Month: April 2008
LMIR – OCBC
Mixed signals from maiden results
Shortfall in revenue. Lippo-Mapletree Indonesia Retail Trust (LMIR) posted S$29.3m in total revenue over 19 Nov 2007 to 31 Mar 2008, missing its IPO forecasts by 5.11%. Management indicated that the shortfall stemmed from four of LMIR’s retail malls in Jakarta; Bandung; and Greater Jakarta that had recently undergone asset enhancement works. The miss was apparently due to “reduced rentals” meant to attract traffic driving tenants. The REIT said the variance from its forecasts would be “mitigated in the coming months”. LMIR has not given many details on the portfolio’s performance, which makes it hard to judge how much blame was due to lower rental rates (with no immediate remedy) or higher vacancy levels (which has an easier fix).
But DPU exceeds forecasts. Tightly controlled operating expenses drove the S$27.6m in recorded net property income. The strong 94.4% NPI margin versus the 93.5% forecasted at listing helped LMIR to recover some of the shortfall in turnover but it was primarily one-time gains that reversed the ‘shortfall trend’. One time gains included realized gains on forex forward contracts which led distributable income to exceed forecasts by 3.3% at S$23.3m. Unitholders will enjoy DPU of 2.2 S cents for the period. We are estimating full-year DPU to come to 5.8 S cents, implying a strong 10.2% yield.
Sun Plaza to brighten 2Q. LMIR completed its maiden post-IPO acquisition on 31st March for IDR980bn. The Sun Plaza in Medan increased its total portfolio NLA by almost 20%. According to Knight Frank estimates, the property was bought at a 11.5% discount to its IDR 1,107bn value and at a 9.4% FY07 NPI yield. We estimate that the retail mall will contribute more than IDR25bn to 2Q revenue. As Sun Plaza is LMIR’s first geared acquisition, it will also begin to record interest costs on the S$125m debt. Nevertheless, we believe the acquisition is DPU yield accretive and will add a shine to FY08 earnings.
Treading carefully. We will continue to monitor the performance of LMIR’s existing portfolio as more data come in on portfolio performance. LMIR also said that it will “reassess the timing and sequence” of its targeted acquisition portfolio, as mentioned in our report last week. While LMIR’s acquisition pipeline remains impressive, the uncertainty shrouding equity and debt markets will most likely drive LMIR to adopt a less aggressive acquisition schedule than previously indicated. We maintain our BUY rating and fair value estimate of S$0.70.
CCT – BT
Market Street Car Park set to stay – at least for now
CCT defers decision on redeveloping site into office building
CapitaCommercial Trust (CCT) has decided to defer its decision on the redevelopment of Market Street Car Park (MSCP) into an office building that could cost up to $1.5 billion.
Asked if the huge supply of new office space after 2010 was a determining factor, Lynette Leong, CEO of CCT manager CapitaCommercial Trust Management Ltd (CCTML), said: ‘No, the main reasons are the significant size of the redevelopment, rising construction costs, present volatility in financial markets and the unknown development premium amount, which have caused us to defer the decision on the planned redevelopment, such that it will not be made any earlier than mid-2009.’
Ms Leong also added that CCTML is ‘carefully evaluating the financial viability of and the funding structure for the redevelopment’.
‘We are not concerned about the new office supply after 2010 given that statistics show that office demand for good-quality office space is still strong and that the lease pre-commitments for the new supply have also reached a high level. For example, about 52 per cent of the office space at Marina Bay Financial Centre has been pre-committed three years ahead of its completion,’ added Ms Leong.
Apart from obtaining the necessary approvals, including the approval of CCT’s unitholders, if required, Ms Leong said that the decision to redevelop the site will always be subject to the financial viability of the project, which includes the amount of development premium payable based on the payment of 100 per cent of the enhancement in land value (instead of the standard 70 per cent).
She said: ‘We do not have any indication of the amount of development premium payable right now. However, it is expected to be a major component of the total redevelopment cost of MSCP.’
When the project was first announced in January, CCT said that the total project cost, depending on the development premium, could range from $1 billion to $1.5 billion.
On rising construction costs, Ms Leong said that this has increased by 10-15 per cent since the beginning of the year and that CCTML had also sought quotations from the construction companies.
Ms Leong said it would continue to take the necessary steps to obtain the planning permission (PP) from the Urban Redevelopment Authority, and assist its retail tenants in relocation. It would also ‘continue operating the car park to serve our season and hourly car park users’, she added.
While the potential loss of 704 car parking lots at MSCP was a prickly issue with many of its current uses, CCTML said that the provision of car parking lots was not an issue in getting PP.
Cushman & Wakefield managing director Donald Han said the deferment was ‘excellent news’, not least because occupancy costs, which factor the cost of car parking, would have increased.
He also reckons that the deferment could be linked to MSCP historically being designed to serve the CBD until new lots are provided. However, new restrictions limiting the number of lots in new buildings will have an impact on the number of available lots.
Knight Frank director (research and consultancy) Nicholas Mak believes deferring the project could be a strategic move to see if construction costs and rates for development charges could fall in the future.
