Lower occupancy but reversion still higher — A-REIT will continue to maximize occupancy and retain customers. With the economic downturn, retention ratio has fallen from 80% last year to the current 70% as its tenants downsize. However, on average A-REIT’s portfolio is still achieving rental reversion at 10- 15% higher than preceding rental.
Adjust earnings in reflect BTS project — We have raised our earnings by 2.4% for FY2010E to reflect the Built-to-Suit (BTS) project for SingTel at Kim Chuan Rd. The building with an expected GFA of 354,000 sq ft is expected to cost S$175.4m and will be completed by 1Q10. SingTel will lease the building on a 20-year lease with an option to renew for another 10 years with an annual rental escalation.
Effect of cap rate increase on Gearing — Management indicated that a 25bps increase in cap rate will lower asset value 3.5% and increase gearing by 1.2%. A-REIT’s gearing as at end Mar 09 was 35.5%. Based on our estimates, A-REIT would be able to maintain a relatively stable gearing of 35-37% over the next two years assuming no acquisitions. We believe decline in asset value will be mitigated given 50% of its portfolio is on long-term leases and that the completing development projects were acquired at relatively high yields.
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