Full year results in-line with expectations. Cambridge Industrial Trust (CIT) released its FY11 results posting a gross revenue and distributable income of S$80.4m (+8.3% YoY) and S$50.4m (+12.7% YoY) respectively. NPI rose 6.2% to $69.1m on the back of higher rental income. DPU for the 4th quarter was reported to be 1.118 S¢ (+3.3% QoQ) bringing the entire year’s DPU to 4.237 S¢ (-13.4% YoY). The drop in DPU was mainly due to the enlargement of share base as a result of April 2011 rights issue. Separately, by completing the acquisition of 3C Toh Guan Road East, we expect the property to contribute c.0.15S¢ to FY12 DPU. Concurrently, by divesting 7 Ubi Close, CIT is able to put the acquired capital to better future investments. We maintain our BUY call with a DDM-based TP S$0.605, which posts a potential upside of c.20%.

Divestment of 7 Ubi Close. As part of the company’s efforts to recycle its capital for future investment opportunities, CIT has completed its divestment of 7 Ubi Close at S$18.7m. This price is a 2.2% premium to the latest valuation of S$18.3m as at 31st Dec 2011.We view this divestment positively as this is the only property in CIT’s portfolio which land lease is due to expire in less than 15 years.

Newly completed acquisition to begin contribution in 2Q12. CIT completed the acquisition of 3C Toh Guan Road East at S$35.5m on 30th Jan 2012. This industrial building adds another 192,864 sq ft of GFA to CIT’s portfolio and is currently leased to an anchor tenant for 3 years with an option to renew for a further 3 years. We expect this newly acquired property to contribute 0.15 S¢ to FY12 DPU.

Positive views on DPU growth in FY12. We view these results and new growth strategies positively and maintain our BUY call with a TP of S$0.605. Although CIT’s FY11 DPU has fallen by 13.4% YoY, the contribution from properties previously acquired together with these new strategies should allow CIT’s DPU to pick up in FY12.

• Seeks approval to buy 50% stake in Chengdu Longemont Mall

• Attractive pricing, financing flexibility minimises risk, strong total return potential

• Maintain Buy and S$0.83 TP

Acquiring Chengdu Longemont Mall at RMB10,000psm. In its latest circular issued to unitholders, PCRT is seeking unitholders’ approval for the acquisition of a 50% stake in Chengdu Longemont Mall (CLM) for RMB2.28bn. At the same time, it is also seeking approval for two other resolutions related to management fees and acquisition fees. To recap, in Nov 11, PCRT announced plans to buy a 50% share in CLM from the Summit Group for RMB2.28bn or a RMB10,000psm on a completed basis. In the latest circular, PCRT has also outlined the flexibility to upsize its stake in the mall to up to 80%, if transactional GFA falls 95% of the 455,260sm. In addition, the group has another option to buy a 50% share in another 544,740sm GFA in the Chengdu Longemont mixed-use project.

Attractive pricing with additional ‘Earn Out Support’ for better visibility on dividends. The deal will not only enable PCRT to expand its asset base at an attractive price but will also strengthen its retail presence and tenant network in Chengdu. Post acquisition, Chengdu will account for about 36% of its attributable GFA. It will be earnings and NAV accretive. We expect this transaction to generate a yield on cost of 8.4-10% when completed and fully occupied, an attractive level when compared to the market net cap rates of 6.5-7%. In addition, the flexible financing terms and fixed psm cost would enable the group to minimize risk of cost overruns during the construction period. Moreover, with an additional RMB226.5m from the new Earn Out Deed negotiated by the Trustee-Manager, this will boost Earn Out support to c90% of the anticipated distribution of the trust from FY11-1HFY13, thus providing unitholders with more stability and visibility on dividends. When

completed, we estimate CLM could add 10cts to RNAV to $0.93.

Strong total returns when malls become operational. PCRT offers investors a strong total return derived from NAV growth as well as yield when its malls are gradually developed and ramped up. The portfolio is currently 41% operational by GFA, rising to 54% and 63% by end FY12-FY13 and fully ramped up by end FY14. We have tweaked our distribution income to account for some changes in asset completion dates. At the current share price, the market is valuing PCRT’s existing portfolio at below replacement cost, at cRMB6,320psm. Maintain Buy with S$0.83 TP, based on a net present value of the existing portfolio value, assuming fully operational by FY14.

