Singapore REITs

THE BURGEONING MARKET

• S-REITs continue to perform
  
• Sector currently trading at 1.24x P/B
  
• Prefer S-REITs with strong fundamentals and compelling valuations
  

Firm 1Q13 performance; mostly in line

In our latest assessment of the S-REITs sector, we continue to see familiar trends. REIT managers have generally maintained firm growth in their trusts’ rental income, on the back of contributions from past investments and improved operational performance. Of the 16 SREITs under our coverage, 10 of them reported results that were in line, three exceeded our expectations, while the remaining three fell short of our forecasts.

Leasing activities remained largely healthy

1Q13 operating metrics for most of the S-REITs had stayed resilient. Average portfolio occupancy was stable at 96.9%, whereas the weighted average lease to expiry improved from 4.3 years in 4Q12 to 4.5 years. In addition, positive rental reversions were also clocked. This clearly illustrates the healthy rental market demand and proactive lease management on the part of the REIT managers, in our view.

Active capital management

We also observe that S-REITs have been very active in refinancing its existing debts and maintaining an optimal capital structure. There were a slew of private placements in 1Q, which helped keep the aggregate leverage healthy at 32.1%. Going forward, we believe that the sector’s aggregate leverage is set to trend upwards. As such, SREITs may continue to tap the equity capital market to fund their proposed investments. The cost of debt is expected to maintain at current levels or increase marginally, as S-REITs trade possibly higher interest costs for diversified funding sources, longer term debt, and/or an improvement in their unencumbered asset ratios.

Sector outlook remains sanguine

For 2013, we are maintaining our view that S-REITs are likely to continue to deliver firm performance. All the S-REITs are either involved in asset enhancement initiatives/development projects, pursuing yield-accretive acquisitions, or enhancing their portfolio metrics through active leasing efforts, which should lead to continued strong numbers for their financial scorecards. For our coverage, we expect the S-REITs to post 6.6% growth in aggregate DPU for the current fiscal year, before experiencing another 8.6% growth in the next year.

Prudent to be selective

Nevertheless, the S-REIT index has been enjoying a good run-up, raking up 36.7% gain in 2012 and another 12.7% increase YTD. Given that the S-REITs are now trading at a 24% premium to book value on average, we feel that it is prudent to be selective on S-REITs. We continue to prefer S-REITs with good growth potential, strong financial position and compelling valuations (relatively lower P/B and decent DPU yields). In this respect, we continue to pick CapitaCommercial Trust [BUY, S$1.80 FV], Fortune REIT [BUY, HK$8.64 FV] and Starhill Global REIT [BUY, S$1.05 FV] as our preferred BUYs. Reiterate our OVERWEIGHT view on the broader SREITs sector.

Look out for maiden distribution

• Expect maiden distribution of 8% annualised payout in FY13 results announcement on 21 May
  
• Share price appreciation panning out as expected; still has 8.3% yield and upside to revised TP
  
• Recent drop in Indian bond yields and stable INR positive for RHT
  
• Maintain BUY, TP raised to S$1.06
  

Expect DPU of 3.56 Scts for FYE Mar13. RHT will be reporting its FYE Mar13 results on 21 May. We are expecting a distribution per unit (DPU) of 3.56 Scts, equating to an annualised yield of 8% (since 19 Oct, 2012) at the current price of S$0.985. RHT pays out its distribution half yearly. In its 3Q results released earlier in Feb, RHT reported a distributable income of S$9.4m, translating into a DPU of 1.66 Scts for the period from 19 Oct to 31 Dec, 2012. This was marginally above the projected 1.63 Scts disclosed in its IPO prospectus.

Still provides 8.3% yield. In our initiation report on 28 Nov, 2012 (“Good bargain at 10% yield”), we had indicated that there will be rising confidence on RHT as it approaches May 2013 with the first distribution announced. So far, RHT has appreciated by c.25% panning out as per our expectations. Despite this, RHT still provides an attractive 8.3% yield for FY14F; and, does not include the 3.56 Scts we expect for FY13F.

Conditions working in RHT’s favour. Currently, conditions seemed favourable for RHT: (i) Indian bond government bond yields have fallen to 7.4%, from 8.3%, arising from RBI rate cuts and lower WPI; (ii) cross rate of SGD/INR has remained relatively stable at c.INR44/SGD. This possibly provides an opportune time for RHT to further hedge its distribution beyond FYE Mar 14, providing assurance to unit holders.

Maintain BUY, TP raised to S$1.06. We raised our DDM-based TP to S$1.06 (from S$0.97 previously) as we roll our valuations over to FY14F (from FY13F) and a lower cost of equity at 11.6% (from 11.8% previously, due to a lower risk-free rate). At our TP, the implied yield is 7.8%, a 200 bp spread over the Indian Government 10-year bond yield (post tax) and about 170 bp to 400 bp over selected peers.

