Month: September 2010
Cambridge – DBSV
Tapping cash pool for new purchases
• Acquisition of Scorpio East Building for S$21.1m at initial 8% yield
• Positive acquisition with slight 2% accretion to DPU in FY11F, and terming out WALE.
• Rolling forward our numbers to FY11, TP is raised to S$0.54. Maintain HOLD.
Acquiring up to S$60m worth of properties to date. Cambridge REIT (“CIT”) announced the acquisition of Scorpio East Building, a recently completed light industrial building located in Paya Labar iPark, for S$21.1m (2% discount to valuation of S$21.5m). With this latest purchase, CIT will have acquired close to S$60m worth of properties to date. The Initial yield of the property is estimated to be c8.0% (based on Scorpio East’s annual rental of S$1.7-S$1.9m), which is in line with CIT current implied yield of 7.9%. The property will be leased back to the vendor for 5 years. The manager intends to fund the purchase through a combination of debt/equity.
Slight accretion to DPU and terming out the weighted average lease expiry (“WALE”) The manager has remained proactive in re-positioning its portfolio, replacing recent asset divestments with new asset purchases. Including this acquisition in our numbers, our FY11 DPU is raised by c2%. In addition, CIT will see its tenant expiry profile terming out further, reducing the concentration of expiry in FY13-14.
HOLD call maintained, TP adjusted to S$0.54. With our revised DPU estimates and rolling forward our numbers into FY11, our target price is raised to S$0.54. Maintain HOLD in view of limited upside. CIT currently offers FY10-11F yields of 9.1%.
SREITs – OCBC
Yield premiums are a short-term game
A yield premium story. The FTSE REIT Index is up 11.3% year-to-date and 145.8% from its Mar 2009 low. Market attention is on low base rates and the high liquidity environment. As a result, S-REIT distribution yields have tightened to about 6.6% on average (on consensus estimates) and to sub-5% in some cases. At the same time, price-to-book ratios have trended up to 0.97x book on average, and up to 1.50x book in some cases.
But will the benchmark hold out in the L/T? We typically pit S-REIT yields against long-term government bond yields to understand the risk premium awarded to REIT investors. Bond yields are currently at historical lows – making REITs look very attractive. But this benchmark may not hold out in the long run, in our opinion. First, long-term investors have to keep in mind that base rates will go up eventually. Second, if base rates are low for a sustained period (a weak economic environment, for instance) – this may actually be a signal that the distribution yields currently being offered are not sustainable and yield premiums will trend downwards eventually. In both scenarios, our argument is that artificially-low yield premiums are a short-term play, not a long-term fundamental reason to invest in REITs.
Don't ignore price-to-book. The market seems to be focusing on relative yields, to the point of ignoring what price-to-book valuations are saying. The case for a significant premium-tobook is questionable, in our opinion. A premium-to-book value signals either: 1) existing assets are undervalued and will rerate (a 50% re-rating looks aggressive to us, though); 2) there is potential to enhance values through asset works (true in specific cases); and 3) there is potential for inorganic growth through acquisitions. But we note that REITs that are already at their medium-term leverage targets are typically able to offer yield accretion of less than 10% given strong capital values and the need to finance acquisitions via both debt and equity.
Focus on the forgotten. Our preference, from the perspective of long-term investors, is to avoid the first-tier, large-cap REITs that are natural liquidity plays (and thus, a magnet for those playing the yield-premium game). Instead, we advocate investing in the so-called "forgotten", but still credible, REITs that are offering high absolute yields and are trading at decent discounts to book value compared to their peers. Reflecting this strategy, our top picks are Ascott Residence Trust [BUY, FV: S$1.33] and Starhill Global REIT [BUY, FV: S$0.65]. Maintain NEUTRAL on the broader sector.
MIT – BT
Mega IPO offers entry into industrial property
Roadshows begin today for Mapletree trust, with price pegged in the $0.88-$0.93 range
Another day, another mega IPO. This time, Mapletree Industrial Trust (MIT) is expected to raise gross proceeds of up to $1.19 billion from a global offering and share subscriptions from cornerstone investors.
It is pricing its offer in a range of $0.88-$0.93 per unit, according to its draft prospectus lodged yesterday.
The mega IPO comes on the back of the foray by Global Logistic Properties (GLP), which is seeking to raise as much as $3.4 billion, having lodged its prospectus just two days before.
Together, MIT and GLP could bring the total IPO funds raised on the Singapore Exchange this year to as much as $6 billion, easily dwarfing the $3.21 billion raised last year, with the potential of hitting $8 billion if market talk on three other upcoming IPOs materialises.
MIT would also be the third real estate investment trust (Reit) to be launched by Temasek's fully-owned Mapletree Investments after the listing of Mapletree Logistics Trust in 2005 and Lippo-Mapletree Indonesia Retail Trust jointly launched with Lippo Group in 2007.
According to its draft prospectus, MIT is issuing 594.91 million units, subject to over-allotment option of another 91.75 million units. The indicative price range of $0.88-$0.93 per unit implies an annualised yield of between 7.6 per cent and 8 per cent for fiscal 2010.