Singapore-listed Frasers Commercial Trust is considering the purchase of the remaining half stake in the Caroline Chisholm Centre in Canberra, up for sale by Record Realty Group receiver KordaMentha.

The Singaporean trust, which owns the other half stake in the complex, could pick up the rest at a slight discount to the $95 million at which it holds its interest.

The trust initially picked up its stake in the tower at $108.75 million in mid- 2007, alongside Record Realty, when both were controlled by the now collapsed Alleo Finance Group.

The bulk of Record Realty’s Australian portfolio fell under the control of Bank of Scotland International. KordaMentha has already sold a series of towers out of the portfolio.

These include Melbourne’s St Kilda Road; one in Margaret Street, Brisbane, and global property manager RREEF Real Estate bought Sydney’s Exchange Centre for $186 million. The Singapore trust, known as Allco Commercial REIT (real estate investment trust) before Frasers took over management, emerged as the likely purchaser after talks with Sydney-based fund manager CorVal Partners ended.

CorVal, which is backed by property investor Andrew Roberts, best known as the former head of Multiplex Group, had been a contender to buy the stake.

CorVal has a good history with Canberra properties. It acquired Industry House in the city during the property crunch for $123 million. However, the Singapore trust is believed to have pursued the opportunity to take full control of the complex. It also owns a half stake in Central Park, a 47-level office tower on St George’s Terrace in Perth. But last year it sold its minority stake in the unlisted Wholesale Australian Property Fund.

The Caroline Chisholm Centre was designed as the headquarters for the federal Department of Human Services, formerly known as Centrelink.

The department has a lease for 18 years from July 2007 with 3 per cent annual reviews.

The premium-grade, five-storey, freestanding office building was completed in 2007 by Multiplex. The entire complex has a passing net income of $14.41 million and it has a net lettable area of about 40,244 square metres. John Marasco and Jim Shonk of Colliers International Property Consultants are marketing the property, but declined to comment as did Korda-Mentha and Frasers.

A sale would be the city’s largest this year as international groups appear set to dominate the early buying.

Property tycoon Lang Walker is advancing the sale of one his key Canberra holdings, the new 40,000 square metre headquarters of the Department of Education, Employment and Workplace Relations, to a Malaysian unit of CIMB-TrustCapital Advisors Singapore and pension fund Employees Provident Fund. The sale of the $230 million Canberra building, an A-grade complex at 50 Marcus Clarke Street, is likely to show a yield of 7.4 per cent. The department

has committed to a 15-year lease for the building.

Clarification from FCOT

Positives in 1Q came from renewals at China Square Central (CSC) and occupancy increases at Key Point. With the start of discussions on early refinancing of its expensive SGD loan and lapsing of the CSC master lease in Mar, we think FCOT is a step closer to realising its catalysts.

1Q12 DPU was in line with our estimate, forming 24% of our full-year forecast. We expect back-end loaded interest cost savings. We retain our DPU and DDM-based target price (disc. rate: 9.4%). Forward yields of 8% are attractive. We keep our OUTPERFORM call.

Occupancy improvements

1QFY12 NPI was up 7% yoy on higher occupancy and rentals at Central Park where three new leases have been secured. Performance from local assets was stable with a key highlight coming from the crossing of the 90% mark in occupancy at KeyPoint after 11 quarters of steady occupancy improvements.

China Square Central master lease lapsing in Mar

Barring major downtime with low occupancy from negotiations, we expect the direct management of CSC on expiry of the master lease in Mar-12 to provide some upside. Slight disappointment comes from lower underlying occupancy of 92.5% though management has successfully reduced FY12 lease expiries from 56% of income in 4QFY11 to 40.1% (excluding 12.6% of committed leases). Signing rents are at high S$6psf, based on our understanding, allowing positive rental reversions. Management is currently in talks with other tenants on renewals.

Closer to refinancing

With signs of borrowing spreads creeping higher, FCOT has started discussions with tenants on plans to refinance its SGD loan ahead of maturity. Management has thus far successfully refinanced its A$ loan with 110bp margin savings. We expect margin savings when it refinances its SGD loans given high spreads for existing loans and on the back of a stronger parent in F&N and an improved property portfolio.

