Rebounding occupancy holds potential earnings upside
Portfolio occupancy rates bottomed out in 3QCY15, increasing marginally to 88.9% (vs 88.6% in Jun-15). Looking ahead, with vacancy rates standing at c.11%, we believe that A-REIT has upside to earnings if the unoccupied space can be filled, which is not included in our earnings forecast.
Modest rental growth but still expected to remain positive despite market headwinds
A-REIT recorded 9.1% reversion in its 2QFY16 (FYE Mar) results, boosted by 13.2% rise in rents achieved for its Business Parks/Science Parks. Looking ahead, we expect rental reversion momentum to slow but still remain positive based on the positive spread between market and passing rent levels over 2H16 – FY17.This will provide a buffer against expected falling market rents.
Acquisitions to drive earnings
A-REIT has acquired assets worth more than S$1bn in assets in Singapore and Australia, in search for higher returns. The medium-term strategy is to have overseas exposure form c.30% of the A-REIT revenues. In addition, A-REIT has a visible pipeline of over S$1bn worth of business park assets under the Sponsor’s balance sheet which can be acquired in the medium term.
Our DCF-based TP is lowered to S$2.52 as we roll forward our valuations and update our assumptions from the recent placement. Maintain BUY given total returns of >10%.
Key Risks to Our View:
Interest rate risk. An increase in lending rates will negatively impact distributions. However, A-REIT's strategy has been to actively manage its exposure and currently has c.70% of its interest cost hedged into fixed rates. (Read Report)
Source : DBS Group Research