Month: July 2008
SREIT – DBS
Facing headwinds
Sector outlook and valuation: The S-reit sector is currently trading at average FY08 yield of 7%, a 360bps spread over the 10-year bond yield and at 0.79x P/book NAV. We believe that much of the rising interest rate expectation and slower economic outlook is likely factored in the current share price. While the sector is likely to continue seeing headwinds from the negative newsflow from the tight credit and sluggish capital markets, valuations are not excessive by historical standards, as yield spreads are trading above their longterm average levels.
Raising cost of capital assumptions. Using higher debt and equity costs have eroded S-reit returns. Even then, Sreits are trading at steep 24% discounts to DCF-backed price projections, which are based on these greater cost of capital assumptions. Essentially, we have lowered our price targets by 19% by increasing our equity discount rates by 107bps. Another issue surrounding the S-reit sector is the relatively short debt expiry profile, estimated at 2.9 years. S-reits have an estimated $5.1b (43% of total) debt to be renewed in the next 12-18 months. However, with more than 75% of total debt on fixed rates or are hedged, the impact of the hike would likely be moderated.
Stock selection is key. Under the present dampened acquisition growth environment, we would be selective in our S-reit picks and would prefer those with strong organic growth potential to drive DPU expansion, such as retail reits as well as those with long lease expiry profiles such as industrial reits. Amongst our top picks are CMT and A-reit. CMT has a multi-pronged growth strategy through organic and asset enhancement activities. A-reit has a relatively long weighted lease expiry profile of 5.5 years that would enable them to have earnings certainty and visibility. There is potential for more rental hikes given that industrial rents have not appreciated significantly from the low. Share price of A-reit had declined 23% since May 08 and is currently offering 7.4- 7.5% FY09 and FY10 yields.
AREIT – CIMB
Reliable performer
• In line. A-REIT’s 1Q09 results were in line with consensus and our expectations. DPU grew 15.5% yoy to 3.89cts, forming 25% of our forecast of 15.4cts for FY09. Earnings in the quarter were powered by full contributions from Goldin Logistics Hub, HansaPoint@ CBP, SenKee Logistics Hub Phase 2, Acer Building, Sim Siang Choon Building, Science Hub & Rutherford, CGGVeritas Hub, and supported by the newly completed acquisitions of 8 Loyang Way 1 and 31 International Business Park. Revenue increased 19.6% yoy to S$92.5m.
• Strong organic growth. A-REIT’s portfolio in the quarter benefited from strong rental and occupancy growth. Renewal rates for its Business and Science Park segment and Hi-Tech segment grew 63.9% and 44.4% yoy respectively, while portfolio occupancy increased by 1.4% pts yoy to 98.6%.
• High pre-commitments for development projects. Pre-commitments for three development projects that would be completed between 2009 and 2012 were also high, at 80% for Changi LogisPark (North), 86.5% for Pioneer Hub, and 100% for Plaza 8 (Changi Business Park) Phase 1 and 75% for Phase 2.
• Maintain Outperform, albeit with lower target price of S$2.60 (from S$3.10). Our DDM-derived target price has been lowered to S$2.60 on the back of a higher discount rate of 9.6% (up from 6.7%), as we align our cost-of-equity assumptions with our house rates. Other estimates are unchanged as we remain positive on AREIT’s income stability from long leases (weighted average lease to expiry of 5.5 years), strong rental reversions for its Business and Science Park and Hi-Tech segments, built-in rental growth for its leaseback arrangements as well as upcoming contributions from A-REIT’s built-to-suit developments. Maintain Outperform.
AREIT – UOBKH
1QFY09: Steady double-digit growth
A-REIT reported gross revenue of S$92.5m in 1QFY09, an increase of 19.6% yoy. Overall occupancy reach 98.6% at Jun 08, compared to 97.2% last year. It achieved strong growth of 63.9% and 44.4% for renewal rates for Business & Science Park and Hi-Tech Industrial properties respectively against preceding contract rates. It acquired 8 Loyang Way 1 for S$25m and 31 International Business Park for S$246.8m during the quarter and currently has a portfolio of 86 properties valued at S$4.5b. A-REIT announced DPU of 3.89 cents for 1QFY09, an increase of 15.4% yoy. This represents annualised yield of 7.4%.
Developing build-to-suit offices at suburban locations. A-REIT utilise development projects to enhance return for unitholders. It is developing a partial build-to-suit distribution facility at Plot 7 & 8 Changi LogisPark with Zuellig Pharma as the anchor tenant. The project is expected to be completed in 2QFY09. A partial build-to-suit ramp up high specification industrial facility at Pioneer Walk is expected to be completed in 2/3Q FY09. The development is already 86.5% pre-committed and key tenants are Tyco and Ameriod. A-REIT is developing two build-to-suit facilities and a multi-tenanted block with combined floor space of 803,600sf at Plot 8 Changi Business Park. Phase 1 comprising two build-to-suit facilities is fully committed to Citigroup and is expected to be ready in 4QFY09.
