Month: June 2008
SREIT – UOBKH
Accumulating bargains after steep correction
Correction was fast and furious. Share prices for Singapore REITs have corrected 6-7% over the past four days. Large cap REITs bear the brunt of selling with steep correction for CapitaCommercial Trust (-7.1%), CapitaMall Trust (-7.5%), Ascendas REIT (-4.1%) and CDL Hospitality REIT (-7.2%). Frasers Centrepoint Trust also fell 6.8%. MacQuarie Meag Prime REIT, KREIT Asia and Parkway Life REIT were relatively unchanged.
On average, the magnitude of correction was in line with the quantum in cut to our target prices. Average distribution yield for Singapore REITs is 5.5%, in line with five-year average. Average yield spread above 10-year government bond at 2.2% is below five-year average of 2.5%.
Lock in the yields. While markets will continue to be shaken by twin fears of inflation and higher interest rates, we are starting to see value in some of the REITs. We have selected a diversified basket of three REITs, Frasers Centrepoint for retail, CapitaCommercial Trust for office and Ascendas REIT for industrial.
Frasers Centrepoint Trust (BUY/S$1.24/Target: S$1.55)
• FCT focuses on suburban retail malls, which provide defensive qualities. Revenue contribution from its largest mall Causeway Point gained 11% yoy to S$14.6m in 2QFY08, benefitting from strong rental reversion and higher turnover rent. 20,816sf of retail space at Causeway Point representing 5% of total net lettable area (NLA) was renewed at 16% above preceding rental rates in 2QFY08.
• Ready pipeline of acquisitions. FCT has a ready pipeline of acquisitions that will double 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 between S$139.5m and S$170.5m. Northpoint 2 is expected to obtain temporary occupation permit (TOP) by Aug 08 and is on schedule to be injected into FCT in 1QFY09. We expect YewTee Point and Bedok Mall with net lettable area (NLA) of 80,000sf each to be injected in 3QFY09 and 2QFY11 respectively. We estimate the three new malls to contribute 28.6% of total revenue in FY12.
• FCT provides attractive FY08 distribution yield of 6.24%, a spread of 2.55% over 10-year government bond.
Ascendas REIT (BUY/S$2.34/Target: S$3.00)
• A-REIT has benefitted from strong demand for suburban office space as Business & Science Park accounted for 25% of its portfolio by property value. Renewal rate for Business & Science Park was S$3.76psf pm in 4QFY08, 68.8% higher on a yoy basis.
• A-REIT had a portfolio of 84 properties and total assets of S$4.2b as at Mar 08. The weighted average lease to expiry is 5.9 years. A-REIT has a well-diversified tenant base of over 790 international and local companies.
• A-REIT provides attractive FY08 distribution yield of 6.88%, a spread of 3.19% over 10-year government bond.
CapitaCommercial Trust (BUY/S$2.08/Target: S$2.63)
• CCT owns nine properties in Singapore with 2.3m sf of office space (excluding Wilkie Edge and One George Street), which accounts for 7% of private office stock within Downtown Core. CCT is well positioned to benefit from positive rental reversion as 29.4% of leases for office space are up for renewal in 2008 and 2009.
• Market Street Car Park and Golden Shoe Car Park is strategically located at the heart of Raffles Place and represents latent potential to be redeveloped into Grade A office towers.
• CCT trades at a 25.4% discount to book NAV of S$2.79/share.
Related Post – Table
LMIR – OCBC
Data points reiterate our investment case
Riding the global slump. Indonesia has received a lot of bad press lately but consensus real GDP growth estimates are still high, ranging between 5.5% and 6% for 2008. This is only marginally lower than the 6.32% growth recorded in 2007, and on par with the growth seen in 2005 and 2006. We believe the investment case for LMIR is still intact. Its portfolio of eight retail malls and seven retail strata spaces is strategically located across Indonesia and boasts strong tenancy profiles with large anchor tenants like hypermarkets. We note that retail sales have historically outperformed GDP growth, averaging a growth of 11% per year since 1998 (Jones Lang LaSalle).
Occupancy is up. LMIR posted S$29.3m in total revenue over 19 Nov 2007 to 31 Mar 2008, missing its IPO forecasts by 5.11%. The REIT had said in April that the variance was due to “reduced rentals” meant to attract traffic driving tenants at four of its retail malls post asset enhancement work. LMIR also said that the variance to prospectus forecasts would be “mitigated in the coming months”. Since then, LMIR has released the occupancy profile of the seven of its eight retail malls owned as of 31 March 2008. Portfolio occupancy had already improved to 95.6% at 31 March from 92.8% at December 2007, which should be reflected in 2Q results.
Focused on improving performance. LMIR continues to focus on improving tenancy mix and occupancy rates. The new Medan mall, which enjoyed 97% occupancy as at April 2008, will also begin contributing to revenue from this quarter onwards. LMIR has also rolled out asset enhancement initiatives worth S$3.3m at its Istana Plaza and Mal Lippo Cikarang malls that will increase the malls’ NLA by 1.7% and 17% respectively. We do expect macro-level uncertainties to slow down LMIR’s acquisition pace versus what was indicated at its IPO. In any case, our
valuation is based solely on the existing portfolio.