JTC asked to review its current policy of divesting industrial space to private entities

Rising rentals for commercial and industrial space have emerged as a pressing issue for small and medium enterprises (SMEs), and the fingers are pointed squarely at the dominance of real estate investment trusts or Reits as landlords.

The Reits’ drive to enhance yields and returns for unit holders – which usually translates into rental hikes – have left many SME owners, who feel they have limited alternatives here, fuming.

It has also led to calls – including a recommendation by the newly formed SME Committee – for JTC Corp to review its current policy of divesting industrial space to private entities like Reits and return to its previous role of an industrial landlord, so that it can provide ready and affordable industrial space to SMEs.

‘Rentals and capital values of properties are going up, impacting business costs for SME owners and eating into their bottomline,’ said Lawrence Leow, chairman of the SME Committee.

According to Abdul Rohim Sarip, president of the Singapore Malay Chamber of Commerce & Industry (SMCCI), rental forms between 40 per cent and 50 per cent of operational costs for small businesses. So the increase in rental costs has had a significant impact on their bottom-line.

‘About 40 per cent of these companies (from the retail and manufacturing industries) who seek advisory assistance from EDC@SMCCI have difficulty in sustaining their operational costs and are in need of short-term loans from banks, which is another challenge,’ he added.

Noted Low Cheong Kee, managing-director of Home-Fix DIY: ‘Reits are commercial entities. They will do what they can to keep upping the rent at every renewal whereas JTC had a national agenda to stabilise rent.’

JTC, a statutory board, oversees the development of industrial infrastructure in Singapore. There is clearly frustration among SME owners. An SME owner who did not wish to be named told BT she is currently in negotiations with her landlord, a Reit trust manager, to renew her lease for an additional three years. The new lease agreement is for $28,000 per month, plus 3 per cent of the store’s monthly gross turnover (GTO). She currently pays $17,000 for her 1,000 sq ft unit.

Another SME owner said his rent for a 50,000 sq ft business space in Tuas increased by 56 per cent from $50,000 to $78,000 when he tried to negotiate to renew his lease for eight months.

According to official statistics, rental rates of multiple-user factory space increased 16.2 per cent year on year in 2011, while rental at multiple user warehouse rose 13.3 per cent.

Retail rents also rose on Singapore’s success as a world-class shopping and event destination, but are expected to stabilise in 2012 due to a more muted economic outlook and oncoming supply. Average rents at prime Orchard Road malls went up 4.6 per cent year on year last quarter, while those at prime suburban malls edged up 2.2 per cent, according to CBRE Research.

What rankles too is the perception SMEs have that the odds are stacked in favour of the landlords.

Retailers argue that the practice of requiring tenants to reveal their GTO figures gives landlords an unfair advantage when negotiating rents. Said an SME owner: ‘The current retail market is unbalanced in favour of landlords . . . (since) in the prime retail spaces, you will find that 80 per cent to 90 per cent of landlords insist that their tenants reveal their monthly sales numbers.’

There is also the problem of landlords working in a clause that allows them to terminate tenancy agreements. ‘So even though the lease may be signed for two to three years, and there’s no breach of contract, landlords still have the right to terminate the tenancy of the tenant simply because the landlord feels that another tenant might be able to bring in a better image, sales, or rental . . . So your future is never secure,’ he said.

Greenpac’s chief executive Susan Chong not only had the plus-two-years clause of her lease terminated following the sale of her factory building to a Reit, but is also unable to negotiate a renewal on her existing lease with the new owner. According to Ms Chong, she has been trying to arrange for a lease renewal since October last year. Her lease expires in April.

Her frustration is palpable, given that she only requires the space for an additional eight months. ‘I’m currently building my own factory so I’m asking that they either allow me to rent for an additional eight months, or a year,’ she said. While she will only require the facilities for the next eight months, she is willing to renew the lease for a whole year, she emphasised. But thus far, the landlord’s response to requests to negotiate has been a firm no, citing potential tenants who are looking to lease the property for a minimum three-year term.

