AREIT has declined more than 19% since 22 May when Federal Reserve chairman Ben Bernanke mentioned that the US central bank might consider tapering its QE3 program as early as September this year. Its closing price of $2.16 yesterday was below its 50-day moving average price of $2.25.

Macquarie Equity Research (MER) however, has an Outperform rating on the company. In the report released on 28 August 2013, MER described AREIT as an operationally stable company, with business as usual.

Here are more excerpts from the research report.

Cap rates are unlikely to rise post the increase in bond yields, according to management and indications from valuers. While interest rates play a role in determining cap rates, rent roll and achieved net profit interest (NPI) are still the biggest components. Further, AREIT’s portfolio cap rates have been largely unchanged over the past 5 years, i.e. 6.8% during 2009 global financial crisis, vs. 6.5% pre-global financial crisis and existing 6.6%.
 
Acquisitions outlook. Going forward, acquisitions are likely to slow, in view of increased competition, high asking prices and introduction of shorter-tenure sites. The group is thinking of executing more brownfield (i.e. retrofitting) than greenfield projects. While more assets could be potentially divested, it is not easy as the prospective buyer must be an end-user/tenant.
 
Leasing updates. Nexus@one-north is expected to hit pre-commitment rate of 70-75% (56% in 1QFY3/14) by its 3Q13 completion. While demand largely came from relocation tenants, they are taking up bigger areas. Current asking rent of S$5.50-5.60 psf/mth compares favourably with S$4.80-5.20 psf previously. Completed in Jul 13, A-REIT City@Jinqiao has a 3% committed rate, with another 20% under negotiation. A rental guarantee of S$13.5m is provided. Although there is no pressure from tenants to decrease rents, AREIT is seeing more requests for shorter leases (i.e. 1-2 years) though these are higher in rates in order to compensate for the shorter timeframe.
 
Debt profile. AREIT’s all-in interest cost has improved to 3.09% (from 3.32% in 4QFY3/13). While floating rates are gradually edging up, they remain low, which explains management’s policy of maintaining 30% of total debts on floating rates, and 70% fixed. Interest cover also remains healthy at 5.7x.
 
Action and recommendation

In MER’s view, AREIT continues to be the dominant player within Singapore’s industrial property sector given its portfolio of 103 properties across various industrial asset classes and proven development expertise. The 3-mth share price correction of 17% provides a good entry point for investors who like its defensive and resilient income streams.
 
Hence, MER has an Outperform rating on AREIT with a 12-month target price of $2.60.

Source: Macquarie Research - 5 Sep 2013