A-REIT has obtained S$200m in credit facilities to refinance part of its S$300m commercial mortgage-backed securities (16% of total debt) due in August 2009 at a low credit spread of 120bp (vs the current 250-300bp). We estimate this translates to a borrowing rate of 3-3.5% for the new loan. We forecast an average funding cost of 3.8% in FY10, from 3.25% previously, which would erode DPU by 5.5%, assuming its S$524m revolving term loan is refinanced at 5%.

We lower net income 13% for FY10F to S$173.7m and 16% for FY11F to S$173.8m as we see a sharp decline in spot rents. The business parks outlook has turned bleak, with rents down 4.4% qoq to S$4.30psf in 4Q08 on slower demand. Net leasable area from the manufacturing sector (21% of A-REIT’s portfolio) fell for three consecutive quarters to 4Q08. However, potential terminations for A-REIT’s multi-tenant logistics and light industrial buildings should be mitigated by its high security deposits (10-month average for sale-and-leaseback properties).

While A-REIT’s 41.4% gearing is near its 45% target, we don’t expect the company to be compelled to raise equity, as industrial-property devaluations, with their long lease expiry profiles of 5.5 years, tend to take longer than commercial ones. Management expects the cap rate to rise more than 50bp (from the current 6.75%) before hitting the 45% target.

We cut our TP to S$1.90 (from S$2.40) on our profit downgrade but keep our Buy rating as the stock still looks undervalued. We forecast yields of 9% in both FY09 in FY10. A-REIT trades at a 17% discount to its September 2008 NAV.