Reit managers are quick to point out that rents are a function of market forces, and that they are simply looking to achieve market rates. They say tenants have a choice as to where to locate their business and it would be impossible for Reits to charge rental rates above what the market can bear and what other landlords are charging.

‘Industrial Reits collectively own about 15.8 per cent (about six million sqm) of the total stock of about 38.2 million sqm of industrial property stock as at 2011. Are they able to dictate rental rates?’ asked an Ascendas Funds Management spokesperson rhetorically.

‘Recent media headlines of high percentage increase in rental rate in certain segments of the industrial property market is a result of catching-up to market rent level as a result of the change from public to private ownership,’ the spokesperson added.

According to a CapitaMall Trust Management Ltd spokesperson, rental reversions for malls in CMT’s portfolio averaged 2.1 per cent a year in the last two years.

‘In that same period, our tenants’ sales have increased even faster – by more than 6 per cent a year – showing that our tenants continue to do well in our malls,’ it added, crediting its strong track record in asset enhancement, which has helped increase shopper traffic and thus tenants’ sales.

Still, business owners look back to the time when JTC was a benevolent landlord. Allen Ang, group managing director of Aldon Technologies Services, pointed out that JTC initiated a rent reduction of 15 per cent during the 2009 financial crisis.

Rent now makes up about 11 per cent of the group’s overhead costs. ‘This is a substantial sum in an operation like ours. Considering our operations/business and industry norms, ideally the rents should stay at around 7 per cent to 8 per cent,’ Mr Ang said.

He has signed a third lease for a three-year term, from 2010 to 2013. The monthly rent for year one is $40,295, while monthly rent for year two is $43,498, a year-on-year increase of 8 per cent.

The SME Committee’s recommendation for JTC to review its role is an attempt to address these issues. A second recommendation calls for a one-off grant to help relocate SMEs with low value-added activities to lower-cost countries.

The recommendations, among others, will be presented to the Ministry of Finance and the Ministry of Trade and Industry ahead of Budget 2012.

Reit’s topline up 6% as occupancy rates, rentals at Central Park improve

FRASERS Commercial Trust (FCOT) reported a distribution per unit (DPU) of 1.51 cents for the first quarter ended Dec 31, 2011.

This is 21 per cent higher year-on-year after factoring in the consolidation of every five units held by unitholders into one unit on Feb 11, 2011.

Distribution for Series A convertible perpetual preferred units (CPPU) for the period remained little changed at 1.38 cents.

Q1’s total distributable income to both unitholders and CPPU holders rose 13 per cent from the previous year to $14.3 million, on the back of higher net property income, which rose 7 per cent year on year to $24.6 million. Distributable income to unitholders increased 22 per cent to $9.6 million over the same period.

The real estate investment trust (Reit) also managed to grow its topline, which climbed 6 per cent to $30.7 million as a result of better occupancy rates and rentals achieved for Central Park. Average occupancy rates stood at a healthy 97.6 per cent due to strong take-up in both the Reit’s Singapore and Australian portfolios, which was 98.1 per cent and 97.8 per cent, respectively. Occupancy levels in the Japanese portfolio stood at 91.4 per cent.

Said CEO of FCOT’s manager, Low Chee Wah: ‘In the coming quarter, we will be taking over the management of China Square Central upon the expiry of the master lease on 29 March, 2012.’ He said rejuvenation plans for the asset will be explored to capitalise on the opening of Telok Ayer MRT station next year.

The counter lost half a cent, or 0.6 per cent, to 76.5 cents yesterday.

With more attractions and events lined up, we share management’s optimism on the local hospitality industry during its briefing. We also like management’s selective and value-driven approach towards acquisitions. CDLHT remains ourtop pick among the S-REITs.

We raise DPUs by 1% on higher REVPARs, offset partially by lower payouts. Backed by conservative book valuations, valuations are not excessive at 1.1x P/BV vs. a long-term average of 1.3x. Maintain OP. We see catalysts from stronger REVPARs and accretive acquisitions.

What Happened

An upbeat management shared its observations and views on the local hospitality industry. Backed by sustained demand from corporates and tight occupancy, management guides that the industry has been able to increase corporate renewal rates by an average of 5%. While upcoming room supplies may pose competition, the deferment of some projects could take some of the heat off. Meanwhile, management remains highly selective and value-driven towards acquisitions. It believes that local transacted values of S$900k per room are excessive and does not see reason to partake given the pipeline from its sponsor. Payouts should be at the low end of 90+% and will continue to match retained earnings against maintenance capex needs to improve efficiency and margins.

