Stable but limited growth
NEUTRAL - Downgrade
| S$2.31 - TP: S$2.47
▊ 2QFY14 results were largely in line with our expectations with DPU accounting for 25% of our FY14 estimate. Management indicated that positive rental reversion will continue but industrial market growth in general is seeing a slowdown. 1HFY14 DPU met consensus and our expectations, forming 50% of our full-year estimate. However, after including performance fees into the model, DPU estimates were lowered by 1.8%/1.6% for FY14/FY15 respectively. As a result, we downgrade AREIT to Neutral with a slightly lower DDM-based (discount rate of 7.2%) target price of S$2.47.
Slight drop in occupancy
During 2QFY14, AREIT announced the completion of its acquisition of AREIT City@Jinqiao, Shanghai and development of Nexus@one-north. Together with the AEIs to upgrade older assets, AREIT is well poised for net property income (NPI) growth of 7.9% in FY14 and 10.7% in FY15. Occupancy for 2QFY14 came in at a healthy 90.1% (vs. 1QFY14’s 93.6%). The slight drop in occupancy was mainly attributed to the additional new space at Nexus – which is currently 73.9% pre-committed (expected 81.4% by year end) – and AREIT City@Jinqiao.
Performance fees limit growth
Although AREIT is expected to continue to grow (thanks to its past investments), its performance fee structure may limit future growth. According to our estimate, DPU is poised to grow yoy by c.4% in FY14 and c.12% in FY15. However, AREIT’s growth will be limited to 2% and 8% in the respective years if performance fees kicks in (0.1% of AUM if DPU grows by more than 2.5% and 0.2% of AUM if growth exceeds 5%).
Downgrade to Neutral
Although AREIT continues to own one of the best industry REIT portfolios in Singapore, its ability to grow further is hindered by the structure of its performance fees. On this basis, we downgrade AREIT from Outperform to Neutral with a slightly lower target price as we factored the performance fees into our estimates.
Publish date: 17/10/13