Rental reversions remained robust, with an uplift of c. 14.8% owing due to low passing rents. Occupancy rates remained stable at 89.6%. Distributable income was 22% higher at S$85.2m (inclusive of tax imcome from prior periods/capital distribution) due to (i) payment of performance fee of S$6.9m in 4Q13 but nil in 4Q14 and (ii) lower interest expenses.

NAV higher by c.1.5% to S$1.98. This was brought about by revaluation gains from A-REIT City @ Jinqiao and slight compression in portfolio cap rates to 6.57% (vs 6.6% in FY13).

Our views

Steady organic growth to compensate for margin pressure. We expect A-REIT to continue reporting positive rental reversions from the renewal of c. 21.6% of its income in FY15, however uplifts in rents are expected to be more moderate in the mid to high single digit range. We believe this will more than compensate for expected hikes in operating costs (utilities/maintenance contracts) and nil vacancy refunds going forward from the tax authorities. As a result, net property income margins are expected to remain flattish.

Visible pipeline and proposed acquisition of Aperia in 1QFY15 to drive growth. A-REIT’s potential to grow inorganically is strong through (i) an active pipeline of development and committed asset enhancement projects (AEI) worth S$106.5m (added new development projects – C&P Logistics Hub and Techlink and Techview); and (ii) proposed acquisition of Aperia in 1Q15. Management gave an update that Aperia property is on track to achieve TOP by 1Q15 and is 40% pre-committed at this point. The Manager is expected to acquire the remaining stake from the vendor. We estimate the trust will have sufficient debt-headroom to fund these initiatives and should see gearing settle at c34%.

Recommendation

Maintain BUY, TP raised to S$2.47. A-REIT’s is expected to offer steady and resilient earnings. TP is raised to S$2.47 as we roll forward our valuation base. Maintain BUY for a total return of c. 12%.