Month: March 2013
CCT – DMG OSK RHB
Rise Of Another Icon
We visited CapitaGreen’s showroom yesterday morning and were wowed by its: i) 40th-floor sky garden and restaurant, ii) innovative technology which directs cool air inwards, and iii) unique dual facade that cuts solar heat, among others. Set to be CCT’s next growth driver, it offers c. 700,000 sq ft of Grade-A office space and is scheduled to receive its TOP by 4Q14. Due to a dearth of immediate drivers, however, CCT is still a NEUTRAL and its SGD1.70 TP remains unchanged as the contribution from CapitaGreen would only stream in by FY15.
CapitaGreen’s unique features include: i) a high ceiling (3.2m vs the typical 2.8m-2.9m), ii) sky terraces on the fifth, 14th and 26th floors, iii) a gym and pool on level 38, iv) column-free efficient floor plates that ranges in size between 12,000 sq ft to 26,000 sq ft, and v) a cool void at the top of the building that draws in cool air from the ‘sky forest’ on the top floor.
Unique design helps save utility cost. Not only is the cool void a unique architectural feature, previous studies have shown that the cool air it draws in could reduce the average temperature in the building by two degrees. Through this, we expect CapitaGreen’s utility cost to be lower than that of other office towers.
Strategic location a key selling point. CapitaGreen is located in the heart of Singapore’s CBD, and is served by the Raffles Place and upcoming Telok Ayer MRT stations. In addition, CCT has indicated that tenants of CapitaGreen will have priority access to the GoldenShoe car park which currently features 1,053 parking lots.
Decent yield from new building. CapitaGreen is a joint development by CapitaLand, CCT and Mitsubishi Estate Asia. In this project, CCT owns 40% equity interest as well as a call option to acquire the remaining 60% within three years upon receiving its temporary occupancy permit (TOP). We expect the building, involving a total development cost of SGD1.4bn, to generate a forecast yield of 5.1%-6.3% when occupancy stabilizes.
CMT – MayBank Kim Eng
At All The Right Places
Expect more positive news flows. CapitaMall Trust (CMT) has used the bulk of the SGD250m raised via a private placement last November to partially finance the redemption of the SGD300m 2-year retail bonds which matured in February. Nonetheless, we still expect more positive news flows in the following months on new AEI plans, which are most likely to involve Tampines Mall and/or Funan. CMT remains one of our top picks amongst the S-REITs. Reiterate BUY, target price SGD2.36.
Well-managed capital structure. CMT has been diligently trying to smoothen and extend its debt maturity profile following the Global Financial Crisis. Via its MTN programmes, CMT had raised long-term debt of as long as 12 years tenure. After the redemption of the 2-year retail bonds, we estimate the average term to maturity of CMT’s outstanding debt at ~4.2 years, which is one of the longest within the SREIT universe. Its healthy cash position of ~SGD800m will be more than enough to fund future AEIs.
The incumbent’s advantage. The importance of Jurong Lake District as a regional commercial hub has been re-emphasized in the recent Population White Paper and Land Use Plan and CMT remains wellpositioned to capitalize on the area’s accelerated development via its three malls – Jcube, IMM and Westgate. In the longer term, the three strategically-located malls will further benefit from a larger catchment area with the development of Tengah New Town, facilitated by greater connectivity from the future Jurong Region MRT Line.
Hunt as a pack. Under the Government Land Sales Programme, sites slated for pure retail use are few and far between. However, we see more opportunities for integrated developments, particularly those near or integrated with MRT stations. We believe this is where the “Westgate model” can be replicated, i.e. CMT joining up with CapitaLand and CapitaMalls Asia, where CMT will take an initial minority stake during the development phase.
Reiterate BUY. We expect AEI plans pertaining to Tampines Mall and/or Funan to be announced soon, while ION Orchard remains a medium-term acquisition possibility following its recent round of rental reversions. Maintain BUY with a DDM-derived target price of SGD2.36.
MLT – OCBC
SECOND DISPOSAL ATTEMPT
- Sale of Singapore property at S$15.5m
- Transaction likely successful this time
- Potential distribution of disposal gains
Divestment of 30 Woodlands Loop
Mapletree Logistics Trust (MLT) announced last Friday that it has entered into an option to purchase agreement with Advanced CAE Pte Ltd, a subsidiary of SGX-listed Advanced Holdings Ltd, for the divestment of 30 Woodlands Loop in Singapore at a sale price of S$15.5m. This represents a significant premium to its purchase price of S$10.3m in 2007 and its valuation price of S$11.0m in Mar 2012. The divestment is expected to be completed by May, and is expected to generate a net disposal gain of ~S$5.0m, which will be distributed to unitholders (subject to clarification on tax treatment). Assuming the disposal gain is tax-exempt, we estimate an additional DPU of 0.2 S cents in FY14 due to the divestment.
Second capital recycling attempt
30 Woodlands Loop is a four-storey factory building with a build-up area of ~89,340 sqft and a leasehold tenure of 60 years from 1 May 1995 (42 years remaining). The property was first put up for sale in Aug 2012 at the same price tag of S$15.5m to Accenovate Engineering Pte Ltd. According to the initial announcement, the decision to divest the property came as a result of limited growth potential (building specifications no longer suitable for modern warehousing requirements) and attractive offer on hand. However, as the buyer’s application to purchase the property was not approved by JTC Corporation after failing to meet its evaluation criteria, the transaction did not proceed further. In the current case, we understand that JTC has already granted in-principle approval for the transaction subject to the fulfilment of stipulated conditions. Hence, we expect the divestment to go through.
