Month: December 2012
SREITs – DBSV
Refocusing on growth
• S-REIT valuations fair but ample liquidity should sustain interest
• Acquisitions a likely theme for 2013; up to S$5.7bn in assets could be purchased
• Focus on S-REITs with acquisition drivers. Picks are MCT, MLT and FEHT
S-REIT valuations fair and not compelling, however abundant liquidity should sustain interest in the sector. After a year of yield-compression led outperformance in share prices, the S-REITs sector now trades at a weighted average FY13F yield of 5.8% and a P/BV of 1.13x. While we believe the S-REITs are fairly valued at these levels, interest in the sector is likely to remain firm. This is because of the strong S$, a sustained low interest rate environment, and sector yields supported by yield spreads of 450bps above long bonds, which are still fairly decent. This could mean that capital allocations within the S-REITs sector are likely to remain high.
Acquisitions a likely key theme in 2013; potential S$5.7bn of assets might be on offer. To combat inflationary pressures which are expected to remain high in 2013, we believe investors are likely to turn from being “yield-hungry” to “growth-focused”. With organic growth prospects looking modest and most S-REITs trading above their respective NAVs, we believe that acquisitions will be a key theme in 2013. We prefer S-REITs with the ability to make accretive acquisitions (adjusted for leverage ratios remaining stable) and see possibilities coming from the sponsored REITs given their visible pipelines and REITs with regional mandates. Based on announced and potential pipelines, assuming all potentials are executed upon, we could see up to a total of S$5.7bn of asset transactions in 2013.
Our key calls. We advocate a selective stance in the SREITs with a preference towards those offering superior total returns compared to peers with potential acquisitions as an added upside to forecasts. Our picks are MCT, MLT and FEHT.
Potential downside risks.
Heightened risks to occupancy rates (which we believe to be minimal at this juncture); lower-than-expected rental reversions, earlier than expected interest rate hikes (base case early 2015).
Hospitality – OCBC
Muted outlook for 1H13
- More stores to come
- Price competition won’t return
- Fair value raised; maintain BUY
Cautious about 1H13
We note that after an outstanding 1Q12, with RevPAR and visitor arrivals growing YoY by 14% and 14.7%, respectively, growth in RevPAR and visitor arrivals decelerated through 2Q12 and 3Q12. Our channel check indicates that hotel bookings up to Chinese New Year in 2013 are still weak, with limited visibility beyond that. We note that 2013, an odd-numbered year, will likely see fewer MICE events, as biennial events are generally held in even-numbered years. Hoteliers have also expressed concern over the upcoming competition that will result from the growth in hotel room supply; new hotels typically provide substantial room rate discounts in the first few months of operation. With no immediate catalysts in sight, and an uncertain global economic environment, we see a muted outlook for tourism in 1H13.
Continued growth expected over 2012-2014
For 2012-2014, we forecast that hotel demand will grow at 6.4% p.a., outstripping the projected 4.8% p.a. increase in room supply. Supporting the positive longer-term outlook, the top four places of origin for Singapore’s visitor arrivals are projected to have real GDP growth rates of at least 4.8% in 2013 (Indonesia +6.3%, China +8.1%, Malaysia +4.8% and India +6.6% for FY ending Mar 2014).
Supply situation is manageable, and better for high-end hotels
Breaking down the projected growth in hotel room supply for 2012-2014, we note that the lower the tier, the higher the expected supply growth: Luxury (+1.6% p.a.), Upscale (+3.4% p.a.), Mid-tier (+7.0% p.a.) and Economy (+7.2% p.a.). For the first 10 months of 2012, higher hotel tiers showed stronger YoY growth in Average Room Rate (ARR) and RevPAR than lower tiers. We think that this is attributable to the more favourable supply and demand dynamics for the Luxury and Upscale tiers. The number of affluent visitors to Singapore is increasing with the general growth in arrivals, and supply is more stable for the higher-end hotel tiers.
Downgrade to NEUTRAL
We are downgrading the hospitality sector from Overweight to NEUTRAL. Our top pick is Ascott Residence Trust [BUY, FV:S$1.37], due its favourable exposure to the global growth regions of the serviced residence industry – Europe and developing Asia. We also have a BUY rating on Global Premium Hotels [BUY, FV: S$0.29], and HOLD ratings on CDL Hospitality Trusts [HOLD, FV: S$1.91], Far East Hospitality Trust [HOLD, FV: S$1.02] and Genting Singapore [HOLD, FV: S$1.33].
A-REIT – Kim Eng
Still Room for Yield Compression
Business Park exposure not fatal. AREIT’s business/science park portfolio constitutes 38% of our FY3/14 GAV and gross revenue. We noted that there is an onslaught of ~7m sqft of new known supply in 2012-2015. The majority of this supply (~81%) is in the central region (One North and Mapletree Business City), where AREIT has ten out of 23 properties. According to our estimates, the central region assets comprises ~40% of AREIT’s business park revenue and NLA. Predominantly, AREITs business park portfolio (~60%) is still concentrated in the east and west region, namely the International Business Park (IBP) and Changi Business Park (CBP).
More than 50% supply pre-committed. In addition, we estimate that ~60% of the impending supply is already pre-committed. Most of the available space will also be catered for specific uses and hence limit the choices available for existing occupiers. The Singapore government is committed to provide incentives to attract established MNCs to Singapore, and this will stabilize occupancy in our opinion. At 94% occupancy (as of 30 Sep) for business park with mostly MNC tenants, we think AREIT stands in good stead with its East+West concentrated business park portfolio and remain confident that it will be able to lease out its upcoming Nexus@onenorth project (complete in 3Q12, 223k sqft) in due course.
