• Portfolio stable. Slight dip in occupancy from 91.7% to 90.6% due to non-renewals but reversions positive at 3.0%. Singapore assets improving.
• Demand remains muted as companies exercise caution but tenants also avoid relocation costs, leading to higher retention rates for AREIT. Electronics (29.3%) and Biomedical (34.0%) sectors main sources of demand in 1Q21.
• Reiterate BUY. DDM TP (COE 6%) raised from S$3.64 to S$3.65. We adjust FY21e/22e DPU by -0.5%/0.8% to reflect acquisition of remaining stake in Galaxis and divestment of three Australian logistics assets. Forecast FY21e DPU growth of 9.2% as acquisitions and redevelopment/AEI start contributing. AREIT remains our top pick in the sector for its scale and diversification.

1Q21 update

+ Positive

+ Reversions at 3.0%. US and Singapore reversions were 6.2%and 2.9% respectively. Singapore reversions were mixed, with positive reversions of 5.6%, 2.8% and 0.8% for logistics, business parks and light industrials respectively. Reversions for high-spec and integrated development assets were -0.9% and -2.7%.

– Negative

– 1Q21 portfolio occupancy slid QoQ from 91.7% to 90.6%, under non-renewals in Australia and Singapore. Singapore occupancy fell QoQ from 88.4% to 86.9% on the back of a 14.9ppt decline at 138 Depot Road and 0% occupancy at TÜV SÜD PSB Building which will be redeveloped (4Q21: 100%). Australia’s occupancy shed 2.5ppts to 94.9% following a non-renewal at 1 Distribution Place (1Q21 0%, 4Q20 100%). Occupancy is expected to improve as the manager has lined up tenants for the space.

Acquisition of remaining 75% stake in Galaxis from CapitaLand for S$543.8mn

AREIT’s acquisition of this stake comes 13 months after its initial 25% investment in Galaxis, acquired from MBK Real Estate Asia Pte Ltd. The agreed property value of S$720mn on a 100% basis represents a 2% discount to the market value of Galaxis and a 14.3% appreciation since AREIT’s initial investment (Figure 1). AREIT has raised S$420mn from private placements and will issue an additional S$83mn new units as partial payment to CapitaLand (CAPL SP, Buy, TP S$4.38) for the remaining 75% stake. The issue will increase its share base by 4.2%.

Galaxis is currently held by a private limited company and is subject to a 17% corporate income tax. With full ownership of Galaxis, AREIT can apply for limited liability partnership conversion, allowing unitholders to enjoy tax transparency on the income from Galaxis. Expected DPU accretion on a pro-forma basis, assuming a 6-month conversion approval process, is 0.46%.

AREIT declared a DPS of 5.63 Singapore cents for the period 1 January 2021 to 13 May 2021, forming 35% of our FY21e DPU, broadly in line with our full year forecast.