Singapore REITs

FY07 results were in line

Comment on Results
A-REIT reported FY07 results that were in line with our expectations. Gross revenue and net income grew 25% and 15% y-o-y to S$283.0m and S$163.8m respectively. Distribution per unit (DPU) increased 9.2% y-o-y to 12.75 cents.
This improvement was due to the additional rental income from the acquired properties, higher occupancy of 96.6% as compared to 95.0% a year ago and organic growth of 2.7%.

Outlook
According to CBRE, there is an increase in capital value and rental rates by around 5% for all industrial space in 1QCY07. We remain positive on hi-tech space and Business and Science Park where demand is expected remain strong given the limited supply and increasing rental rates of office space in the Central Business District. Of note, A-REIT has 45% of its portfolio in the Hi-tech and Business and Science Park sectors. With both the stepped rental increase for the long-term leases and the positive rental reversions for the short-term leases, A-REIT is expected to continue to benefit from organic growth. Some 57% of under-rented leases are due for renewal in FY08.

Recommendation
A-REIT targets an asset size of S$5.0bn by 2010, with S$400.0m p.a. worth of acquisitions and development required. Hence, we have reduced our acquisition pipeline from S$500.0m p.a to S$400.0m p.a. from 2008 to 2010. Based on DCF Valuation rolled over to FY08), we have a target price of S$2.69. This derives a total return, including yield, of 17%. Upgrade our recommendation to Buy from Hold.

Slowing down

DPU growth slowed on fewer acquisitions. Ascendas REIT (AREIT) reported its 4Q07 results with revenue rising 16% YoY to S$74.0m and with its distribution per unit (DPU) at 3.3 cents (+13% YoY). FY DPU was 12.75 cents (+9% YoY) and in line with our forecast. While FY DPU grew it was less than half of the 22% achieved in FY06. The growth deceleration reflects the slower rate of acquisition.

No guidance for acquisition in FY08. Historically most of AREIT’s earnings growth has been on the back of acquisitions of domestic assets. In FY07, AREIT only acquired assets worth S$488m, well below that achieved in FY06 of S$656m and S$1,000m in FY05. AREIT has not given any guidance with respect to acquisitions in FY08, but it has a long-term target of S$400m per year. However, we see the current slower pace of acquisition and hence DPU growth as probably here to stay. Nevertheless, AREIT does have about S$148m worth of acquisitions previously announced but yet to complete. These assets are presently being constructed and S&P agreement is not expected to complete until the buildings are physical completed towards the end of FY08. So these acquisitions are unlikely to boost earnings meaningfully for AREIT in FY08.

Market competition is intensifying. The industrial market space is definitely getting more competitive. There are three industrial REIT players in the market, i.e. AREIT, Mapletree Logistics Trust and Cambridge Industrial Trust. A fourth player, MacarthurCook Industrial REIT, is to be listed today and JTC REIT could be listed in 2008. Growth strategies of these REITs vary very little, as they all adopt the same acquisition-led growth strategy. Hence we do not anticipate competitive pressures to buy assets to get any easier.

Maintain HOLD. The key worry is AREIT’s high price-to-book ratio of about 1.7 times. This implies that the market continues to anticipate strong growth. With the industrial REIT space getting very crowded, we see a high risk of market being disappointed. Hence AREIT has to either moderate expectation or alternatively propose a new approach to growth. Nevertheless, we have allowed for AREIT’s asset size to increase from its current S$3.3b to S$4.0bn over the next 2 years. On the target asset size basis, our fair value remains at S$2.31. We maintain our HOLD rating.

Overseas expansion by year-end?

FY03/07 results in line. Full-year DPU of 12.8cts is in line with our forecast but 1.5% below consensus estimate. Gross rental revenue was up 25% yoy to S$283m, driven by acquisitions completed during the year (S$340m) and higher overall occupancy rates (97% as at end-FY03/07, up from 95% a year ago).

On course to meet portfolio target. Areit has a portfolio target of S$5bn by 2010 (current S$3.3bn). Some S$148m worth of acquisitions sealed last year are pending completion (build-to-suit projects that are expected to be completed by 1H08). The potential acquisition pipeline includes S$400m-500m from parent Ascendas, S$600m-700m from JTC asset divestments and a development capacity of S$269m.

Strong demand for suburban office space, as more businesses move their noncore operations away from the CBD on account of surging prime office rents. As a result, rental renewal rates at Areits Business and Science Parks and Hi-Tech Industrial properties rose 13% and 19% respectively during the year. About 74% of Business and Science Parks leases and 65% of Hi-Tech Industrial leases are short term and imply the potential for robust rental reversions going forward.

Decision on regional expansion by year-end. Besides outright acquisitions of overseas assets, Areit could participate in parent Ascendas investments in the region by taking stakes in funds that Ascendas has set up in these countries.

FY10 DPU introduced at 14.6cts, based on a portfolio size of S$4.8bn by end-FY10 (average growth of S$500m a year) and an assumed average cap rate of 7% for potential acquisitions. In addition, our FY08-09 DPU forecasts have been raised by 3.2% and 1.6% respectively after tweaking margin assumptions for the different property segments.