MIT's offering consists of an international placement of 488.77 million units and a public offer of 106.15 million units, of which 25.5 million units are reserved for directors, management, employees and business associates of Mapletree.
Separately, six cornerstone investors have agreed to subscribe for 322.58 million units at the offer price. They are AIA, Prudential Asset Management (Singapore), Henderson Global Investors, Columbia Wanger Asset Management, US investment firm DE Shaw, and Dutch pension fund APG.
The sponsor's two wholly owned subsidiaries Mapletree Dextra Pte Ltd and Sienna Pte Ltd have also agreed to subscribe for 359.45 million MIT units.
MIT's IPO portfolio will comprise 70 properties located across Singapore with an aggregate net lettable area (NLA) of about 1.1 million sq m and a gross floor area of 1.5 million sq m.
These assets include six light industrial buildings from Mapletree Singapore Industrial Trust (MSIT), a private trust that MIT is acquiring for $183.3 million on the listing date.
The IPO is seen as a recapitalisation exercise for MIT, which has some $977.8 million of debt on its balance sheet maturing in July 2012.
MIT will be mainly using the IPO proceeds and a new debt facility of $837 million from three banks – DBS Bank, Standard Chartered Bank and Citibank – to pay down the existing debt as well as pay for the acquisition of MSIT and related costs.
While there have been concerns over whether the market could digest the back-to-back IPOs of GLP and MIT, some say that the two have different appeals.
UOB-KayHian executive director Chan Tuck Sing noted that MIT's structure as a Reit appeals to investors looking for steady, regular returns while GLP caters to investors seeking underlying growth in the markets it has exposure to.
Analysts also note that the domestic focus of MIT works in its favour, given the strong outlook of Singapore's industrial property market.
'I expect healthy interest as investors have been going for yield recently,' said Phillip Securities analyst Lee Kok Joo, citing MIT's implied yield which falls within the 6-10 per cent range seen in the industrial Reits sector.
Investors could also consider potential rental revisions on existing assets as another possible avenue of growth, added OCBC Investment Research analyst Meenal Kumar. She noted that MIT's IPO is priced at between 1.02x and 1.08x book value (using an estimated net asset value per unit of $0.86 as at listing date). This is broadly in line with the broader S-Reit sector average of 0.97x book value and the industrial sector average of 1.06x book value. MIT will begin roadshows today and pricing of the offer is expected to take place on Oct 11. The public offer opens on Oct 13 and closes on Oct 18. Trading of the units is expected to commence on Oct 21.
DBS Bank and Goldman Sachs (Singapore) are the joint global coordinators for MIT's offering. They are also joint bookrunners with Citigroup Global Markets Singapore and Standard Chartered Securities (Singapore).
Some of these banks are also working on GLP's IPO. DBS and Citi are joint bookrunners and underwriters alongside JPMorgan, UBS and CICC, while Citi is also the joint global coordinator and joint issue manager with JPMorgan for GLP's issue.
Other IPOs that could be making their way to the local bourse by year-end include China's New Century Shipbuilding, Malaysia's Mewah Group and the European unit of STX Pan Ocean.
PLife – Lim and Tan
• It took TPG 6 days to announce it has sold out of PLife at 41.56 a unit on Sept 22nd but “crossed” on the 23rd.
• As the 56.25 mln units crossed on Sept 23rd matched the holdings of TPG, the latter’s exit had not come as a surprise to us.
• As the block represents 9.3% of PLife’s issued, a single buyer would have to identify itself. As such, we believe the 56.25 mln units went to more than one party, hence the “discount” to the $1.67 market price the day before the “crossing”.
CDL H-Trust – CIMB
Factoring in acquisitions
• Maintain Outperform with higher target price of S$2.30 (from S$2.04). Visitor arrivals to Singapore crossed the one-millionth mark for the first time in its history in Jul 10. We believe the surge was not just the result of seasonality, but an indication of long-term uptrends in hotel demand in Singapore. Acquisitions appear possible in the near term for CDLHT with the sponsor’s Studio M operating above market occupancy rates. We factor in S$300m worth of acquisitions for 2010-11, lower cost of debt and lower payouts. Our DPU estimates fall by 5% for 2010 before rising 3% for 2011-12. Our DDM target price (discount rate 8.6%) rises accordingly to S$2.30.
Although CDLHT is trading at a premium to its peers, its P/BV has yet to reach the peak of divergence with ART and the FSTREI during its last peak in 2007. Larger than-anticipated acquisitions and stronger-than-anticipated room-rate growth in its upcoming 3Q10 results could provide stock catalysts, we believe.
• 3Q10 results likely to shine. Occupancy at all its Singapore hotels had already surpassed 90% in 3Q10, according to the company, some way above the technically full rate of 85% and above the islandwide average of 89.8% in Jul 10. At these saturated levels, we believe room rates could surprise on the high side.
• Refinancing S$350m. In August, CDLHT paid in advance its S$350m S$-term loan facility with proceeds from an issue of S$260m fixed-rate notes and variable-rate notes from its MTN programme. With the refinancing, all-in cost of debt is expected to go down by 50bp to 3.5%. Also, CDLHT’s Singapore assets which were earlier pledged to the term loan are now fully discharged.