• FY20 DPU of 14.69 Scts (-0.9% YoY) came in below, at 91% of our estimate post-adjustment of our DPUs for its S$1.2bn equity fund-raising (EFR) in 4Q20.
• Portfolio occupancy stable at 91.7%. FY20 reversions in the green at 3.8%.
• Completed S$973mn of acquisitions, S$125mn of divestments and S$34mn of AEI in FY20.
• Reiterate BUY. Lower FY21/22e DPUs by 8.8/0.2% but raise DDM (COE: 6%) TP to S$3.73 from S$3.61 to incorporate recent acquisitions, an enlarged share base following fund-raising and updated leasing assumptions. TP climbs due to higher later-period DPUs and terminal value.

Positives

+ Portfolio occupancy stable at 91.7%, -0.2ppt/+0.8pppt QoQ/YoY. Singapore occupancy rose from 87.9% to 88.4%, lifted by the logistics sector. New demand came from government agencies (22.7%), logistics and supply chains (16.2%), biomedical and agri/aquaculture (11.5%) and engineering (10.0%).

+ FY20 reversions in the green at 3.8%, reflecting better leasing for its Singapore portfolio in 1H20. There were also strong reversions of 16.7% and 14.0% in the US and Australia. About 20.9% of Singapore leases will expire in FY21, mostly in business (41%) and logistics (22%) parks. Due to longer WALEs in its overseas portfolio, only 7%/5.7%/5.5% of leases will be expiring in the US/Australia/UK.

+ Gearing improved YoY from 35.1% to 32.8%, after its S$1.2bn ERF in 4Q20. AREIT raised more funds in advance of acquisitions to give it greater financial flexibility. Balance sheet remained strong with interest coverage at 4.3x and formidable S$5bn headroom to the 50% leverage limit.

Negative

– Handful of non-renewals. There were some non-renewals during the year. A 9,494 sqm logistics asset at Changi North and a 15,421 sq m light-industrial asset at Joo Koon Circle ended the year vacant. Occupancy at 7,915 sq m Cintech II also fell to 0% in 3Q20 but AREIT was able to lease the building fully to a government agency by 4Q20. Some pre-terminations are expected following the recent rollout of the Singapore government’s ReAlign Framework. However, AREIT’s manager shared that the impact should be minimal at 0.1% of GRI.

Outlook

AREIT announced the acquisition of two Class A office buildings in San Francisco and its S$1.2bn EFR on 10 November 2020. Proceeds will be used to part-fund its acquisition of two US office buildings, a suburban office in Sydney, Australia and a portfolio of data centres (DC) in Europe. Its EFR will increase its share base by 10%. The US and Australian acquisitions were completed on 21 November 2020 and 13 January 2021 respectively. Negotiations and due diligence for the European data-centre portfolio remain in progress.  

Construction slippages in 2020 have led to the rollover of new industrial supply to 2021. The leasing environment remains challenging as landlords keep rents competitive to attract new tenants. Still, AREIT expects tenant retention to be 60-70%, similar to historical levels. It has guided for flat to mid-single-digit reversions for all its markets. Demand is likely to emanate from the technology, precision engineering and biomedical sectors. Singapore continues to be an attractive location for manufacturers. AREIT’s manager said it has conducted viewings for several prospective foreign tenants. Construction costs have crept up due to compliance costs with health and safety measures. Costs for contracts locked in before COVID-19 may tick up 2-3%. New construction quotes may cost up to 15% more.

Maintain BUY. DDM-based TP raised from S$3.61 to S$3.73

We drop FY21e/22e DPUs by 8.8%/0.2% (Figure 1) as we incorporate its acquisition of the: i) two Grade A office buildings in the US; ii) suburban office in Sydney; iii) logistics asset under development in Brisbane; iv) portfolio of European data centres; and v) its S$1.2bn ERF. We also updated our leasing assumptions. We have assumed it will be acquiring the S$1.5bn European data-centre portfolio at an NPI yield of 6% and LTV of 40% sometime in 3Q21.

We continue to favour AREIT for its scale and diversification. Stock catalysts are expected from acquisitions and redevelopment. We forecast DPU growth of 9.6% for FY21e as acquisitions and redevelopment/AEI start contributing.

Source: Phillip Capital Research - 8 Feb 2021