Maintain BUY
We re-jig our forecasts to take into account the divestment and the potential distribution of the net disposal gains in FY14. However, our fair value remains unchanged at S$1.25. We maintain our BUY rating on MLT.
SREITs – Kim Eng
Rational Temperance
Reiterate NEUTRAL for S-REITs following uninspiring risk-reward profile as: (1) Yield spreads against ten-year bond yields continue to tighten with rising bond yields. (2) Downward pressures on rentals with slowing growth in Singapore.(3) Risk of asset-price declines in the event that monetary tightening is not conducted gradually (a case in point: Japan’s “lost decade” after the Finance Ministry sharply raised interest rates in late 1989). Our top picks remain only with the Retail REITs, in which the mismatch between rentals and physical prices have not proved unnerving. Reiterate BUY for CMT (TP: SGD2.36), SGREIT (TP: SGD0.95), SUN (TP: SGD1.85).
Gravity defying, but will QE-inflated asset prices sustain? S-REITs have registered an impressive price return of 5% YTD and 43% since end-2011. Their stellar performance in FY12 outshone even the major REITs markets in the US and Australia. Nonetheless, the rapid step-up in asset values (fuelled in the past years by quantitative easing [QE] policies) and the gradual creep-up in risk-free rate have skewed risks to the downside.
Let the buyers beware. Fundamentally, we believe that S-REITs stock price performance should be a function of forward DPU growth and physical asset prices. The almost 60% returns generated by S-REITs in 2005-2006 were buttressed by similarly outstanding DPU growth rates of 19-43% pa over 2005-2008 and strong growth in rents and capital values in 2005-2007 (in short, fundamentals-driven growth). However, the recent S-REITs 2012 rally was primarily fueled by QE-inflated asset values and ample liquidity, and not so much driven by underlying fundamentals such as strong DPU growth or rental upside, in our view.
Overheating asset prices but rentals not catching up. Post-GFC, retail and office properties have appreciated but rentals have been slow to catch up. This has in turn caused retail and office cap rates to compress from 5.9% and 4.4% in 2010 to 5% and 3.7% in 2012. Moving forward, we think it is unlikely that rentals will ever catch up in the near-term, given that the growth outlook in Singapore is expected only at 1-3% this year. Tenants are increasingly feeling the heat from escalating business costs and declining profit margins. Limited rental upside means that S-REITs are unlikely to have significant organic DPU growth anytime soon.
Rational Temperance. Unlike the “fundamentals-driven growth” experienced by S-REITs in 2005-2006, we expect the current “QE-inflated growth” to run out of steam once the “artificially compressed” interest rates in the US, and hence Singapore, start normalising sometime next year or early 2015. However, as markets are typically forward-looking, we expect S-REITs prices to rationalise probably in 2H13 or 2014.
Hospitality REITs – OCBC
CHALLENGING INDUSTRY ENVIRONMENT
- Uninspiring 4Q12s
- Serviced Residences’ rates may drop
- Maintain NEUTRAL
Recap of 4Q12s
For 4Q12, CDLHT performed in line with ours and the street’s expectations. RevPAR for its Singapore hotels was flat YoY at S$205, leading NPI to stay roughly constant at S$35.6m (+0.2%). ART performed slightly lower than our expectations but higher than the street’s. 4Q12 NPI fell by 3.7% YoY to S$38.5m. FEHT’s operational results for the period 27 Aug-31 Dec 2012 was not impressive, with its Singapore hotels registering RevPAR of S$171, missing its IPO prospectus forecast of S$174. Net property income of S$38.8m was 0.2% higher than the forecast as a result of lower operating expenses. Active management of finance costs and other trust expenses helped to lift FEHT’s DPU 4.5% above its forecast to 2.09 Scents.
Challenging environment
We have learnt that players in the local serviced residence industry believe that demand for 2013 will remain flat, with rates staying flat or declining. This corroborates our view that 1H13 is challenging for the Singapore hospitality industry. For 2013-2015, we forecast that hotel room supply will grow 5.8% p.a., faster than hotel room demand growth of 5.4% p.a. We believe that the average length of stay per visitor is declining, at least partially due to the strong SGD, and this means fewer hotel room nights. Singapore is facing a potential oversupply situation for its local lodging industry over the medium-term.
Acquisitions in FY13
CDLHT completed the acquisition of Angsana Velavaru (Maldives) on 31 Jan and now the attention is on FEHT, which may buy the 298-room Rendezvous Hotel from Straits Trading around end 2Q13. An acquisition could serve as a positive price catalyst.
Maintain NEUTRAL
Based on the above and with no near term catalysts for improvement in RevPAR, we expect the industry to face continuous challenges to sustain margin with a tight labour work force and high operating costs. As such, we maintain our NEUTRAL rating on the Hospitality REITs. We have HOLDs on Ascott Residence Trust [FV: S$1.36], CDL Hospitality Trusts [FV: S$2.11] and Far East Hospitality Trust [FV: S$1.05].