Post its equity fund raising in January, AREIT has recapitalised its balance sheet and is well-positioned for the next two years. We update our DCF valuation and target price to S$1.70 (from S$2.44) to reflect the enlarged unit base and maintain our Outperform recommendation.

AREIT raised S$408m via a private placement of 258m units as well as a 1-for-15 preferential offering of 95.9m units, at S$1.16 per unit, enlarging its unit base by 26%. ~S$200m will be set aside to fund committed and future development projects, with the balance to be used to pay down debt. After funding S$163m of current committed developments, gearing is expected to reach 36%, down from the 42.2% as at 31 December 2008.

We believe refinancing risk is minimal over the next two years given AREIT’s government-backing and active approach to capital management. AREIT has sought and received an expression of interest from the provider of the S$300m bilateral term loan due March 2010, to extend this term loan. Further, the group is in advanced negotiations for a new S$250m, 3-year committed credit facility from a major financial institution.

Operationally the group remains strong, with FY3/09 3Q distribution income of S$54m, 3.56 S cents DPU, up 13.8% YoY and 1% QoQ. Portfolio occupancy is a healthy 97.2%, with a long average lease to expiry of 5.3 years. Only 1.6% of total portfolio revenue is due for renewal this quarter, and 14.7% in FY10.

FY3/09 DPU lowered by 8% and FY10-12 DPU lowered by 22-24% to reflect the enlarged unit base.

12-month price target: S$1.70 based on a DCF methodology. Catalyst: The extension of its term loan due March 2010; DPU enhancement from the completion of its development projects over the next year.

We prefer SREITs over developers and AREIT is our top pick among the SREITs. We like the group’s proactive approach to debt refinancing beyond the current year’s requirements and less dilutive capital raising compared to its peers.