Solid performance in 1H
- 1H22 DPU of 7.873 Scts is broadly in line, at 48% of our FY22 forecast
- Robust portfolio occupancy and rental reversions uplifts in 2Q
- Reiterate Add, with an unchanged TP of S$3.20
1H22 results highlights
AREIT reported a 13.7% yoy rise in 1H22 gross revenue to S$666.5m, thanks to contributions from its European data centres and US logistics properties, and income from Galaxis, Grab HQ and UBIX in Singapore, partly offset by asset divestments. However, NPI rose a smaller 7% yoy to S$476.9m due to higher utilities expenses from its Singapore properties. 1H22 DPU came in at 7.873 Scts, up 3.6% yoy. Aggregate leverage stood at 36.7% at end-1H22. While AREIT has significant debt headroom, management indicated that AREIT is unlikely to reach its stated S$1bn acquisition target for FY22, as it expects deals take longer to conclude in this rising interest rate environment. An estimated 80% of its borrowings are in fixed rates; management guided that a 25bp change in average funding cost would only impact DPU by 0.07 Scts. Portfolio occupancy rose to 94% at end 1H, with take up in Singapore rising to a record high of 91.9%. Rental reversion averaged +13.2% in 2Q22 (1Q22: +4.6%).
Strong occupancy and rental reversions from Singapore portfolio
Its Singapore portfolio achieved a +13% rental reversion in 2Q22, led by uplifts at business and science parks, industrial and data centres, as well as logistics segments. New demand for space came from the engineering, logistics and supply chain management and electronics sectors. Management raised its guidance for portfolio rental reversions to be in the positive mid-single-digit range for FY22 (vs. its previous guidance of a low single-digit). AREIT has a remaining 9.5%/26.6% of leases in Singapore to be renewed in 2H22F/ FY23F. These are mainly business and science parks and industrial and data centre spaces. In terms of redevelopment and asset enhancement opportunities, AREIT has a pipeline of S$405m worth of projects, to be gradually completed over 4Q22-2Q25F.
Overseas assets benefited from healthy rent renewals
In 2Q22, AREIT enjoyed rental reversions of +15.2%/15.3%/11.7% in Australia/US/UK and Europe amid rising occupancy. Leases equivalent to some 5.7%/23.7% of its income in Australia are to be renewed on 2H22F/FY23F, largely coming from the logistics properties in Sydney. Its US portfolio achieved a 15.3% rental reversion for its business space properties in 2Q. This portfolio has a remaining 18.9% of income, mainly from the San Diego properties, to be re-contracted in 2H22. UK/Europe properties reported an 11.7% uplift in rent renewals from the data centre portfolio and has a minimal 7.2% of lease expiring in 2H22, coming from data centre properties in the Netherlands.
Reiterate Add rating
We leave our FY22-24F DPU estimates unchanged and retain our DDM-based TP at S$3.20. AREIT is currently trading at 5.6% FY22F yield. We continue to like AREIT for its diversified and resilient portfolio and healthy balance sheet. Potential catalysts include faster-than-expected global recovery and accretive new acquisitions. Downside risks include a protracted economic downturn.