Growth limited by fee structure
With room for rental growth, asset enhancement and development, albeit at a slower rate than before, AREIT’s outlook remains strong. However, as its portfolio continues to grow, generous performance fees are expected to limit its long-term DPU growth.
Although we are expecting growth from asset-enhancement initiatives (AEI) and positive rental reversions, we keep our DPU estimates and DDM-based target price (discount rate: 7.2%). Under our new rating structure, our rating for AREIT changes from Neutral to Hold.
We expect AREIT’s portfolio to stay resilient while rental reversions should be positive (albeit slower than previous years). With the completion of its acquisition of City@Jinqiao, Shanghai and development of Nexus@one-north, coupled with AEI to upgrade older assets, AREIT is poised for net property income (NPI) growth of 7.9% in FY14 and 10.7% in FY15, in our estimation. Occupancy in 2Q14 was a healthy 90.1% (1Q14: 93.6%). The slight qoq drop in its occupancy was mainly caused by new space at Nexus, which is currently 73.9% pre-committed (expected 81.4% by year-end) and City@Jinqiao.
Performance fees to limit growth
Although DPU is expected to grow further (thanks to its past investments), its performance fee structure may limit its future DPU growth. According to our estimates, DPU is poised to grow 4% yoy in FY14 and 12% in FY15. However, reported growth could be limited to 2% and 8% in the respective years if performance fees kick in (0.1% of AUM if DPU grows by more than 2.5% and 0.2% of AUM if growth exceeds 5%).
Continue to Hold
Although AREIT owns one of the best REIT portfolios in Singapore, its ability to grow further could be hindered by the structure of its performance fees. We advocate
Holding the stock until catalysts for a re-rating emerge, such as a change in its performance fee structure.
Publish date: 02/12/13