3QFY07 results were in line

3QFY07 results were in line. Gross revenue and net income available for distribution grew 16% and 7% y-o-y to S$71.1m and S$41.0m respectively. This improvement was mainly due to the additional rental income from completed acquisitions. Property expenses grew 23% as a result of higher electricity costs from the aggregation of energy costs for nine properties in the portfolio and an increase in the number of properties in the portfolio. Interest expense grew 100% due to additional debt drawdown. Distribution per unit (“DPU”) grew 6% y-oy to 3.20 cents.

Update on acquisitions and developments. To date, A-REIT announced committed investments of S$425m in FY07 of which S$214m is still pending completion. Efforts have also been taken by A-REIT to enhance its existing assets (i.e. increase of 3,527 sqm space for The Alpha Building which is expected to complete by Sep 07 and the increase of GFA by around 352 sqm for Telepark Building), which in turn has created higher yields for the assets. Moving forward, A-REIT would continue to focus on built-to-suit development projects, which creates greater value to unitholders as acquisition costs will be lower if assets are acquired from the market. A-Reit still has an additional capacity of S$173.0m to utilise.

Maintain Hold. With the limited new supply of office space in the CBD area, there is potential of a positive spillover effect on demand for Business & Science Park and high-tech industrial sectors. We raised our target price to S$2.68 based on 10-year DCF valuation, which has assumed S$500.0m acquisitions pipeline per annum from 2007 to 2010. Maintain Hold as upside is limited at 5%.

Still a distinct advantage

• 3Q07 results beat our expectations. 3Q07 DPU of 3.2cts represents 26% of our full-year forecast and 25% of consensus. Our FY07 DPU forecast is 77% fulfilled YTD. Gross rental revenue was up 16% yoy to S$71.1m in 3Q07, on account of a larger portfolio as well as improved occupancy of 96.1% vs. 94.7% a year ago. Renewal rentals for Hi-Tech Industrial and Business & Science Park properties, which make up 46% of Areit’s portfolio, also increased by about 14% from existing rates in 3Q07. Gearing remained manageable at 40% as at end-3Q07.

• Adds new business park property. Areit has acquired 27 International Business Park, a multi-tenanted property with an NLA of about 9,079 sq m, from Primefield for S$18.6m. Annualised proforma addition to FY06 DPU is 0.02ct, assuming the acquisition is funded by 40% debt and 60% equity. According to Jones Lang LaSalle, business park rentals rose for the sixth consecutive quarter in 3QCY06 to S$155/sq m p.a., up 16% from a year ago. As surging office rentals drive more tenants into housing their backroom operations in business parks, we expect Areit’s business park business to remain strong.

• Headroom for more development projects. Areit currently has five acquisitions worth S$214m, pending completion. About S$127m of these are built-to-suit projects, which translates into S$170m (S$236m, excluding the Cold Storage WRS property which would be ready in Mar 07) worth of potential development projects. As these development projects are typically high-yielding, we see more robust DPU growth for FY08 and beyond.

• Maintain Outperform; target price raised to S$2.82. Considering that 27 International Business Park (estimated yield of 6.7%) will be contributing this quarter and our FY07 DPU forecast is already 77%-met, we have raised our DPU forecast for this year by 3% to 12.8cts. FY08-09 DPU forecasts have also been raised by 2-5% to reflect the higher-yielding acquisitions that will be completed after FY07. Accordingly, our DDM-derived target price has been lifted from S$2.60 to S$2.82 (cost of equity still 6.2%). Forward yields of 5-5.6% remain attractive compared to the 4.5-5% yields that S-Reits currently trade at. Maintain Outperform.