11 March 2015
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Refinancing Risk to surface

  • Refinancing risks as SOR rate rises
  • Acquisitions to complement modest organic outlook
  • Picks MAGIC, MCT, FCOT and CDL HT

Refinancing to cost more. The recent increase in the benchmark 10-year yield to 2.3% and 30-50 bps rise in the 3-month/3-year swap offer rates (SOR) could cap upside to S-REIT unit prices. Although most S-REITs have hedged the bulk (estimated 75%) of their debt at fixed rates, these will start to expire starting 2015 and they would be more expensive to roll over. We estimate a 1% hike in the refinancing rate on debt renewals in 2015 and 2016 would reduce distributions by an average of 2.0% (ranging from 0.0% to 5.6%). This suggests average FY16F yield might dip as much as 15 bps to 6.05%, and there would be only marginal growth this year. As refinancing risks rise, we may see limited upside for S-REIT unit prices from current levels.

Modest 4% growth in distributions over FY15-16F. The outlook guidance for 2015 remains modest for most sub-sectors with estimated c.4% growth in distributions over FY15-16F. Retail REITs remain cautious of the rental outlook amid rising occupancy costs as average portfolio tenant sales remain static. Industrial REITs continue to see acquisitions as rental growth moderate due to the competitive operating environment. For office REITs, the squeeze in CBD space remains a key catalyst for landlords to remain optimistic of near-term rentals, and we are seeing demand flowing into the business park sub-sector (both A-REIT and MINT saw back-filling of vacant space at Changi Business Park). Despite a better outlook for 2015, Hospitality REITswill see near-term weakness but remain optimistic that a strong line-up of events in Singapore this year will improve tourist arrivals. Most are looking outside Singapore for opportunities.

Acquisition-led growth partly funded by new equity. Supported by conservative c.33% gearing and ample access to capital, most S-REIT managers can continue to gear up for growth. But we are cautious of rising gearing levels at the start of an interest rate upcycle. The S-REITs are currently trading at 1.1x average P/Bk NAV, which suggests the managers may partly fund acquisitions by raising new equity, so as not to dilute NAV substantially. Sponsored REITs and industrial/hospitality REITs offer stronger visibility in termsof acquisition-led growth.

Picks. The current yield spreads, at 3.7%, are close to historical trading levels. Hence, we see limited upside to S-REIT unit prices going forward. Our top picks are REITs with strong growth potential like MAGIC, MCT, FCOT and CDL HT.


HPH-Trust – OCBC

9 February 2015
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Hit by impairment charge

  • HK$19b impairment charge
  • FY15 DPU range in 33-36 HK-cents
  • Tariff increases likely mid-low single digits ppt

Hit by HK$19b one-time impairment charge

HPHT swung to a 4Q14 loss (after taxes and minority interest) of HK$18,610.0m, versus a profit of HK$334.8m in the same period last year. This was mainly due to a HK$19b impairment charge on goodwill allocated to a cashgenerating unit in Hong Kong which was adversely impacted by uncertainties in the global economy, challenging trading environment and labor cost pressures. Excluding the impairment charge, adjusted net profit after tax for FY14 was HK$2,981.7m (down 0.7% mainly due to higher taxes), which constitutes 101.7% of our full year forecast and is within expectations. FY14 distribution per unit is 41.0 HK-cents; but management has guided for FY15 DPU to dip to 33-36 HK-cents, below the consensus of 38.6 HK-cents.

Outbound cargoes to EU remained soft in 4Q14

In terms of the topline, FY14 revenue increased 1.9% to HK$12,622m as throughput at HIT increased 2.1%, mostly due to higher transshipment volume but partially offset by weaker intra-Asia cargoes. At YICT, throughput was up 8.1% YoY due to higher transshipment volume, US and empty cargoes. Average revenue per TEU increased YoY in HK, but decreased in China given the higher proportion of transshipment throughput handled. While outbound cargoes to the US remain firm, volumes to the EU continue to soften in 4Q14. Cargo volume for transshipment and the niche trade routes of Far East, Africa, Central and South American and Oceania is projected to increase moderately. Management reports that it is still in discussions with the shipping lines regarding tariff increases and sees a mid-low single digit percentage increase. While the impairment is a non-cash item and will not affect the trust’s cash flow generation and debt servicing ability, we note that unitholder’s NAV per unit (after deducting DPU for both years) has dipped significantly from HK$7.26 (end FY13) to HK$4.86 (end FY14), and believe the share price will likely react negatively to the impairment charge and lower DPU guidance. Maintain HOLDwith an unchanged fair value estimate of US$0.68.


2 February 2015
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Longterm optimism priced in

  • 4Q14 DPU of 2.48 Scts (+13% y-o-y) below
  • Weaker than expected contribution from Grand Canyonand Minzhongleyuan malls
  • Cut FY15-17F DPU by 5-10% but still expect DPU growth on the back of positive rental reversions
  • Downgrade to HOLD, TP lowered to S$1.64

4Q14 results below. 4Q14 DPU came in at 2.48 Scts (+12.7% y-o-y), taking FY14 DPU to 9.82 Scts (+8.9% y-o-y), which was below our and consensus estimates of 10.8 Scts and 10.2 Scts, respectively. The underperformance was due to (i) weaker than expected contribution from the Grand Canyon mall, (ii) an unexpected 4Q14NPI loss of Rmb3.7m at the Minzhongleyuan (MZLY) mall as it was impacted by road closures to facilitate the construction of a new subway line, and (iii) a larger number of units on issue on greater DRP take up. Nevertheless, 4Q14 NPI rose30% y-o-y to S$33.5m on the back of the initial contribution from Grand Canyon acquired in Dec13 and rental growth at its other properties. Overall occupancy dipped to 95.9% (97.6% in 3Q14) on account of the disruption to MZLY’s operations (73.9% occupancy).