Keppel Corporation: Sells 6.7% of Keppel REIT at S$1.555/unit

Keppel Corporation (KEP) announced that its wholly owned subsidiary, Keppel Real Estate Investment Pte Ltd, has entered into a sale and purchase agreement with Goldman Sachs (the placement agent) for the sale of 180m units of Keppel REIT (6.7% of total issued units of KREIT) for S$1.555/unit. The aggregate cash consideration of S$279.9m took into account KREIT’s last transacted price of S$1.605/unit as at 20 May 2013 and the 30-day VWAP of S$1.5129. This is at a premium to the book value and NTA/share of S$1.31 and S$1.28, respectively, as at 31 Mar 2013. Upon completion of the sale (expected 27 May), KEP’s interest in KREIT remains substantial (from 58.2% to 51.5%). Recall that KEP earlier rewarded shareholders with dividend in specie of KREIT units; announced on 24 Jan 2013 when KREIT’s share price was S$1.37. Maintain BUY on KEP with S$12.68 fair value estimate.

Limited Impact From 6 Pioneer Walk Sale

Ascendas REIT (AREIT) recently announced that it has entered into a conditional sale & purchase agreement with GKE Private Limited (GKE) for the sale of 6 Pioneer Walk (Goldin Logistics Hub) for SGD32m. We maintain our NEUTRAL view on AREIT, with an unchanged DDM-based (COE: 7.3%, TGR1.0%) TP of SGD2.76.

Attractive selling price. We viewed this sale positively as the selling price represented a 42.2% and 30.1% premium over the original purchase price and book value of SGD22.5m and SGD24.6m respectively. As of 31 March 2013, 6 Pioneer Walk is currently a two-storey ramp-up warehouse with an adjoining office and 40 car park lots, and has a remaining land tenure of 23 years .

Minimal impact on earnings. With the sale, AREIT’s gross revenue and net profit interest (NPI) are expected to be reduced by SGD1.9m and SGD1.6m respectively. In relation to the trust’s earnings, this translates to a mere drop of c.0.3% in its gross revenue and NPI.

Use of proceeds from divestment. According to Management, the deployment of proceeds from this divestment has not been finalized. They may be used to repay AREIT’s existing debt or for general corporate and working capital purposes, and/or to distribute to unit holders.

Retain NEUTRAL outlook. As this sale is expected to have minimal impact on AREIT’s earnings and outlook, we are maintaining our NEUTRAL rating on this counter, with an unchanged TP of SGD2.76 on the back of: i) the lack of new sizeable potential acquisition targets, ii) the stock’s near-term dilution of c.7% as a result of the recent capital-raising exercise, and iii) the demanding valuation it is currently trading at (1.34x P/B and FY14′s forecasted dividend yield of 5.2%) vs the market cap weighted industrial REITs yield of 5.5%.

Current yield presents little room for comfort

YoY revenue up 9.2% in Q313. For the third quarter ending March 2013, Saizen reported a 9.2% and 12.5% increase in its revenue and net property income respectively. This performance was supported by its acquisitions of 8 properties between Mar 12 and Mar 13.

Bearing short‐term pain. Amid aggressive monetary easing measures by the Bank of Japan (BoJ) in a bid to jumpstart its stuttering economy and end deflation, the Japanese Yen has experienced substantial depreciatory pressures in recent months. The Japanese Yen has weakened from JPY/S$64.6 in May 2012 to JPY/S$80.3 currently. Due to a weakening yen, Saizen REIT will inevitably have to bear the near‐term pain of a declining NAV and distributions in S$ terms.

Fundamentals improving in the residential space. We have already witnessed improving rental rates and signs of recovery in the Japanese residential market prior to ‘Abenomics’, and recent monetary easing initiatives are likely to expedite the recovery progress. Given the increasingly favourable macro dynamics, we conservatively raise our rental reversions assumption from ‐1% to 0%

across Saizen REIT’s portfolio.

Going full throttle on acquisitions. Saizen REIT has successfully raised new borrowings of JPY3.8bil and presently has an aggregate debt‐to‐total‐assets ratio of 39%. Given that it has no remaining unencumbered properties, Saizen REIT has limited debt headroom at present and the focus for the REIT will be on acquisition growth in the near future. We have factored in JPY3bil of acquisitions in FY14. The acquisitions are assumed to be completed at 6.5% NPI yield.

We project forward FY13‐14 yields at 5.9‐6.3%. Saizen REIT’s FY13 yield is expected to take a slight dip due to its refinancing costs and acquisition‐related expenses as well as the impact of a weaker yen. However, as the full revenue contribution of recently‐acquired properties is being recognized in FY14 and with further acquisitional growth in the coming quarters, this will lift its yield to 6.4%, according to our projections.

Upgrade TP to S$0.220, Downgrade to HOLD. Despite our higher revised target price of S$0.220, we downgrade our call to HOLD given the limited scope for capital upside from current valuations. Based on our revised FV of S$0.220, this represents a potential capital upside of only 5.8%. Saizen REIT’s recent price appreciation and the impact of a weaker yen have also dampened its attractiveness as a high yield play. We project Saizen REIT’s FY13 yield at 5.9%. This translates to approx. 450 basis points over the risk‐free rate, leaving li