What We Think

Backed by events and tourist attractions, resilient Asian economies and moderate upcoming room supplies, the outlook for hospitality remains positive. We continue to like management for its prudence while a strong balance sheet (asset leverage of 25.3%) provides debt headroom for acquisitions and AEI (e.g.Orchard Hotel Shopping Arcade after the finalisation of plans).

What You Should Do

While the stock has been re-rated16% since our last note in Dec 11, we continue to see value at 1.1x P/BV vs. its long-term average of 1.3x. Book valuations of about S$600k per room key for its local properties remain highly conservative when benchmarked against theS$900k per room key (implied cap rate of <5%) in some market transactions. Maintain Outperform.

Organic growth

3QFY12 was boosted by stronger year-end GTO rentals at VivoCity. With strong 25% rental reversions for committed retail leases and contributions from the newly-opened ARC, MCT’s organic growth should be one of the strongest among S-REITs.

3Q/9M12 annualised DPU is slightly above consensus and our estimates, at 27/78% of our FY12 on lower borrowing costs. We raise DPU by 2-4% on reduced borrowing costs and thus our DDM target price (disc. rate: 8.6%). Maintain Outperform.

Robust rental reversions at VivoCity

We expect strong rental reversions at VivoCity, backed by strong shopper traffic (+15%) and tenant sales (+9%) and an under-rented portfolio. 3QFY12 NPI grew 6% qoq and 9% yoy on higher passing rents during renewal and year-end GTO rentals at VivoCity. Positives were stronger YTD rental reversions of 25% (over preceding rentals, 2Q: 20%) for its retail leases as occupancy remained nearly 100%. Substantial leases will be due in FY13 and management has started discussions as early as 10 months ahead of expiry, noting good demand from existing and prospective tenants.

Maiden contributions from Alexandra Retail Centre

Its newly-opened ARC (in mid-Dec 11) contributed to 3QFY12. While occupancy and commitments were fairly low at 36% and >55% (of NLA) respectively due to its earlier commencement, we expect these to rise with management in close discussions with several prospects.

Stable office performance

The completion of ARC has added 15k sf to MCT’s office portfolio. Excluding this, occupancy at PSA Building has climbed to 95.1% from 92.7% the last quarter. We understand that while tenants are increasingly cautious, asking rents are still stable. The commencement of ARC could provide additional impetus for the leasing momentum at PSA Building.

MAPLETREE Commercial Trust (MCT) posted a distribution per unit (DPU) of 1.428 cents for the third quarter ended Dec 31, 2011, beating its forecast of 1.237 cents by 15.5 per cent.

This translates to an annualised yield of 6.7 per cent, based on MCT’s closing price of 85 cents on the last trading day of 2011.

Gross revenue of $49.7 million for Q3 exceeded forecast by 4.4 per cent and was 10.7 per cent higher than the unaudited pro-forma gross revenue for the same period the previous year following stronger revenue streams from VivoCity, new contributions from Alexandra Retail Centre (ARC) as well as tenants taking up additional space in PSA Building.

Consequently, net property income (NPI) rose 9.3 per cent to $33.8 million from $30.9 million in the corresponding period a year back (based on pro-forma numbers).

Cumulatively, from the commercial real estate investment trust’s (Reit) April listing date till Dec 31, 2011, a gross revenue of $127.4 million was recorded, up 4.9 per cent year-on-year due to stronger revenue flows from VivoCity and positive rent renewals.

Correspondingly, NPI also climbed 5.5 per cent to $88.2 million year-to-date and distributable income rose to $69.2 million, up 25.2 per cent on the back of higher net income and non-tax deductible items that were not factored in the pro-forma numbers.

So far, the DPU for the period spanning April 27, 2011 to Dec 31, 2011, stands at 3.717 cents, beating the IPO forecast of 3.334 cents by 11.5 per cent.

