Month: September 2012
Industrial REITs – OCBC
STILL HOT ON PORTFOLIO MANAGEMENT ACTIVITIES
- Healthy debt maturity profile
- Increased investment activity
- Subsector yield remains attractive
Active capital management
Industrial landlords continue to be very engaged in their capital management activities. For 3Q to-date, we note that two industrial REITs, namely AIMS AMP Capital Industrial REIT and Mapletree Industrial REIT, had announced the issuance of fixed-rate notes, while Sabana REIT had entered into a financing agreement for S$258.6m additional Commodity Murabaha facilities. Based on our understanding, the proceeds from these issuances will be used to refinance part of their existing borrowings. This is in line with our view that the industrial REIT subsector’s debt maturity profile will remain healthy, with limited refinancing risks in the near term.
Pickup in acquisition activity
We also observe that there was a pickup in investment activity during the period. The most active REIT was Cambridge Industrial Trust, which announced the proposed acquisitions of Teban Gardens Crescent, 30 Marsiling Industrial Estate Road 8, and 11 Woodlands Walk for an aggregate consideration of S$97.3m. With just days to the close of 3Q, we estimate that the total subsector acquisition value for 3Q will be at S$182.9m. This significantly exceeds the S$66.0m acquisition size clocked in 2Q, albeit still lower than the S$678.2m value registered in 1Q. We are currently maintaining our view that the subsector acquisition activity is likely to be skewed more towards smaller REITs. We also believe that further acquisitions in the industrial space may possibly involve a combination of debt and equity, given that the subsector aggregate leverage is set to increase after funding committed acquisitions. In addition, some REITs (e.g. Ascendas REIT and Mapletree Logistics Trust) have also turned to capital recycling via divestments to enhance their portfolio returns, in line with our expectations.
Maintain OVERWEIGHT
We are retaining our OVERWEIGHT view on the industrial REIT subsector due to its high yields (7.0-7.1% for FY12-13F) and growth potential. Cache Logistics Trust remains our preferred pick, given its robust portfolio, healthy financial position and attractive forward DPU yield of 7.1%.
K-REIT – CIMB
Clocking K-angaroo miles
A 50:50 debt-equity funded acquisition of a Perth office development could be accretive though mainly through cheap S$ debt. Accretion is offset by a resultant higher gearing. The longer lease provides visibility but could limit upside from a buoyant Perth office market.
We tweak our DPUs by -0.3/+0.8%, fine-tuning our assumptions and assuming a 50:50 debt-equity funded acquisition. Our DDM target prices rises slightly because of these changes and the rollover of our target price. Downgrade to Neutral from Outperform given the limited upside.
What Happened
K-REIT has entered into a conditional agreement with Mirvac Projects to acquire a 50% interest in a new office tower development (slated for completion in 2H15) in Perth, Australia. Total consideration is estimated at A$165.0m (S$211.2m, 7.15% cap rate), paid through an initial 50% in Mar 13 and five further progressive tranches from Dec 13. The first tranche will be funded by debt. Management has yet to decide on the funding mode for the remaining tranches. Regular income at an effective rate of 7.0% will be paid throughout the construction phase. Development risk will largely be taken on by Mirvac. 98% of the NLA is pre-committed to the government of Western Australia.
What We Think
We are net-neutral on the deal as the accretion is offset by higher gearing. The capital value of S$1,274 psf appears a tad above recent market transactions, arguably for a relatively newer asset. Cap rates were fairly in line with some recent premium grade office transactions. While we like the visibility from a 25+25 year lease and 3-5% annual rental step-ups, the long lease could also result in limited upside for K-REIT in the buoyant Perth office market. A higher asset leverage of an estimated 45% after the first 50% payment could imply a need for equity fundraising for the remaining tranches. We estimate that a 50:50 debt-equity transaction could still be accretive though this is aided mainly by cheap S$ debt.
What You Should Do
K-REIT has outperformed the STI by 25% since we upgraded it to Outperform in Apr. With limited further upside and equity fundraising needs (as gearing creeps up) expected to limit accretion from a potential acquisition of MBFC Phase 2, we downgrade K-REIT from Outperform to Neutral.
FE-HTrust – OCBC
Far East Hospitality Trust: Largest pure Singapore hospitality REIT
- Pure Singapore hospitality play
- Strong sponsor
- Clear and sizeable pipeline
Largest diversified hospitality portfolio by asset value
Far East H-Trust’s portfolio consists of 11 properties in Singapore, including seven hotels and four serviced residences, with 2,531 rooms/units in total. The trust has the largest diversified hospitality portfolio in Singapore by asset value, equaling S$2.14b. With a mix of hotels and serviced residences, the portfolio is able to ride on the up-cycle in the hotel industry, while the serviced residences would provide downside protection during economic slowdowns due to the longer average stay. We note that the hotels have good locations, with the majority located in the Core Central Region. Five of the hotels are close to private hospitals, enabling them to benefit from anticipated growth in Singapore’s healthcare tourism.
