2Q-1H FY3/13 results inline. 1HFY3/13 revenue at SGD285m, was 55% of ours and 52% of consensus estimate. 2QFY3/13 revenue at SGD143m, was 28% of ours and 26% of consensus estimate. 1HFY3/13 DPU at 7.06 SG-cts (+7.3% YoY) was 54% of ours and 50% of consensus estimates. 2QFY3/13 DPU at 3.53 SG-cts (flat QoQ, +4.4% YoY) was 27% of ours and 25% of consensus estimates. Aggregate leverage inched down to 32.5% from 32.7% last quarter. After funding of committed capital expenditure, aggregate leverage is expected to be 34.8%. All-in-financing costs for 2QFY3/13 averaged 3.15% with an average term of debt of 4.2 years.  

Stable portfolio continues to deliver. Occupancy rate (same-store basis) for th e portfolio and multi-tenanted buildings (MTB) improved to 96.6% and 93.4% respectively from 96.4% and 92.8% a quarter ago. 2QFY3/13 weighted average lease to expiry was 3.9 years, with only 5.8% of income due for renewal for the remaining FY3/13. Positive rental reversion on renewal range between 9.5%-13.3% throughout all segments of the portfolio boosting NPI margin (71.8%) and yields (6.6%)  

New Asset Enhancement Initiatives. The former Aztech Building and Ultro Building will be undergoing refurbishment works till 2Q13 and 4Q13 respectively. We expect rental upside of 117% for Aztech (SGD 2.73 psf/mth from SGD1.25 psf/mth) and 56% for Ultro (SGD3.90 psf/mth from SGD2.50 psf/mth on completion. We raise our FY3/13- 3/15 DPU by 0.9%-3% in view of the enhancements and better-thanexpected rental reversions from renewals.  

Yields can be compressed by another 40bps. We continue to like AREIT for its stable DPU yield, healthy lease expiry (not more than 25.5% of income expiring per annum) and debt maturity profile (not more than SGD400m maturing per annum). In addition, only 19.8% of A-REIT’s NLA is used for conventional manufacturing, which is a plus given that the per annum net demand for factory space has been modest compared to warehouses and business parks. From our estimates, the implied cap rate for A-REIT is 5.4%. If we take this cap rate as the floor for FY3/14 DPU yield, we believe that yields can be further compressed by another 40bps from our forecasted FY3/14 DPU of 5.8%. Reiterate BUY with a DDM-derived TP of SGD2.65.

Source: Maybank Kim Eng Research - 18 Oct 2012