DDM-based target price lifted to S$2.90 from S$2.82, on account of our revised DPU forecasts (cost of equity 6.2%). Our new target price implies an FY08 yield of 4.9% (spread of 200bp over the 10-year government bond), which we believe is reasonable. While the size of Areit makes acquisition-led growth incrementally difficult, above-average projected yields of 6% for the next three years make Areit a good defensive stock. We anticipate newsflow on Areits overseas expansion over the next 12 months to provide catalysts for the stock. Maintain Outperform.

CRCTs First Quarter 2007 Income Available for Distribution Exceeds Forecast by 9.5%

Pro-active asset management drives occupancy rates and shopper traffic across the portfolio

CapitaRetail China Trust Management Limited (CRCTML), the manager of CapitaRetail China Trust (CRCT), is pleased to announce a S$7.17 million income available for distribution to unitholders of CRCT (Unitholders) for the period from 1 January 2007 to 31 March 2007 (First Quarter 2007). This is S$0.63 million or 9.5% higher than the forecast income available for distribution of S$6.54 million for First Quarter 2007.

Available Distribution Per Unit in CRCT (DPU) for First Quarter 2007 is 1.51 cents (6.11 cents on an annualised basis), which is 9.5% higher than the forecast available DPU for First Quarter 2007 of 1.38 cents (5.58 cents on an annualised basis).

CRCTs gross revenue of S$17.1 million for First Quarter 2007 was S$1.2 million or 6.4% lower than the forecast1 gross revenue for the same period. Net property income was S$1.05 million or 8.9% lower than the forecast1. However, income available for distribution for First Quarter 2007 exceeded forecast1 by 9.5%, mainly due to net interest savings.

The lower than forecast gross revenue and net property income are mainly attributable to tenants at Wangjing Mall and Qibao Mall taking longer than expected time to obtain approvals from relevant local authorities, as well as some pre-termination of leases at Xinwu Mall. Tenants turnover and changes to tenancy mix are part and parcel of the active asset management process. Despite these slight disruptions, the portfolio occupancy rate registered an increase of 3.2% from 89.9% (as at 31 August 2006) to 93.1% (as at 15 April 2007), with all malls in the portfolio showing an improvement over the same period. Separately, rental from new leases at Wangjing Mall, Qibao Mall and Xinwu Mall outperformed forecast rental rates by 11.8%.

MacarthurCook Reit paints bullish outlook before S’pore debut

MACARTHURCOOK Industrial real estate investment trust (MacarthurCook Reit) , which starts trading here on Thursday, is upbeat about expanding its portfolio, hoping to take advantage of Asia’s growing industrial property market. The Reit, managed by Australia’s MacarthurCook Ltd, has set a target of adding $500 million worth of assets to its portfolio annually and is optimistic of achieving this within a year of listing.

‘We are confident we can achieve our target,’ MacarthurCook Reit chief executive officer Chris Calvert told XFN-Asia in an interview. Funding for further acquisitions would probably come from the sale of additional shares in the Reit, given the company’s rapid expansion plans. ‘With our IPO our gearing is only going to be about 8 per cent, so we can acquire more properties without raising anymore equity. We can just borrow more money till we get to 35 per cent,’ MacarthurCook Reit managing director and chief investment officer Craig Dunstan said, referring to the gearing level the firm is comfortable with.’But the reality is we would probably have to go to the equity market at least once a year, probably for a very long time,’ Mr Dunstan said.

The Reit is selling 247.33 million shares at $1.20 each at its IPO, and another 6 million shares to MacarthurCook Ltd and 7.1 million shares to MacarthurCook’s partners. In all, MacarthurCook Reit will raise $312.5 million, which it will use to pay for its initial portfolio of 12 properties in Singapore, valued at $316.2 million.

The 12 properties are currently 100 per cent-leased and are expected to generate a combined rental income of $24.47 million in the year to March 2008 and $25.82 million in the following financial year. With these assets, Mr Calvert believes the Reit has gained good traction on the industrial property market here, with more opportunities to make further acquisitions. ‘At this stage it is still not a very highly securitised market and we see ample opportunities (for growth),’ he said, adding, ‘we are very busy behind the scenes’.

MacarthurCook Reit will compete with other industrial Reits in Singapore including Ascendas Reit, Mapletree Logistics Trust, and Cambridge Industrial Trust, but the firm believes there is enough room for all players to continue to make yield-accretive acquisitions. ‘There are so few Reits focused on industrial property and so much industrial property out there, we actually don’t come across each other that often,’ Mr Dunstan said. ‘Ascendas Reit is focused on office parks, Mapletree just logistical facilities, whereas our portfolio looks at office parks, logistic facilities and also manufacturing facilities. So we have a broader scope of investment.

‘MacarthurCook Reit is also actively looking for properties in Japan, Malaysia and Hong Kong. And further down the road, it intends to acquire industrial properties in China, South Korea and the Philippines. The firm aims to keep 40 per cent of its assets located in Singapore to provide the Reit with stable returns.