But he believes the project will not be deferred for too long. ‘Reit’s have to constantly look for a growth story or it won’t seem interesting to investors.’
CCT – UOBKH
Plans to redevelop Market Street Car Park postponed
CCT has decided not to submit design plans for the redevelopment of Market Street Car Park before mid-2009 after considering the significant size of the project, rising construction costs and volatility in the financial markets. The design plans for the iconic Grade A office building was required to obtain Provisional Permission (PP) from the Urban Redevelopment Authority (URA). The Chief Valuer will then conduct assessment of the enhancement in land value based on the design plans and determine the amount of development premium payable. CCT will evaluate financial viability and funding structure for the redevelopment project after the amount of development premium is determined.
CCT has previously estimated the cost to redevelop the site into a Grade A office tower with estimated gross floor area of 850,000sf at between S$1b to S$1.5b. The building was originally expected to be ready by 1H2012. We did not view the development negatively due to:
• We did not factor in any contribution from the redevelopment of Market Street Car Park in our earnings forecast.
• CCT will focus on digesting the acquisition of One George Street. CCT’s asset size would increase to S$6.5m after the acquisition of One George Street is completed. This allows CCT to undertake development projects of up to S$1.4b in size on a 50:50 JV basis. Pursuing the redevelopment of Market Street Car Park at a later stage allows CCT to secure a larger slice of returns from redeveloping the site.
• The project is postponed but not cancelled. The redevelopment potential of Market Street Car Park remains to be exploited.
Office REIT – UOBKH
A new record for office building
Foreign funds continue to grab office buildings. Commerz Real, a subsidiary of Germany-based Commerzbank, has bought 71 Robinson Road for a record S$743.8m or S$3,125psf. The building is owned by a partnership between Lehman Brothers and Kajima Overseas Asia. The site was acquired from Singtel for only S$163.4m in Oct 06 and is being redeveloped into a 15- storey Grade A office building with net lettable area of 238,000sf to be completed by mid-2009. Lehman Brothers and Kajima will provide Commerz Real with coupon of 4.5% during the period of construction.
This is a new record transaction price for office buildings, 7.7% higher than S$2,901psf for Hitachi Tower in Jan 08 and 20.2% higher then S$2,600psf for One George Street in Mar 08. We expect the news to create positive share price momentum for CCT, K-REIT and Suntec REIT.
Leasing momentum remains strong. According to Colliers International, rentals for Grade A prime office space in Raffles Place shot up from S$10.63psf pm in 1Q07 to S$16.64psf pm in 4Q07. Rentals for Raffles Place surged a further 5.3% qoq to S$17.52psf pm in 1Q08 as tenants chased after limited pockets of vacant space. There is strong demand from banks and financial institutions and supporting business services such as law and IT firms. Foreign financial institutions setting up operations in Singapore in 1Q08 includes Sun Hung Kai Fund Management, Man Investments, Swiss Life and MacQuarie Private Bank. Occupancy rate for Grade A office space in has further improved from 98.9% in 4Q07 to 99.1% in 1Q08.
Cambridge – Phillip
CIT reported 1QFY078results with gross revenue of S$17.6 million (+60.8% YoY), net property income of S$15.5 million (+66.0% YoY) and distributable income of S$12.6 million (+71.3% YoY). DPU grew 10.7% from 1.434 cents to 1.588 cents. This represents an annualized DPU of 6.387 cents.
Portfolio growth. CIT completed 2 acquisitions in the 1st quarter, bringing the total number of properties in its portfolio to 42, valued at S$956.4 million. In addition, CIT has signed option agreement for 2 properties worth S$18 miilion and S$75.2 million worth of MOU.
Capital management. CIT has total borrowings of S$358.7 million with S$337 million due for maturity in Feb 2009. It has a further S$131 million in available facility to fund its acquisitions. In Feb, CIT entered into an interest rate swap which provides an allin funding cost of 3.32% until 2013. The current gearing of CIT is 36.9%.
Plans ahead. The Oxley Group took a 20% stake in Cambridge Industrial Trust Management, the manager of CIT in Feb. Oxley is a private investment house with vast experience in Australia and the Asian regions. Oxley’s experience and expertise will be beneficial to CIT regional expansion plan. CIT is currently exploring investment opportunities in Malaysia and China and management reveals that these might crystallise later this year.
Valuation and recommendation. We like CIT for its stable underlying cash flow as well as its management’s execution. CIT managed to lock-in the cost of borrowing at a time when interest rate was at one of the lowest ever. It is also able to keep its expansion on schedule while maintaining a comfortable gearing ratio. With Mitsui and Oxley as its strategic partners, CIT is able to expand regionally without being at a disadvantage compared to some of the bigger players with a parent sponsor. We updated our projections with the recently acquired properties and continue to adopt a conservative approach in not assuming any unannounced acquisitions in our model. We have a DPU forecast of 6.44 cents for FY08, which translates to an attractive distribution yield of 9.33%. Maintain Buy.