Maintain BUY. A-REIT provides FY08 distribution yield of 7.7%, an attractive spread of 4.3% over 10-year Singapore government bond yield at 3.4%. Our target price is S$3.00 based on two-stage dividend discount model.
AREIT – BT
A-Reit: Q1 distributable income of $52m
ASCENDAS Real Estate Investment Trust (A-Reit) yesterday reported net distributable income of $51.8 million for the first quarter ended June 30, 2008 – 15.9 per cent higher than for the corresponding period last year.
This follows a 19.6 per cent growth in gross revenue from the year-ago period to $92.5 million. The increase was due mainly to additional rental income from completed acquisitions and a development project.
The distribution per unit (DPU) for the quarter is 3.89 cents, up 15.4 per cent from the year-ago period. The DPU, to be paid out on Aug 27, represents an annualised yield of 7 per cent based on the closing price of $2.21 per A-Reit unit on June 30.
A-Reit had 86 properties with a total book value of around $4.5 billion as at June 30. Acquisitions in Q1 comprised 8 Loyang Way 1 for $25 million and 31 International Business Park for $246.8 million.
The portfolio’s overall occupancy rate stood at 98.6 per cent, against 97.2 per cent a year ago. For the business and science park and hi-tech industrial properties, renewal rates rose 63.9 per cent and 44.4 per cent respectively versus preceding contract rates.
This is due to ‘the continued healthy demand for quality suburban industrial and business space as well as the active leasing and investment activities conducted by the manager and its property management team’, said A-Reit manager Ascendas Funds Management (S)’s CEO and executive director Tan Ser Ping.
A-Reit’s weighted average borrowing cost for the portfolio was 3.16 per cent. To diversify funding sources, it recently took on a three-year committed revolving credit facility for $200 million, and is also incorporating a medium-term notes issuance facility.
Citing a CB Richard Ellis study, A-Reit said yesterday that rents and occupancy rates for hi-tech and business park space could continue to increase, but at a slower pace.
A-Reit also mentioned that it is difficult to gauge how much the Asian economy could be hit by the possible US recession and global inflationary pressure.
‘Despite the cautious outlook for the economy and barring any unforeseen events, the manager expects to be able to deliver, for the coming year, a DPU that is in line with its recent performance,’ A-Reit’s release stated.
The release also said that the A-Reit manager remains committed to pursuing quality and sustainable yield accretive investments, and expects results from asset management and investment strategies to underpin steady performance.
A-Reit’s units closed trading yesterday at $2.10, down one cent.
CMT – BT
CMT still keen to acquire; DPU beats forecast
THE current economic landscape could provide rich pickings for some.
Chief executive of CapitaMall Trust (CMT) management Pua Sek Guan noted that when the market is ‘very good’, it is difficult for acquisitions to be made. ‘Today, there are deals to be done,’ he said.
While Mr Pua would not say if CMT was looking at any ‘deal’ in particular, he did say that single asset owners of retail properties may want to ask themselves: ‘Is this your long-term business?’
He said: ‘This business is a skill-set business. You need a platform to innovate.’
Mr Pua was referring to the CMT’s programme of proposed asset enhancement initiatives (AEI) for assets including the Atrium and Plaza Singapura, Lot One Shoppers’ Mall and Bugis Junction.
CMT expects its AEI capital expenditure outlay for 2008 to be about $174 million, up from $168.6 million in 2007. But CMT expects incremental net property income of about $25 million from AEI completed by end-2009.
Mr Pua was speaking at a press conference to announce CMT’s Q2 2008 financial results which saw net property income of $83.6 million, up 24.7 per cent on a year-on-year basis.
Distributable income for the quarter was $58.6 million. This represents an annualised distribution per unit of 14.16 cents, up 13.2 per cent from the previous corresponding quarter.
Distribution per unit (DPU) for the quarter is 3.52 cents, 1.7 per cent higher than CMT’s forecast.
Gross revenue for Q2 was $125.6 million, an increase of $21.7 million or 20.9 per cent. This was attributed to an increase in revenue of $11.1 million from the three malls under CapitaRetail Singapore (CRS), which contributed three months of revenue in Q2 2008, against one month in Q2 2007.
CMT’s other malls accounted for another $7.6 million increase in revenue mainly due to new and renewal leases as well as higher revenue from IMM Building, Plaza Singapura and Bugis Junction. Its interest in Raffles City accounted for another $3.0 million.
CMT, which tracks gross turnover of tenants, said that tenants’ sales growth outpaced the increases in gross rent. Citing Plaza Singapura as an example, it said that sales increased by 5.1 per cent in 2008 over 2007 to hit $97 million, based on a sample size of 143 tenants. Gross rent increased by 2 per cent in the same period.
Still, one casualty appears to be John Little at Plaza Singapura. A spokesman for John Little confirmed that it will close its Plaza Singapura outlet. However, it is understood that the company will take up a smaller space there for a possible new brand.