Positive rental reversions. 4Q14 tenant sales were strong, up 21.3% y-o-y, which assisted CRCT in achieving 20.6% increase in rents over the quarter. Owing to growth in Chinese domestic consumption and CRCT’s strong track record, we expect positive rental reversions to continue, albeit at a lower rate due to the higher base effect. However, given weaker than expected performance, the need to reposition the Wuhu mall due to heightened competition, disruption to MZLY over the next two years and higher assumed units on issue, we cut our FY15-17F DPU by 5-10% and lowered our DCF-based TP to S$1.64 from S$1.70. Upside to our numbers would arise if CRCT utilises its strong balance sheet (c.29% gearing).

Downgrade to HOLD. While we remain positive on the long term prospects for CRCT, we believe this has largely been priced in and downgrade our recommendation to HOLD.


30 January 2015
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Ends FY14 on a strong footing

  • 4Q14 DPU grew 12.7% YoY
  • Positive rental reversions of 23.1% in FY14
  • Healthy financial position

4Q14 results within expectations

CapitaRetail China Trust (CRCT) reported a good set of 4Q14 results which met our expectations. DPU grew 12.7% YoY to 2.48 S cents on the back of a 27.7% increase in its gross revenue to S$52.7m. The latter was driven by new contributions from its acquired CapitaMall Grand Canyon and organic rental growth from its other multi-tenanted malls, but partially offset by a decline in revenue from CapitaMall Wuhu. For FY14, revenue and DPU increased by 27.0% and 8.9% to S$203.3m and 9.82 S cents, such that these figures constituted 102.3% and 101.3% of our FY14 projections, respectively.

Fundamentals remain strong

CRCT’s overall portfolio occupancy stood at 95.9% as at 31 Dec 2014, a slight 1.7 ppt QoQ decline. The drag came from weaker occupancy from CapitaMall Wuhu and CapitaMall Minzhongleyuan. The former is undergoing a repositioning phase due to competitive pressures, while the latter was impacted by a major road closure to facilitate the construction of subway Line 6 for two years from Aug 2014 (estimated -0.4 S cents impact to FY14 DPU). Nevertheless, CRCT’s other malls have performed strongly. The REIT manager also secured solid rental reversions of 20.6% and 23.1% in 4Q14 and FY14, respectively, making it the fourth consecutive quarter where it saw a rental uplift of more than 20%. Shopper traffic and tenants’ sales rose 3.9% and 16.2% in FY14, respectively.

Maintain HOLD

As at 31 Dec 2014, CRCT had a healthy gearing ratio of 28.7%. 72.6% of its total borrowings are at fixed rate (86.0% if weexclude onshore RMB loans). We raise our DDM-derived fair value estimate on CRCT from S$1.58 to S$1.64 after rolling forward our estimates. CRCT is trading at FY15F distribution yield of 6.2%, which is approximately one standard deviation below its 5-year average forward yield of 6.8%. Maintain HOLD.

CDL H-Trust – OCBC

29 January 2015
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Softness to prevail in near term

  • 4Q14 DPU +7.2% YoY
  • FY14 Singapore RevPAR down 1.6%
  • Ample debt headroom for acquisitions

4Q14 results met the street’s expectations

CDL Hospitality Trusts (CDLHT) reported its 4Q14 results which were in-line with the street’s expectations. Gross revenue and DPU rose 14.4% and 7.2% YoY to S$45.1m and 3.13 S cents, respectively, underpinned by the recognition of a full quarter’s hotel revenue from Jumeirah Dhevanafushi amounting to S$5.4m. FY14 gross revenue came in at S$166.8m (+12.1%), while DPU was flat at 10.98 S cents (+0.1%). This formed 103.1% and 99.8% of Bloomberg consensus’ projections, respectively.

Market conditions still challenging

Although CDLHT managed to record a 3 ppt growth in its Singapore hotels’ occupancy to 90% in 4Q14, competitive pressures from higher supply of hotel rooms and a cautious corporate spending environment resulted in a 4.7% decline in its average room rate to S$205. Hence RevPAR was down 1.1% to S$185. For FY14, CDLHT’s Singapore hotels saw a 1.6% dip in RevPAR to S$188. We expect market conditions to remain challenging in the near future, given the uncertain macroeconomic landscape. We believe the situation is further exacerbated by the weak Euro and Japanese Yen, which have drawn tourist arrivals to those areas. There is also an expected addition of 3,258 hotel rooms (+5.7%) to the Singapore market in 2015, and this would exert more pressure on room rates.

Maintain HOLD

Looking ahead, CDLHT will continue to focus on finding suitable acquisition opportunities in the hospitality sector, with Japan and Singapore being the key areas of interest. Its healthy gearing ratio of 31.7% (as at 31 Dec 2014) implies that it has sufficient debt headroom of S$339m to finance prospective acquisitions before reaching the 40% gearing level. Following a change in analyst coverage, we fine-tune our assumptions and derive a new fair value estimate of S$1.76 (previously S$1.80), based on our dividend discount model (discount rate: 8.4%, terminal growth rate: 2%). Maintain HOLD.

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