Month: May 2008
CCT – UOBKH
Organic growth from positive rental reversion
CapitaCommercial Trust (CCT) is the prime beneficiary of the escalation in rental rates for prime office space within the Central Business District (CBD). It owns nine properties in Singapore with 2.3m sf of office space, which accounts for 7% of private office stock within Downtown Core.
Benefiting from positive rental reversion in 2008 and 2009. CCT has 29.4% of its leases for office space up for renewal in 2008 and 2009. We understand that in Jan 08, Standard Chartered renewed leases for 130,000sf at 6 Battery Road at above S$15.00psf pm vs the previous rate of S$5.50psf pm. Another 26% of office space at 6 Battery Road is up for renewal in 2008 and 2009. 50% of office space is up for renewal in 2008 at Robinson Point with existing rent of only S$4.00psf pm. 51% of office space is up for renewal in 2009 at Raffles City Tower with existing rent of only S$5.70psf pm.
CCT has entered into a seven-year lease renewal agreement with HSBC commencing on 30 Apr 2012 (after expiry of existing lease) and expiring on 29 Apr 2019. The contract value of S$143.1m represents an average rental of S$8.50psf pm, much higher than existing passing rent of S$3.63psf pm.
Leasing momentum remains strong. Management expects rental rates for prime office space within the CBD to have further increased in 2Q08 due to high occupancy rates although the pace of growth has moderated.
Call option to acquire OGS. CCT has obtained a call option to purchase One George Street (OGS) from CapitaLand for S$1.165b, or S$2,600psf. Sponsor CapitaLand will provide yield protection with minimum net property income of S$49.5m p.a. (yield of 4.25%) for five years from the date of completion of acquisition till 2013. This is equivalent to rental of S$10.50psf pm. The company has secured committed debt funding. We estimate that gearing will increase from 24% to 40.8% after the acquisition is completed in Jul 08.
Has refinanced short-term borrowings. CCT has issued S$100m 3-year medium term note (MTN) with fixed interest rate of 3.15% in Jan 08. It has also issued S$150m 2-year MTN with fixed interest rate of 3.05% in Mar 08. CCT has completed the refinancing for short-term borrowings and funding for the acquisition of Wilkie Edge, a mixed development project at Selegie Road. CCT has issued S$370m five-year convertible bond with coupon of 2%, yield-tomaturity of 3.95% and conversion price at S$2.6762. Proceeds from the convertible bond will be utilised to finance acquisition of OGS.
CCT provides a diversified exposure to the office market in Singapore. It provides FY08 distribution yield of 4.90%. We have raised our target price to S$2.87 after incorporating contributions from the acquisition of OGS and lease renewal at HSBC Building into our forecast.
AREIT – UOBKH
Riding on increasing demand for suburban office space
Benefiting from strong demand for suburban office space. The shortage of office space within the Central Business District has forced many companies to relocate non-client-facing backroom and data centre operations to suburban locations such as Changi Business Park. A-REIT has benefitted as Business & Science Park accounted for 25% of its portfolio by property value. Occupancy rate for Business & Science Park has increased from 92.4% at Mar 07 to 97.0% at Mar 08. Renewal rate for Business & Science Park was S$3.76psf pm in 4QFY08, 68.8% higher on a yoy basis.
Developing built-to-suit offices at suburban locations. A-REIT is developing two build-to-suit facilities and a multi-tenanted block with combined floor space of 803,600sf at Plot 8 Changi Business Park. Citigroup has committed to a seven-year lease for 400,000sf space at the build-to-suit facilities, which will house its international technology office supporting its consumer businesses, regional processing centres for securities and funds administration and regional technology infrastructure support. Credit Suisse has also taken up a three-year lease for 26,600sf space at HansaPoint@CBP, a partial build-to-suit sevenstorey business park building completed in 4QFY08.
A-REIT will undertake more development projects on a built-to-suit basis. Management has submitted several proposals for requests from financial institutions and IT service companies. Sponsor Ascendas is developing a purpose built nine-storey operations hub with gross floor area of 500,000sf at Changi Business Park for DBS Bank. Ascendas is also developing similar facilities for Standard Chartered for up to 225,000sf at the initial phase. These assets would eventually be injected into A-REIT.
Acquisition of 31 International Business Park. A-REIT has entered into a put and call agreement with Creative Technology to acquire 31 International Business Park for S$246.8m. Creative will leaseback the building with NLA of 541,300sf for five years with options to renew for another 3 + 2 years, providing net property yield of 6.24% for the initial five years. Creative will provide cash security deposit of S$72.2m. The acquisition will increase A-REIT’s exposure to Business & Science Park from 25% to 29%.
A well diversified portfolio. A-REIT has a portfolio of 84 properties and total assets of S$4.2b at Mar 08. The weighted average lease to expiry is 5.9 years. It has a well diversified tenant base of over 790 international and local companies. The top 10 tenants accounted for 27.9% of portfolio income. The largest tenant Singtel accounted for only 6.5% of portfolio income. Tenants for sales & leaseback properties have to provide security deposits of 12 months. A-REIT’s weighted average funding cost is 3.1% due to its corporate rating of A3 and consistent track record. It will be concluding a three-year S$200m transferable loan facility, after which the earliest date for refinancing is Aug 09.
