Month: March 2010
Office REITs – OCBC
Comparing the four office REITs
Vulnerable to negative rent reversions in FY10-11. Many of the leases secured on high rents during the hot 2007-2008 period will be expiring in 2010 and 2011. It is very likely that these leases will be renewed or replaced at much lower levels. This, in turn, will have an effect on revenue and distributable income, in our view. Among the four office REITs we discuss here, Frasers Commercial Trust [FCOT, NOT RATED] has the lowest percentage of NLA expiring (16.9%) in FY10 and FY11. K-REIT Asia [K-REIT, NR] follows with 32.2% of its NLA expiring in FY10-11. CapitaCommercial Trust (CCT) and Suntec REIT (Suntec) will see the most expiring office leases: 52.3% of CCT's gross rental income derived from office space will be up for renewal in FY10-11. Meanwhile, leases on 41.8% of Suntec's office NLA expire in FY10-11. While REITs may be hit by the appetite for newer buildings, we believe tenants will still favor quality assets such as Six Battery Road.
Expect significant re-financing activity. We estimate that S$2.4b of office REIT loans mature in both 2011 and 2012. The bulk of the maturities are for Suntec and CCT loans. We believe the REITs will tap on secured loan facilities, convertible bond issues and medium-term note programs to meet their re-financing needs. Some of the REITs could potentially test the CMBS market but in small amounts. We expect the REITs to start the re-financing process early to take advantage of the easing credit market, the low interest rate environment, and to assuage any remnant investor jitters. Quality sponsors and quality assets will continue to be crucial to securing competitive pricing.
Valuation. Office REITs trade at an average forward yield of 6.9%. They trade at an average price-to-book of 0.71x, which compares favorably to the broader S-REIT sector. We have BUY ratings on both Suntec and CCT as we feel their current valuations more than reflect the challenges facing the office sector. Suntec is one of our top picks for the broader S-REIT sector due to its exposure to the revitalizing Marina Bay area and its oft-forgotten retail portfolio (two Circle Line MRT stations open at Suntec City next month). In addition, we feel that market attitudes towards office REITs may start turning due to increased leasing activity and the supply management tactics taken by office landlords including CCT. Investors who want a purer exposure to the office sector may prefer CCT to Suntec.
Singapore Retail REITS – Daiwa
The laggard stands out
Summary
- The recovery in retail sales has just started to gain pace, while the rental decline from 2Q08 might soon be over, but we believe expectations of a gradual retail-sector recovery have already been discounted fully.
- We have not changed our preference for using the Daiwa RNG valuation method (a finite-life Gordon Growth model) as our primary tool for valuing Singapore real-estate investment trusts (S-REITs), but we have modified this valuation approach slightly to improve the comparability of its results.
- In contrast to its peers, which we see as fully-valued, we believe Starhill Global is a standout on valuations and distribution-per-unit (DPU) yield, even if we ignore the proposed acquisitions in Malaysia. We maintain our 2 (Outperform) rating for Starhill Global, with an RNG valuation-derived six-month target price of S$0.65.
- We have downgraded our rating for Frasers Centrepoint Trust (FCT) to 3 (Hold) from 2 (Outperform), after lowering our RNG valuation-derived six-month target price to S$1.44 (from S$1.54).
- We maintain our 3 (Hold) rating for CapitaMall Trust (CapitaMall), which looks fully-valued (in our opinion) for a dominant market leader that faces low single-digit-percentage DPU growth (based on our revised DPU forecasts) for FY10 and FY11.
CRCT – UBS
Steady yield and attractive theme priced in
Exposure to China theme remains attractive
We continue to like CRCT for its exposure to the China consumption and urbanization theme. However at 6.5% 2010 DPU yield, it is trading near our DCF derived price target. Our estimates are unchanged. We downgrade our rating from Buy to Neutral.
