Month: December 2010
CCT – UOB Kay Hian
BACKGROUND
CapitaCommercial Trust (CCT) has the largest portfolio of prime office properties in Singapore, deriving about 72% of its value from this segment. Its portfolio also includes office and business park properties in Malaysia through a 30% stake in Quill Capital Trust (QCT) and a 7.4% stake in Malaysian Commercial Development Fund.
OUTLOOK/RECOMMENDATION
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Watch out for acquisitions.
- Portfolio reconstitution saw the sale of two office buildings, Robinson Point and StarHub Centre, in quick successions this year for a total of S$572.5m. Current gearing of 31.5% gives debt headroom of S$1b, assuming target gearing of 45%, for acquisitions. Management indicated it is on an active lookout for prime/Grade A office property in the CBD.
- Portfolio reconstitution saw the sale of two office buildings, Robinson Point and StarHub Centre, in quick successions this year for a total of S$572.5m. Current gearing of 31.5% gives debt headroom of S$1b, assuming target gearing of 45%, for acquisitions. Management indicated it is on an active lookout for prime/Grade A office property in the CBD.
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Strong pick-up in office rentals mitigates risk of negative reversion.
- The market rents for office space continued to improve in 3Q10 with prime office rents increasing 7.2% qoq to S$7.40psf pm and Grade A office rent increasing 6.5% qoq to S$9.00psf pm. The risk of negative rental reversions is mitigated with Grade A office rents exceeding the average portfolio rent of S$8.73psf pm and the prime office rentals bridging the gap to average portfolio rents. Average portfolio rent for CCT is S$8.79psf pm.
- The market rents for office space continued to improve in 3Q10 with prime office rents increasing 7.2% qoq to S$7.40psf pm and Grade A office rent increasing 6.5% qoq to S$9.00psf pm. The risk of negative rental reversions is mitigated with Grade A office rents exceeding the average portfolio rent of S$8.73psf pm and the prime office rentals bridging the gap to average portfolio rents. Average portfolio rent for CCT is S$8.79psf pm.
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Market Street carpark redevelopment.
- With prime office capital values increasing 29% ytd to S$2,000psf in 3Q10, outpacing a corresponding 9.6% rise in prime office rents to S$7.40, yield compression is starting to set in. With yield-accretive acquisition opportunities becoming increasingly difficult in the near term, management may relook the option to redevelop the Market Street carpark into an office building.
- With prime office capital values increasing 29% ytd to S$2,000psf in 3Q10, outpacing a corresponding 9.6% rise in prime office rents to S$7.40, yield compression is starting to set in. With yield-accretive acquisition opportunities becoming increasingly difficult in the near term, management may relook the option to redevelop the Market Street carpark into an office building.
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Maintain BUY and target price of S$1.70.
- We use the dividend discount model (required rate of return: 7.7%, terminal growth: 2.5%) to value CCT.
Ascendas REIT – UOB Kay Hian
BACKGROUND
Ascendas REIT (A-REIT) is a business and industrial REIT which invests in a diversified property portfolio in Singapore, comprising business and science parks, hi-tech industrial properties, light industrial properties, logistics and distribution centres as well as warehouse retail facilities.
OUTLOOK/RECOMMENDATION
Positive rental reversions in FY11. A-REIT will benefit from positive rental reversions for lease renewals across all sub-segments in FY11, as current market rentals are at 4-21% premium to expiring rents, with existing business park rentals commanding a 19% premium to space due for renewal. A-REIT will also benefit from the bottoming out in industrial rentals and the improvement in the manufacturing sector outlook.
- Industrial rentals picking up. The Urban Redevelopment Authority (URA) industrial rental index bottomed out in Sep 09 and is up 8.0% ytd. Average market rents for business parks, factory and warehouse space are up 6.9%, 8.0% and 8.1% ytd respectively. Hi-tech industrial space is expected to recover in 2011 after bottoming out this year due to supply overhang in the segment.
- Downside protection in earnings. A-REIT has a well-diversified and stable portfolio with average lease to expiry of five years. About 45% of the leases are long-term, typically with annual rental escalation, of which 32% have adjustments pegged to the Consumer Price Index.
- Continued acquisitions and developments to drive growth. A-REIT acquired DBS Asia Hub at Changi Business Park and another industrial property in Joo Koon in 1Q10. Development projects, such as the recently completed Plaza 8 @ Changi Business Park (CBP) and Phase II of CBP due to be completed in 1Q11, will contribute to FY11 and FY12 earnings.
- Debt headroom of S$953m. A-REIT has a debt headroom of S$953m from its current gearing level of 34.3% before reaching the 45% aggregate
- leverage. This presents ample opportunity to fund build-to-suit (BTS) development projects and acquisitions.