Positive outlook for the Singapore hospitality sector
For 2012-2014, we estimate that the overall hotel room demand in Singapore will grow at 6.4% p.a., outstripping expected hotel supply growth of 4.8% p.a. On a combined basis, we see Mid-tier and Upscale hotel room supply growing at 4.8% p.a.
Credible and experienced sponsor
The Sponsor is part of Far East Organization, which is the largest private property developer in Singapore. Far East Organization has developed real estate in the residential, hospitality, commercial, medical and industrial sectors. It has substantial experience managing hospitality assets and its total hospitality portfolio (including the initial portfolio of the Far East H-Trust) comprises 18 properties valued at more than S$3.0b as at 31 Dec 2011. The hospitality operations have also established three inhouse brands – Village, Oasia and Quincy.
Visible and substantial pipeline
Three hotels and four serviced residences have been identified by the Sponsor as Sponsor Right of First Refusal (ROFR) properties which could be offered to Far East H-Trust. These properties, if acquired could increase the number of hotel rooms/serviced residence units in the trust by 1,242 rooms/units, or 49.1%, to 3,773.
Initiate with BUY
We initiate with BUY and a RNAV-based fair value of S$1.08.
Office REITs – OCBC
RENTAL DECLINES LIKELY SLOWING IN 3Q12
- Rental decline likely slowing in 3Q12
- Limited supply till 2H13
- Maintain OVERWEIGHT
Office rentals decline likely to slow in 3Q12
We believe the office rentals are likely to show a more subdued dip in 3Q12 after three consecutive quarters of declines since 3Q11. Over 2Q12, Grade A office rentals fell 4.7% QoQ to S$10.10 which cumulated in an 8.7% decline over three quarters. Core CBD vacancies, however, showed a reversal from a rising trend in 2Q12 to register a 0.9 ppt dip to 8.4%. A similar picture was seen for islandwide vacancy rates which declined 0.9 ppt to 6.4% (end 2Q12) from 7.3% (end 1Q12). We expect a similar trend for vacancies in 3Q12 which would likely contribute to a muted rate of rental decline.
Office absorption coming in above expectations
The 2Q12 decline in vacancies was mostly due to net absorption coming in at ~470k sq ft – in line with our forecast but markedly above market expectations which had anticipated a softer demand on macro-economic weaknesses. Grade A capital values also dipped an estimated 2% QoQ marginally to $2,450 psf in 2Q12 (1Q12: S$2,500 psf) as investment sales slowed and market players adopted a wait and see attitude in light of the residual uncertainty in the macroeconomy.
Limited supply till 2H13
Looking ahead to the remainder of FY12, it is likely that a situation of limited office pipeline completion would ensue with only ~70k sq ft of office space slated for opening – a mixed use development in Upper Pickering St – which has been fully pre-leased to AGC. We see this dynamic continuing until mid 2013 when Asia Square T2 and The Metropolis T1&2 are slated for completion.
Maintain OVERWEIGHT on Office REITs
We note that, since we have upgraded Office REITs to OVERWEIGHT on 21 Aug 2012, our top pick CCT has appreciated 4.0% against the STI’s 0.2 gain%. We maintain an OVERWEIGHT rating on Office REITs. Our top picks in the sector are CCT [BUY, FV: S$1.53] and FCOT [BUY, FV: S$1.23].
FirstREIT – AmFraser
First REIT has entered into conditional sale and purchase agreements for the proposed acquisition of two new properties in Indonesia. The proposed acquisitions comprise an integrated hospital and hotel in Manado, and another hospital in Makassar in Indonesia's southern province of Sulawesi, both of which will be purchased from two wholly‐owned units of PT Lippo Karawaci Tbk (First REIT's sponsor) for a combined purchase consideration of approximately S$142.9 million.
The acquisition of Siloam Hospitals Manado & Hotel Aryaduta Manado at a consideration of S$83.6 million will be funded by a combination of committed debt and proceeds from a proposed private placement exercise while the purchase of the S$59.3 million Siloam Hospitals Makassar will be financed entirely by a drawdown of committed debt.
PT Lippo Karawaci Tbk, First REIT's sponsor and Master Lessee of the two properties, has signed conditional master lease agreements for lease terms of 15 years, with an option to renew for a further term of 15 years. The two properties are estimated to earn a total of $14.1mil in net rental income, or 26% of First REIT's $53.4mil net profit in 2011.
We view this as a positive development for First REIT (UNRATED, S$1.03). The acquisition of two hospitals in Indonesia not only improves its portfolio diversification in terms of locations and medical specializations but also enhances its weighted average lease expiry profile (WALE). The acquisitions are expected to improve its WALE from 10.8 years to 11.7 years. More importantly, the acquisitions would strengthen First REIT's reach in Indonesia, a market we perceive to be highly attractive on the back of strong underlying demographics and the government's aim of improving healthcare access to the public. Given that the acquisition of Siloam Hospitals Manado & Hotel Aryaduta Manado is to be funded by a mix of committed debt and cash from private placement exercise, we expect First REIT's aggregate leverage to remain below 30% (lower than the regulatory limit of 35%), which should provide comfortable headroom to support its future acquisitions.