We reiterate our BUY rating on LMIR. We expect compelling distribution yields of 10.7% in 2008 and 11% in 2009. The continued volatility of the SGD-IDR exchange rate should be of limited concern to LMIR investors as the trust has hedged both its SGD-denominated distributions and interest expense. While SGD-IDR volatility will not threaten investor income, it could affect NAV as asset values would fall in SGD terms. Our fair value estimate of S$0.70 takes these factors into account.
Indiabulls – BT
SINGAPORE – Indiabulls Properties Investment Trust opened flat at its IPO price of $1.00 but then fell as much as 7.5 per cent in its Singapore market debut on Wednesday.
The fall continues the poor record for listing of new real estate investment trusts, after the last two Reits to list in Singapore, Lippo-Mapletree Indonesia Retail Trust and Saizen Reit, tanked on their debuts last November and are still trading as much as 31 per cent below their IPO price.
Indiabulls Trust, a subsidiary of Indiabulls Real Estate, had raised $353.5 million (US$257 million) after pricing its initial public offer at the lower end of the indicative price band of $1 to $1.10.
In a sign that retail investors’ interest in new listings remains weak, Indiabulls Trust said 1.75 million out of the 13.1 million units alloted to its public offer were not taken up, despite the Reit extending the offer by an extra day last week.
The unsubscribed retail units were transferred to the placement tranche for institutional investors and have been fully taken up, making the offer about 1.3 times subscribed overall, Indiabulls Trust said. —
FrasersCT – CIMB
Holding fort North
• Well-located suburban assets. FCT is a retail real estate investment trust with three suburban retail properties concentrated in the north of Singapore. Its welllocated assets in the heart of suburban residential estates and major transportation nodes should be sustained by ready population catchments and limited competing supply.
• Strong sponsor to aid acquisitions. FCT is supported by Frasers Centrepoint Limited (FCL), which provides FCT with a ready pipeline of four assets for acquisition.
• Growth via acquisitions and double-digit rental-renewal rates. FCT is poised for growth via acquisitions and growth in retail rents from 2008 to 2010. We expect FCT to acquire S$480m of properties from 2008 to 2010. In addition, retail rents are expected to increase by up to 45% over preceding rates from 2008 to 2010 on the back of tight supply and ongoing asset enhancements.
• Initiate with Outperform and DDM-derived valuation of S$1.70. We have a target price of S$1.70, using DDM valuation (discount rate 8.5%, terminal growth rate 4%). This represents a total prospective return of 38.3% from a forward yield of 5.5% and potential price upside of 32.8%.
PLife – UOBKH
Protected against inflation
Strong defensive qualities. Parkway Life REIT provides strong defensive qualities as the minimum rent increase for Gleneagles Hospital, Mount Elizabeth Hospital and East Shore Hospital is set at CPI + 1%. Assuming that CPI is 5.5% in 2008 (mid-point of CPI inflation forecast by MAS), the minimum rent increase for the three hospitals in Singapore would be 6.5% in 2009. Where CPI is negative for any given year, then it is deemed to be zero. This ensures that rental income from hospitals in Singapore is always increasing.
Diversification from acquisitions in Japan. Parkway Life REIT has acquired a pharmaceutical production and distribution facility in Japan for a total cash consideration of ¥2.59b, or S$35m. The two-storey freehold building is located in Matsudo City, Chiba prefecture with a net lettable area of 34,875sf. Tenant Inverness Medical Japan utilises the facility to manufacture and distribute medical test kit devices. The acquisition provides an initial net yield of 5.3%. There is potential to redevelop the site as the ratio of the building’s floor area to the land area is about 40% compared with the allowable ratio of 200%.
Parkway Life REIT will be acquiring two nursing homes located in Yokohama City and Ibaraki City, Japan for S$34.9m. Nursing home operator ZECS Community Co Ltd will lease back the properties for 15 years with option to extend for an additional five years. The Yokohama facility has lettable area of 35,230sf and provides net operating income yield of 6.1%. The Ibaraki facility has lettable area of 39,890sf and provides net operating income yield of 6.7%. Rental income is index-linked to inflation with rent reviews every five years.
The acquisition in Japan will be funded by debt. We estimate that gearing will increase from 4% to 10.8% after the acquisitions are completed. The acquisitions allow Parkway Life REIT to gain exposure to Japan where population is aging rapidly. It is estimated that one in every three Japanese will be above 65 years of age by 2050.
Reiterate BUY. We like Parkway Life REIT for its healthcare focus. It provides strong defensive qualities as rental income from hospitals in Singapore and nursing homes in Japan is linked to inflation. The company also has a low level of gearing. Our target price is S$1.52 based on the discounted dividend model (required rate of return: 7.68%; terminal growth: 2.8%).