New Asset Enhancement Initiatives and Developments to drive growth. The former Aztech Building and Ultro Building are undergoing refurbishment works till 2Q13 and 4Q13 respectively. We forecast rental upside of 117% for Aztech (SGD 2.73 psf/mth from SGD1.25 psf/mth) and 56% for Ultro (SGD3.90 psf/mth from SGD2.50 psf/mth on completion). We expect existing developments (Unilever Four Acres, Nexus@one-north) and AEI works (Freight Links, Xilin, TechPlace II) to be the main growth driver for AREIT in 2013.
Yields can be compressed by another 60bps. We continue to like AREIT for its stable DPU yield, healthy lease expiry (not more than 25.5% of income expiring per annum) and debt maturity profile (not more than SGD400m maturing per annum). In addition, only 19.8% of AREIT’s NLA is used for conventional manufacturing, which is a plus given that the per annum net demand for factory space has been modest compared to warehouses and business parks. From our estimates, the implied cap rate for AREIT is 5.5%. If we take this cap rate as the floor for FY3/14 DPU yield, we believe that yields can be further compressed by another ~60bps from our forecasted FY3/14 DPU of 6%. Reiterate BUY with a DDM-derived TP of SGD2.60.
Hospitality – DBSV
Pockets of opportunity
• Visitor arrivals in 2013 to continue rising
• Soft operating outlook with new completing supply to make hotel landscape more competitive
• Limited opportunities to raise ADRs, Industry RevPAR to grow by 3% (vs 5% previously)
• FEHT our pick given its superior earnings profile
Visitor arrivals in 2013 to continue growing. Notwithstanding a slow start, we believe Singapore’s tourism sector in 2013 continues to hold promise with the opening of new major attractions like the Marine Life Park, River Safari and the International Cruise Terminal anchoring Singapore as a regional holiday destination. Moreover, our top visitor markets like Indonesia and China (c30% of total visitors), continue to grow strongly. We expect visitor arrivals to grow 7.7% to15.3m in 2013 vs the expected 14.2m visitors in 2012.
New rooms added; industry occupancy levels to remain fairly stable. We expect the operating environment to remain competitive coming from 4,028 new rooms (1,572 rooms in 2012, remaining 2,456 rooms over 2013). Despite that, our base case scenario of 15.3m visitors should translate to record stable occupancies of c83%. Upside will hinge on the average length of stay (LOS) profile, which could increase if visitors extend their holidays to cover the full range of attractions available. We estimate that a 0.1 day extension in the LOS results in a 2 ppt increase in occupancy rates.
Moderating trends in recent months points to weaker visitor spending. After a strong start in 2012, we sense that travelers have turned more cautious in spending from the (i) weaker average spending per visitor in recent quarters and (ii) the relative weakness in the luxury and upscale hotel segments, implying that travelers, are trading down to cheaper accommodation. Thus, going forward, with competition from newly opened hotels, we expect hoteliers to focus on maintaining occupancies and see limited opportunities in raising average daily rates (ADRs). e expect the industry to record a 3% y-o-y growth in RevPAR (vs 5% before) in 2013.
Stock picks. Within the hospitality plays, FEHT offers the highest earnings growth given that 25% of its portfolio is currently undergoing refurbishment and will complete in the next 2 quarters. Further upside catalysts hinges on the proposed acquisition of Rendezvous Singapore Hotel.
FCOT – OCBC
WELL-POSITIONED FOR GROWTH
- Positive move to exit Japan market
- Lower funding cost burden
- Good growth potential
Transformational year
We are very positive on Frasers Commercial Trust’s (FCOT) transformation over the past one year. At the close of 4QFY12, FCOT announced the exit of the Japan market with the divestment of its Japan properties. This was earlier than we expected, even though we had been anticipating the move. We like the transaction because 1) the Japan properties had been recording weak performance, 2) divestment would enhance the portfolio occupancy and weighted average lease to expiry, and 3) gearing ratio is expected to drop from 36.8% to 28.6% (including partial prepayment of its AUD and SGD loans), with no debt maturing until FY15. This will significantly strengthen its financial position and flexibility, and aid FCOT in seeking the release of 55 Market Street and Caroline Chisholm Centre (CCC) from its securitized pool.
Successful redemption of CPPUs
More recently, FCOT had also exercised its right of redemption in respect of 170.7m Series A CPPUs, representing 50% of the number of CPPUs in issue. This is in line with our view that FCOT may redeem half of the CPPUs using the net proceeds (S$537.8m) of KeyPoint divestment. Based on the latest announcement on 5 Dec, FCOT had successfully redeemed 162.6m CPPUs, or ~47.6% of total outstanding CPPUs, in cash. With this positive development, we expect FCOT to post an improvement in the distributable income, since the funding costs (distribution rate) of the CPPUs are relatively high at 5.5%.
Maintain BUY
Apart from having a significantly strengthened financial position and lower funding cost burden, we expect FCOT to gain from interest savings following the refinancing of its S$500m term loan facility. In fact, average borrowing rate fell from 4.0% in 3Q to 3.5%. In addition, the increased stake in CCC and expected improved performance at China Square Central will likely continue contributing positively to its rental income. Hence, we are staying optimistic on its growth potential in FY13. Maintain BUY with an unchanged fair value of S$1.31 on FCOT.