Maintain BUY. Management sees opportunity to invest S$500m p.a. in Singapore through acquisitions and development projects till 2010 before shifting its focus to overseas markets (Malaysia, Vietnam and Philippines). A-REIT provides FY08 distribution yield of 6.54%. We have raised our target price to S$3.22 after factoring in the acquisition of 31 International Business Park and the three development projects at Pioneer Walk, Changi LogisPark and Changi Business Park.
CDLH-Trust – CIMB
In an upswing
• Largest hotel owner in Singapore. CDLHT is a stapled group comprising H-REIT, a real estate investment trust which owns six hotel properties and one shopping arcade; and HBT, a business trust which is currently dormant. CDLHT is the largest Singapore hotel owner with 2,327 room keys, representing a 6% share of the hotels in Singapore.
• Tourism targets to drive demand for hotel stay in Singapore. The government has set aggressive targets for tourism in Singapore, aiming to triple tourism receipts to S$30bn and double visitor arrivals to 17m by 2015. These targets should drive the demand for hotel accommodation in Singapore over the next eight years.
• Sustainable performance despite large upcoming hotel supply. New hotel rooms in 2008-10 are expected to add some 37% to the current room stock. However, we see resilience in CDLHT’s portfolio, from: 1) its centrally located Singapore assets with mid-tier pricing; 2) concentration on less price-sensitive business travellers; 3) price advantage over new hotels which face high construction costs; and 4) the possibility of demand outstripping supply if Singapore’s tourism targets are met.
• 8.2% DPU CAGR for 2008-10. CDLHT is poised for growth via acquisitions and growth in revenue per room (REVPAR) from 2008 to 2010. We expect CDLHT to acquire S$300m of properties each year from 2008 to 2010, expanding its portfolio to about S$2.5bn by end-2010. In addition, we expect REVPAR growth of up to 25% for its Singapore hotels in the same period. On this basis, we forecast a DPU CAGR of 8.2% for 2008-10 for CDLHT.
• Initiate with Outperform and DDM-derived valuation of S$2.38. We arrive at our target price of S$2.38 using DDM valuation (discount rate of 8.5%, terminal growth rate at 3%). This represents a total return of 24% from a forward yield of 5.6% and potential price upside of 18.4%.
SREITs – DB
Returning to a virtuous cycle
Re-rating based on organic growth, acquisitions and availability of funding
We expect the re-rating of Singapore REITs to continue, based on: 1) firm trading performance, 2) the availability of funding allowing the return of acquisitions to the sector, and 3) steady physical asset markets. We see a return to a virtuous cycle for the larger REITs, which have demonstrated their ability to raise capital and acquire assets. The valuations for CMT and Suntec REIT are attractive (as CMT has been weak since the Atrium acquisition, and Suntec has lagged its peers).
Better-than-expected 1Q08 earnings; reversion cycle supportive
The REITs delivered 1Q08 DPU growth ahead of expectations (avg 19.1% YoY), based on reversionary rental growth and full occupancy rates. The near-term outlook remains positive, as office and industrial passing rents still trail market rents and retail rents are firming up due to asset enhancements and the entry of new retailers.
Raising capital, a pick-up in acquisitions; majors gaining market share
Singapore REITs have announced S$2.9bn of acquisitions YTD as activity from opportunistic funds have slowed. AREIT’s acquisitions have gained momentum at the expense of competitors who face funding constraints. The REITs have been able to raise funds for acquisitions and debt refinancing, and the completion of KREIT’s S$552m rights issue helps to address concerns over refinancing. Funding costs have been largely contained, as declining swap rates offset a rise in spreads.
Physical market steady as REITs and core funds stepped up to acquire
More than 2/3 of the REITs are trading below book NAV. Recent investment transactions, such as 71 Robinson (S$3,125psf), One George Street (S$2,600psf), and the Serangoon White Site (est. breakeven S$2,000psf), suggest firm asset pricing due to REITs and core funds being more active. Book NAVs for commercial REITs are typically conservative and are at discounts to recent open market transactions.
Focus on large, quality names; smaller REITs likely takeout plays
Yield spreads remain well above average at yields of 5.0% for CY07 and 6.1% for CY08E, representing a 342bps spread over the 10-year gov’t bond and avg. 9.1% discount to book NAV. Inflows into real estate funds have improved in recent weeks, supporting global REIT markets. We prefer the larger REITs which are able to deliver organic growth, mobilize funding, and potentially gain market share. We view the smaller REITs as likely takeover targets if deep NAV discounts persist.
Top picks for REIT sector: CMT, Suntec REIT and AREIT
CMT is attractive after the pullback following the CB issue for the Atrium deal. We believe that CMT has the right platform to extract value and synergies from that asset. Suntec REIT continues to benefit from robust demand in both the office and retail segments. We also like AREIT for its leverage on the rising business park segment. Risks include any protracted economic slowdown affecting demand, further deterioration in credit markets, and inability to refinance.