19 September 2014
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Acquisition of MBFC Tower 3

KREIT just announced the highly anticipated acquisition of MBFC Tower 3. Although this iconic office building could strengthen the REIT’s portfolio and diversify its tenant base, the resulting yield dilution is disappointing. As a result of the estimated DPU dilution of 3.6% in FY15 and 3.8% in FY16, we maintain our Hold rating with a lower DDM-based (discount rate: 8.4%) target price of S$1.21, as we factor this weakness into our model.

What Happened

Keppel REIT (KREIT) said it has entered into a conditional share purchase agreement with Bayfront Development Pte Ltd. for the acquisition of a one-third stake in Marina Bay Financial Centre Tower 3 (MBFC Tower 3) for a purchase consideration of S$1,248m. This property is a 46-storey premium grade A commercial building with ancillary retail space situated in the heart of Marina Bay, with an attributed NLA of c.447,000 sq ft and an occupancy of 94%. After the adjustments for net liabilities, total purchase consideration is S$710.1m and will be satisfied by way of issuance of S$185m worth of units to the vendor and cash payment for the balance. The cash will originate from i) 195m of new KREIT units to be issued via a placement at an issue price of S$1.17/unit (4.88% discount to the last traded price); ii) part of the proceeds (S$185.2m) from the Prudential Tower divestment; and iii) borrowings of S$120.7m.

What We Think

The value of S$1,248m translates to a value of S$2,790psf – c.9% higher than what DBS paid for its 30% stake in late 2012. Including the five-year rental support of S$10.40-10.80 psf/month, the initial yield is estimated at c.3.5%. Taking into consideration the expiry profile, coupled with an expected growth in rental spot rate by 10% and 5% in FY15 and FY16 respectively, we estimate the passing rent to surpass the supported level by FY18, by which time the majority of the leases in the property would have been renewed. However, on the back of new units being issued, coupled with a resultant leverage ratio of 43.8%, we estimate KREIT’s DPU to be diluted by 3.6% in FY15 and 3.8% in FY16 as a result of this acquisition. Having said that, this weakness could potentially be mitigated if KREIT is able to obtain the Limited Liability Partnership tax transparency status as per MBFC Tower 1 & 2.

What You Should Do

Factoring in the lower DPU over the next few years as a result of this acquisition, we have maintained our Hold rating on KREIT with a lower target price of S$1.21.



18 September 2014
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Engines started

The Singapore Tourism Board (STB) recently released the Jul 2014 visitor arrival and hotel RevPAR data. Although the numbers did not appear exciting at first glance, the mom growth figures in Jul 2014 were the strongest in the last five years. This trend was in line with our expectations of a stronger tourism/hospitality sector in 2H14 and could mark its turnaround. We maintain our sector Overweight rating, with CDL-HT and OUE-HT as our top picks in the hospitality REITs sector.

What Happened

STB's recently published Jul 2014 tourism numbers showed that tourist arrivals dipped 0.9% yoy, while hotel RevPAR was flattish in 7M14.

What We Think

Although visitor arrivals in Jul 2014 were weaker than in Jul 2013, they were stronger than in Jun 2014. Although Jul is a seasonally strong month for tourism, we think it noteworthy that visitor arrivals rose 19.2% mom in Jul 2014 compared to the historical average of 13.5% (since 2010). Similarly, Chinese and Indonesian tourist arrival rates rose 97.4% and 6.7% mom in Jul 2014, respectively, above the historical average of 65.5% and -1.7%, respectively. Although this growth could partly be due to the low base from 1H14, we think that it marks a turnaround in the tourism sector, thanks to the easing political tension in Thailand and slight recovery from the negative impact of the MH370 disappearance earlier this year. The recovery is supported by the gradual recovery in Chinese visitor arrivals growth in Singapore during the past two months (vs. arrival rates in Jun-Jul 2013) from the trough of -51.7% yoy in May 2014. In Jul, we note that hotel occupancy growth of 5.1% mom was the strongest in the past five years, despite the flattish yoy hotel RevPAR. Among the various classes of hotels, luxury and upscale hotels continued to deliver strong performances, posting RevPAR gains of 11.2% and 2.8% yoy, respectively. Economy hotels posted a surprisingly strong RevPAR increase of 7.5% yoy. As highlighted in our previous report titled 'Impending turnaround', we continue to believe that Singapore's hospitality market will deliver stronger performance in 2H14 than 1H14, barring any unforeseen circumstances. Our view is based on the following positive factors: 1) the stabilisation of the Indonesian Rupiah, 2) delays in the delivery of several hotel projects, which will halve the estimated new supply of hotel rooms in FY14, 3) the slightly stronger tourist arrivals in 2H14 (+2.8% hoh, based on our estimates), and 4) the stronger corporate spending expectations in 2H14.

What You Should Do

We believe that CDL-HT (Add, TP:S$1.88) and OUE-HT (Add, TP: S$0.96), which are REITs with upscale hotels in their Singapore portfolio, will be prime key beneficiaries of the anticipated recovery in the hospitality sector in 2H14. Currently, CDL-HT is trading at 1.0x FY14 P/BV, with 6.5% FY14 dividend yield and 7.1% FY15 dividend yield, while OUE-HT trades at 1.0x FY14 P/BV, with 7.8% FY14 dividend yield and 8.0% FY15 dividend yield. These valuation levels are undemanding in our view when compared against CDL-HT's trading range of 5-6% yield and 1.4x P/BV in 2010/11.


17 September 2014
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Another milestone attained

  • Secured refinancing for all debts
  • Positive growth prospects intact
  • Still attractively priced


Refinancing of all loan facilities

Frasers Commercial Trust (FCOT) announced earlier this week that it has entered into agreements with a club of banks for transferable term loan facilities of S$545m and A$135m to refinance its entire existing borrowings. While the interest rates are likely to be comparable, we view this as a major positive move given that all the new facilities will be unsecured and that the debt maturity profile will be significantly enhanced. Specifically, we expect FCOT’s unencumbered asset ratio to improve from c. 20% to 100% and its average debt duration to be extended to 4.3 years from c. 1.4 years as at 30 Jun following the drawdown of the new facilities (expected before 30 Sep).

Expecting robust rental growth

For the year ahead, we remain positive on FCOT’s performance. Apart from benefitting from the recovery in the Singapore office market, we note that the master lease at Alexandra Technopark (ATC) has expired last month and that FCOT is poised for strong rental uplift with the direct management of the property. Based on our projections, there may be 24% gap between the underlying passing rent and master lease rent. As ATC contributed a significant 23.3% to FCOT’s 3QFY14 NPI, we believe the rental growth in FY15 is likely to be material. This, we note, is in addition to the improved performance at China Square Central, which enjoyed higher leasing demand after its asset enhancement initiatives and the opening of Telok Ayer MRT station.

Maintain BUY

FCOT is currently trading at 0.88x P/B, lower than the S-REITs sector average of 1.01x P/B. We believe FCOT is likely to see a net revaluation gain for its portfolio assets when it reports its FY14 results in Oct, thus making it more attractive relative to its listed peers. Forward yield is also compelling at 7.2% in our opinion. We maintain BUY with unchanged fair value of S$1.48 on FCOT.

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