● We are upgrading AREIT to OUTPERFORM with a target price of S$2.59, implying total return of 24%. With the sell-off in equity markets, AREIT now trades at an FY16 yield of 6.9%.
● AREIT has gone through the bulk of the conversions on its logistics assets to multi-tenanted buildings, while business park occupancies look to have bottomed with portfolio occupancy now at 88.8%.
● AREIT extended its investment mandate to explore opportunities in mature markets, and plans to grow this to 20-30% of its portfolio. This is on the back of its sponsor winning the bid for GIC's ~S$1.1 bn logistics portfolio in Australia. The devil will be in the details for any potential deals, but further acquisitions could provide some support to DPU growth amid lacklustre organic growth.
● With volatile markets we expect defensives to be in favour, while the decline in stock prices has improved the risk-reward for the sector, making the REITs a more conducive place to hide, at least in the rest of the year. We believe, Retail is the most benign (CMT and FCT), followed by Industrial (KDCREIT, MINT, AREIT)
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