Acquisition only like towards end 2010/2011 and hinges on cost of capital
As the majority of CMA's pipeline of malls is still in the stabilization phase, we think acquisitions are only likely to happen towards end 2010/2011. Cost of capital is likely to be a key determinant as the gearing is 34% and capped at 35% given no credit rating. Assuming 35%/65% debt/equity funding, we estimate accretion from new deal flow would make sense when CRCT is at S$1.70. In the past, CRCT's share price had outperformed strongly when the market was willing to price in the option of acquisition.
Credit rating could lift debt headroom
The key risk, in our view, is that CRCT obtains a credit rating which would lift the debt headroom for acquisitions. Speaking with management, it does not appear that this is likely to occur in the near term. The implementation of a formal REIT legislation in China could potentially facilitate this process but the actual timing is hard to determine.
Valuation: Downgrade to Neutral
Our price target uses 2.6% risk-free, 1.1x beta, 5% ERP and 2.5% terminal growth.
CMT – Daiwa
Time to show off leasing prowess
Dominant, but DPU-growth challenged
• We maintain our 3 (Hold) rating for CapitaMall, which looks fully-valued (in our opinion) for a dominant market leader that faces low single-digit-percentage DPU growth (based on our revised DPU estimates) for FY10 and FY11, and already trades at a premium to its December 2009 NAV of S$1.56.
Clarke Quay acquisition could provide some boost
• We estimate that the acquisition of Clarke Quay (announced on 9 February) from its sponsor, CapitaMalls Asia (CMA SP, S$2.29, 5), would be marginally DPU accretive by about 2%, and any contribution to DPU growth for FY10-11 would help to overcome the sluggish performance of the existing portfolio, where we expect modest rental reversions and subdued contributions from asset-enhancement activities. We expect a big pick-up in DPU growth only in FY12, when the Jurong Entertainment Centre redevelopment comes on stream.
As good a time as any to show off its leasing skills
• One big difference between retail and office leasing is the ability to re-invent space for a brand new or totally different retail concept, and if successful, set higher market-rent benchmarks. We have assumed average overall rental increases (relative to preceding rents) for its lease renewals of 2.5% for FY10 and 3.1% for FY11, but we think it would be an opportune time for the manger to show off what we see as its industry-leading leasing capabilities and surpass our relatively low expectations for rental reversions. Since listing, CapitaMall has achieved average rental increases (over preceding rents) of 7.3-12.6% for FY03-08.
FCT – Diawa
Mission accomplished
Rating downgraded to 3 (Hold) from 2 (Outperform)
• We have downgraded our rating for FCT to 3 (Hold) from 2 (Outperform). Trading at a DPU yield of 6.1% on our revised FY10 forecasts, in line with the sector average, and a 12% premium to NAV (as at the end of December 2009), we believe any further unit-price appreciation will be limited for its Singapore suburban retail-mall portfolio at a time when risk premiums for defensiveness could be diminishing.
• For FY11, FCT could possibly acquire the sponsor's 81,000 sq ft Bedok Mall, a suburban mall in the vicinity of the Bedok MRT station, and similar in scale to its two most recent acquisitions, Northpoint 2 and YewTee Point. Due to the uncertainties over valuations, capital-market conditions, and the exact timing of the deal, we have not factored in any contribution from Bedok Mall.
• We have also not made any forecast assumptions for NPI improvements from its next major AEI for Causeway Point, FCT's largest property asset. Considering that Causeway Point's passing rents were just over S$10 psf for FY09, compared with over S$13 psf for Northpoint (after its recent asset enhancement), the NPI accretion from the AEI could be significant.
S$1.44 target, assuming a 5.25% effective cap rate
• We set our FCT target price of S$1.44 at parity to our RNG valuation (a finite-life Gordon Growth model). We have applied an effective cap-rate assumption of 5.25%, compared with the weighted-average cap rate of 5.76% for its portfolio, based on the most recent (September and November 2009) valuations.