Month: April 2008
FrasersCT – UOBKH
Defensive Anchor From Suburban Malls
Frasers Centrepoint Trust (FCT) is a retail-focused real estate investment trust (REIT). It delivers sustainable growth through four growth strategies: positive rental reversions, asset enhancement initiatives (AEIs), building up a pipeline of quality malls for injection into FCT and overseas expansion. FCT’s initial portfolio comprises Causeway Point, Northpoint and Anchorpoint in Singapore. FCT was assigned a corporate rating of A3 with a stable outlook by Moody’s Investors Services in Mar 07.
Ready pipeline of acquisitions. FCT has a ready pipeline of acquisitions that will double net lettable area (NLA) to more than 1.2m sf when fully completed. It has entered into a put and call option agreement with sponsor Frasers Centrepoint Limited for the purchase of Northpoint 2 at S$139.5m-170.5m. Northpoint 2 is expected to obtain temporary occupation permit by Aug 08 and to be injected into FCT in 1QFY09. We expect YewTee Point and Bedok Mall with NLA of 80,000sf each to be injected into FCT in 3QFY09 and 2QFY11 respectively. We estimate the three new malls to contribute about 29.1% of total revenue in FY12.
Contributions from Northpoint affected by AEI. FCT commenced S$30m major AEI at Northpoint. Gross floor area will be transferred from the fourth floor to level one to three, which will provide higher rental yield. Average rental is expected to increase from S$11.00 to S$12.40psf pm after the revamp. However, contributions from Northpoint will be affected from 3QFY08 to 3QFY09 with average occupancy estimated to decline from 100% to 85%.
Initiate coverage with HOLD. FCT focuses on suburban retail malls, which provides defensive qualities. Contributions from new malls to be acquired come much later, starting 1QFY09. Growth momentum would slow down in the near term due to AEI at Northpoint. FCT provides FY08 distribution yield of 5.47%. Our fair price for FCT is S$1.39 based on two-stage dividend discount model.
AREIT, CMT – DBS
West Side Story
Extreme Makeover – Jurong Edition: The government’s proposal to turn Jurong into a commercial and entertainment hub is a major concerted effort to transform the Jurong Lake District into a unique lakeside destination for leisure and business over the next 10-15 years. This is likely to have a positive impact on property capital values there in the long term.
Go West: Plans for the 360ha land area, close to the size of Marina Bay, includes developing the area around the Jurong East MRT station into a commercial hub serving the west region and creating a new leisure destination around Jurong Lake. About 70ha of land is allocated for development into a vibrant commercial hub with 5.4msf of GFA for office use while a further 2.7msf GFA is slated for retail, entertainment, F&B and other complementary uses. There is potential for 2,800 hotel rooms and more than 1,000 private residential units. The other major development would involve converting 220ha of land and 70ha of water into a major leisure destination with plans for 4-5 new ‘edutainment’ attractions in addition to current attractions.
Western Exposure: The office component is sizeable and would likely complement the existing business needs catering to R&D, biotech, pharmaceutical, and chemical industries. However, development will take place over 10-15 years in tandem with market demand and take-up, allaying fears of oversupply in the medium-term. The government will adjust its land supply and consequently, the development timeframe, through the Government Land Sales (GLS) mechanism. In terms of beneficiaries, CMT (BUY, TP S$3.93) has established a presence in this area through Jurong Entertainment Centre and IMM Building that could benefit from higher population mass, while A-REIT (BUY, TP S$2.80) has properties in the International Business Park that could benefit from higher capital values in the long-term. TT International is also developing a big-box retail scheme, to be completed in 2009.
CitySpring – OCBC
Unique infrastructure assets bear a closer look
High dividend yields. CitySpring Infrastructure Trust (CitySpring) is a listed business trust. Business trusts are able to pay distributions out of operating cash flows consisting of both accounting profits and non-cash charges such as depreciation. Consequently, the trust is able to offer a high dividend yield of 8.8%, based on its most recent quarterly payout.
Strong asset portfolio. What differentiates CitySpring from other listed trusts is its unique portfolio of infrastructure assets. It came to the market in February 2007 with two local assets – City Gas and SingSpring. City Gas is Singapore’s only producer and retailer of piped town gas. SingSpring is Singapore’s only supplier of desalinated water to the Public Utilities Board. It is considered a key diversifier as part of the government’s “four taps approach” for Singapore’s water sources. After its IPO, CitySpring has gone on to acquire Basslink, an electricity interconnector in Australia.