- Maintain BUY and target price of S$2.50. We value A-REIT based on the dividend discount model (required rate of return: 7.7%, terminal growth: 2.0%).
MIT – SGX
COMPLETION OF ACQUISITION OF 44 & 46 CHANGI SOUTH STREET 1, SINGAPORE
Further to its press release dated 2 December 2010 regarding the acquisition of the property at 44 & 46 Changi South Street 1, Singapore for a purchase price of S$16.8 million, Mapletree Logistics Trust Management Ltd., as manager of Mapletree Logistics Trust is pleased to announce that the acquisition was completed today.
The acquisition was fully funded by proceeds raised in the recent equity fund raising exercise announced on 21 September 2010 (“EFR announcement”). This was one of the Potential Acquisitions as identified in the EFR announcement.
Singapore Reits – DBS
The quest for growth
• S-REITs offer FY11 yields of 6.1%, an attractive 340 bps spread against long bonds
• As inflation inches higher, we prefer SREITs with ability to continue delivering strong organic growth
• Strong balance sheets to leverage on in the chase for further acquisitions
• BUY FCT, P-Life, Cache, MLT, CDL HT, ART, CMT
Normalized FY11F yield of 6.1%. The S-REIT sector now trades at a normalized FY11F distribution yield of c6.1%, slightly below its historical mean of c6.5%. Spreads have narrowed but still remain attractive at c340bps above the long-term government bond yield, currently at c2.7%.
The quest for DPU growth. S-REITs offer a good hedge against inflation given that earnings growth can potentially outpace inflation, which is expected to inch higher to 3.2% in 2011. We prefer S-REITs with the ability to deliver growing distributions organically while having the opportunity to acquire accretively. We continue to hold the view that hospitality and retail sectors offer a more robust outlook on the back of expected strong visitor arrivals in 2011. Office REITs are expected to see topline pressure from negative reversions in 2011 though the sector is on an uptrend.
Interest rate hikes to have minimal impact on distributable income. Given the current low interest rate environment, S-REITs have taken the opportunity to refinance, lengthen the debt maturity profile as well as widen their sources of debt, hence enjoying savings in interest. DBS economist expects interest rate hikes only towards the end of 2011. Even then, our scenario analysis reveals that the impact on S-REITs FY11 distributable income is limited to -0.2 to -3.0% as majority of the S-REITs have hedged/fixed their interest rate positions.
Industrial & Sponsored REITs have potential for further accretive acquisitions. Even after acquiring cS$6bn of assets YTD, S-REIT sector gearing remains low at 34.4%. Further growth from acquisitions is possible and we look towards the industrial REITs for their ability to acquire earnings accretive assets given the relative higher yields of industrial assets while sponsored REITs continue to offer long-term portfolio growth visibility to investors from potential asset injections in the medium term.
Stock picks. CMT, FCT, CDL HT and Ascott REIT are expected to deliver strong organic growth potential coupled with sponsor injection possibilities. P-Life offers downside protection as revenue is pegged to inflation. MLT and Cache offer potential earnings surprise given their visible sponsor pipeline.
First REIT – SGX
ANNOUNCEMENT
EXTENSION OF HGB TITLE FOR MOCHTAR RIADY COMPREHENSIVE CANCER CENTRE
Further to:
(1) the announcement dated 9 November 2010 in which Bowsprit Capital Corporation Limited, in its capacity as manager of First Real Estate Investment Trust (“First REIT” and as manager of First REIT, the “Manager“), proposed the acquisition by First REIT of Mochtar Riady Comprehensive Cancer Centre (“MRCCC” and the proposed acquisition of MRCCC, the “MRCCC Acquisition“) subject to, among others, the condition precedent that the in-principle approval for the renewal of the “Right to Build” (Hak Guna Bangunan or “HGB“1) title in relation to MRCCC be obtained from Badan Pertanahan Nasional (or the National Land Office of Indonesia);
(2) the circular dated 10 November 2010 issued to unitholders of First REIT (“Unitholders“) to seek Unitholders’ approval for, among others, the MRCCC Acquisition; and
(3) the approval by Unitholders of the MRCCC Acquisition at First REIT’s Extraordinary General Meeting on 29 November 2010,
the Manager is pleased to announce that the National Land Office of Indonesia has extended the HGB title in relation to MRCCC (which was scheduled to expire on 27 August 2015) for a period of 20 years subject to, among others, the payment of a nominal premium and certain other standard conditions, and therefore the condition precedent described above has been satisfied. The amount of premium payable is approximately 193.2 million Indonesian Rupiah (approximately S$28,006.252) and is payable by the vendor of MRCCC.