MCT’s total portfolio was also recently valued at $2.9 billion as at Nov 30, 2011, by DTZ Debenham Tie Leung (SEA) Pte Ltd, which triggered a revaluation gain of $62.4 million in the Reit’s books.

Gearing also improved by declining to 37.7 per cent from 38.5 per cent previously.

Going forward, management expects MCT’s portfolio which is located along the ‘Southern corridor’ of Singapore to benefit from the opening of MRT stations on the Circle Line extension, while the mix of office and retail together with a diversified tenant base would reduce risk and offer sustainability of earnings.

MCT ended trading unchanged at 86.5 cents yesterday.

Its S’pore hotels, excluding Studio M, post Q4 RevPAR of $205, up 6%

CDL Hospitality Trusts (CDLHT), which has posted a 5.8 per cent year-on-year rise in distribution per stapled security for Q4 2011, continues to look for acquisition targets in Asia Pacific markets.

‘Singapore still remains our favourite market in terms of visibility and prospects,’ said Vincent Yeo, CEO of M&C Reit Management, the manager of CDLHT, at a media briefing yesterday.

The stapled group posted distribution per stapled security of 2.94 cents for Q4 2011, up 5.8 per cent from the same year-ago period. Over the same period, CDLHT’s gross revenue rose 13.4 per cent to $37.8 million – thanks to improved hospitality performance across the portfolio and contribution from Studio M Hotel in Singapore, which was acquired in May last year

Net property income for Q4 improved 12.7 per cent year-on-year to $35.5 million.

The stapled group, which makes semi-annual payouts, will distribute 5.71 cents per stapled security for the July 1-Dec 31, 2011 period, or 7.5 per cent higher than the same year-ago period. The payout for H2 2011 will comprise 5.33 cents of taxable income and 0.38 cent tax-exempt income. The counter ended 6.5 cents higher at $1.775 yesterday.

The group’s Singapore hotels achieved strong performance for Q4 as well as full-year 2011. Fuelled by the growth in visitor arrivals, revenue per available room (RevPAR) of the hotels here, excluding Studio M, rose 6 per cent year-on-year to $205 in Q4 2011, the highest Q4 RevPAR since CDLHT’s inception in 2006, supported by high average occupancy of 88.6 per cent in the quarter. Including Studio M, the RevPAR for the Singapore hotels increased 6.1 per cent to $200 in Q4 2011.

Full year 2011, the Singapore hotels’ RevPAR (excluding Studio M) climbed 6.9 per cent to $204, just a tad below the all-time high annual RevPAR of $207 achieved in 2008.

This was despite an increase in hotel room supply in Singapore and room nights being taken out of Orchard Hotel’s inventory during the year for refurbishment. Excluding Orchard Hotel, the RevPAR growth would have been higher at 10.2 per cent in FY 2011 compared to a year ago.

The group’s five Australian hotels – in Brisbane and Perth – also continued to perform strongly, bolstered by the buoyant natural resource sector and static supply of hotel rooms.

Full-year 2011 gross revenue rose 15.4 per cent to $141.1 million. Net property income improved 17.5 per cent to $135.2 million. Distribution per stapled security climbed 8.3 per cent to 11.05 cents.

Last year, the group finished refurbishing the 331-room Claymore Wing of Orchard Hotel. By mid-January 2012, it also completed upgrading all the rooms at Novotel Clarke Quay. Asset-enhancement initiatives this year are likely to focus on less ‘visible’ back-of-house works like chiller replacements to boost hotel efficiencies and create energy savings, says Mr Yeo.

Last year, CDLHT retained 10 per cent of its income available for distribution as working capital to fund capex on asset enhancement initiatives, resulting in a payout ratio of 90 per cent. A ‘good guide’ on 2012’s payout ratio is the low-90s, says Mr Yeo.

M&C Reit Management acknowledged that the outcome of the European debt crisis, the depth of the recession in some European countries and the health of the US economy may have an impact on Asian economies which may affect visitor arrivals and the hospitality sector.

‘There are indications in the market that some companies are exercising caution about travel budgets in view of the economic uncertainty,’ it added.

On the flip side, the range of new attractions in Singapore – including the first phase of the Gardens by the Bay and the River Safari – as well as the stronger events calendar in 2012 could continue to draw visitors to Singapore, it added.