Features unique to infrastructure assets. These assets essentially operate as regulated monopolies with regulated tariffs (City Gas) or longterm contracts and concessions (SingSpring and Basslink). SingSpring and Basslink enjoy a revenue model distinctive to infrastructure assets: as both are considered key strategic assets, they are compensated by availability – not by utilization. Such a revenue model is untouched by industry cycles unlike say, shipping trusts or REITs, making cash flows truly stable and predictable over the long haul.
A key risk is a changing regulatory landscape. For instance, it is expected that City Gas’ domain will be restructured and liberalized over seven to nine years. Nevertheless, CitySpring believes that steep economies of scale in the residential segment and a 600,000 strong customer base will make City Gas a formidable incumbent.
Basslink acquisition DPU accretive, but not yet. CitySpring’s S$1.5b Basslink acquisition was intended to be 75% debt and 25% equity funded with trust parent Temasek initially providing an S$370m equity bridge facility. We note that Basslink currently does not contribute to the trust’s distributions – its contribution was originally supposed to kick off after the planned equity issue took place. Given current market conditions, it seems most likely CitySpring will instead resort to more debt funding for now. If the equity issue is indeed shelved, it is unclear when Basslink will start being accretive to the trust’s DPU and by how much. CitySpring is currently trading at S$0.725, a 10% discount to its NAV and a 19% discount to its IPO price. We do not have a rating on this stock.
MMP – UOBKH
Evaluating proposals from strategic review
Received various proposals from third parties. Macquarie Pacific Star Prime REIT Management, manager of Macquarie MEAG Prime REIT (MMP REIT), has embarked on a strategic review with the objective of enhancing value for all MMP REIT unitholders. The manager has received a number of indicative proposals from third parties and is in the process of reviewing these proposals. Macquarie Real Estate Singapore, the largest unitholder with a 26% stake in MMP REIT, continues to support the strategic review.
Reiterate BUY recommendation. We like MMP REIT for strategic frontage on Orchard Road. MMP REIT benefits full year contribution from overseas investments in China and Japan in FY08. The on-going strategic review could also unlock value for investors. MMP REIT provides FY08 distribution yield of 6.08%. Our target price is S$1.55 based on two-stage dividend discount model.
CRCT – Goldman Sachs
Discounting the pace of acquisition growth; maintain Sell
What’s changed
Since its placement and maiden acquisition of Xizhimen Mall (Beijing) in early Feb 08, CRCT’s stock has fallen ~22% and is now trading below the placement price of S$1.36; it has declined ~62% from its Oct 07 peak. Higher funding costs and uncertainty in realizing the value of an impressive acquisition pipeline have weighed on the shares, in our view. Across the SREIT universe, we continue to favor stocks with strong organic growth over those for which acquisition growth is a key driver. Maintain Sell.
Implications
For much of its trading history (Dec 06 listing), CRCT, fueled by investors focused on its acquisition growth prospects, has traded at distribution yields (i.e., funding cost) that have facilitated accretive acquisition growth. However, with CRCT trading at a 6% 08E yield, we believe it will be difficult for the company to raise equity to fund growth. We view CRCT’s exposure to Chinese domestic consumption as positive and see value in its right of refusal to about 65 malls from CapitaLand and its funds, of which 16 malls are operational. But we think the challenge of raising equity could cast doubt on CRCT’s target to grow portfolio size from S$1.1 bn today to S$3 bn by 2009. We note CRCT’s leverage of 31.6% vs. regulatory cap of 35%
means acquisition growth needs to be largely equity funded. Also, S$171 mn of debt is due for refinancing end-08.
Valuation
We have removed acquisition premiums in setting TPs for most REITs under our coverage, but not for CRCT. Our new DCF-based 12m TP of S$1.46 (vs. S$1.80 previously) comprises a base-case S$1.25 (unchanged) and premium of S$0.21 (vs. S$0.55), reflecting a 50 bp rise in funding costs and slowdown in the pace of acquisitions to S$450-500mn p.a. till 2010.
Key risks
Performance of the underlying malls could surprise on the upside.