Month: February 2010
CDL H-Trust – UOBKH
Hospitable Outlook Ahead
Increase in ALOS and rebound in visitor arrivals to soak up additional supply. Singapore’s attractiveness as a standalone tourist destination in the region is gaining traction among tour operators, with additional attractions like the upcoming Universal Studios, Marine Life Park and integrated resorts. Average Length of Stay (ALOS), which has been on the uptrend for the last couple of years, is set to receive a major boost. Although there is concern of over-supply in the market with an expected addition of close to 6,000 rooms in 2010, our analysis shows that an ALOS increase of 0.5 days combined with the strong rebound in visitor volumes (+15% yoy in 2010) are more than sufficient to soak up the additional supply.
ARR to rebound on sustained high occupancy levels. Although CDL Hospitality Trusts’ (CDREIT) occupancy level was sustained at above 86% in 2H09, average room rate (ARR) continued to remain soft at S$184 (-24.3% yoy) in 2009 in line with the industry. We believe that this is mainly due to the wait and-see approach adopted by the hoteliers to ensure the recovery in the number of visitors was sustained. With the improved macroeconomic climate, we expect the scenario to change in 2010 as hoteliers will start regaining their pricing power amid the high occupancy levels. For 2010, we expect CDREIT’s occupancy to remain in the high 80s and ARR to increase 12-17%.
Yield-accretive acquisition of five freehold hotels in Australia. CDREIT recently signed an A$175.1m deal to buy five hotels (total 1,139 rooms) in Brisbane and Perth, taking the total number of rooms owned to 3,942. The acquisition is yield-accretive with an attractive guaranteed yield of 7.8%, significantly greater than CDREIT’s FY09 implied property yield of 5.2%. We view the acquisition as a positive move, resulting in higher income stability and better diversification of its assets.
Maintain BUY and target price of S$2.25 based on our two-stage dividend discount model (required rate of return: 7.7% and terminal growth rate: 2.5%).
FCOT – Phillip
Things Picking Up
• 1Q10 revenue of $29.6 million, net property income of $23.5 million, distributable income available to unitholders of $7.4 million.
• 1Q10 DPU of 0.24 cents.
• Total asset value of $1.9 billion.
• Fair value raised slightly from $0.17 to $0.18, upgrade to Buy
Steady showing
(Note: Financial year-end changed to 30 Sep) FCOT recorded 1Q10 revenue of $29.6 million (+19.1% y-y, +15.5% q-q), net property income of $23.5 million (+26.6% y-y, +17.7% q-q) and distributable income available to unitholders of $7.4 million (-20.2% y-y, +20.3% q-q). 1Q10 DPU was 0.24 cents (-80.9% y-y, +20.0% q-q). Underlying rental income streams were steady, the increase over prior quarters were mostly due to new acquisition and favorable exchange rates. 1Q10 revenue was boosted by the contribution from Alexandra Technopark, which was added to the portfolio in August 2009. The revenue contribution from Australia benefited from the strengthening AUD, while the Japan properties performance were largely flat. Percentage of revenue breakdown is 51% from Singapore, 35% from Australia and 14% from Japan. DPU was 0.24 cents, a big drop from a year ago, due to higher borrowing cost as well as dilution from the rights issue in 2009. However 1Q10 DPU was 20% higher than 3Q09. We believe things are already on the mend as seen from the improving numbers.
FCOT registered a slight decrease of 0.2% in its asset value. Revaluation was carried out on central Park and Cosmo Plaza. The decrease comes from Cosmo Plaza, which is being earmarked for divestment. Total asset value is $1,914.2 million.
Capital management
FCOT completed all recapitalization and refinancing activities in 2009. As at 31 Dec 2009, it has total debt of $823.8 million, of which 60% is SGD loan, 19% is AUD loan and the rest is JPY loan. The constitution of the loan is a deliberate effort by management so as to form a natural hedge on the foreign cash flows. Gearing is 40.4% and the loans are due only in 2012. We believe in the event that FCOT managed to divest Cosmo Plaza and the AWPF wholesale fund, proceeds will be used to pare down debt.
Forecasts
We are slowly gaining confidence in management execution to turn FCOT around from the time when the new management team took over in late 2008. We have seen strong support from the sponsor, Frasers Centrepoint Limited, through the injection of Alexandra Technopark. We also believed that the relationship enabled FCOT to secure credit facilities from the lenders. We did mention in previous reports that repositioning the REIT takes time and management has shown that they are delivering what they have promised. Again we like to echo our view that the transformation is not yet complete and investors have to take a long-term view. We are forecasting a FY10E DPU of 1.26 cents on the back of improving market fundamentals. We are raising our fair value from $0.17 to 0.18 derived from our DCF valuation on a WACC of 7.04%. Upgrade to Buy.
K-REIT – DBS
Venturing Down Under
• Maiden foray into Australia, with purchase of a 50% stake in commercial building for A$166m
• DPUs raised by 12% in FY10 and 15% in FY11, taking into account contributions from this purchase
• Maintain Fully Valued with slightly higher TP of $1.13
Maiden overseas acquisition. K-reit has ventured overseas with the purchase of a 50% stake in a commercial property in Brisbane for A$166m (S$208m). 275 George St is a Grade A building with 40317sm of office and 1431sm of retail space. Average occupancy is 99.4% with the office tower fully occupied. Quality tenants include Telstra Corp and Queensland Gas Co. The weighted average lease to
expiry is 9.4 years underpinned by 10-year lease commitments from these 2 major tenants.
Diversifying income source. In terms of financial impact, the deal will be fully funded by the recent rights proceeds (post acquisition gross gearing at 25.2%) and is DPU enhancing, based on an annualized net profit yield of 5.9% (net profit of A$9.7m) compared to its implied yield of c4%. The vendor would provide an income support of A$1.8m over the income guarantee period till Jun 2012. We note the yield accretion and diversification merits of this deal. However, as Singapore would remain the key earnings contributor, accounting for three quarters of total income, the additional contribution is unlikely to fully offset the
expected negative rental reversion impact from its Singapore properties kicking in from FY10.
Risk-adjusted TP raised to $1.13. We are lifting our FY10 and FY11 DPU estimates by 12% and 15% respectively to take into account the latest contributions. Recent share price had brought valuations back in line with its sector peers, at FY10 and FY11 DPU yield of 6.5-6.4% respectively. Our risk-adjusted TP is adjusted up slightly to $1.13.
CLT – BT
CWT in sale and leaseback deal worth $445m
Move a prelude to proposed listing of logistics trust
LOGISTICS group CWT Limited has proposed the sale and leaseback of two of its logistics facilities in a deal worth $445 million.
CWT will sell CWT Commodity Hub and CWT Cold Hub to Cache Logistics Trust, for the purposes of Cache’s eventual public listing as Asia’s first logistics-focused real estate investment trust.
Cache, whose setting up is subject to regulatory approval, will be managed by ARA-CWT Trust Management (Cache) Limited. CWT will have a 40 per cent stake in the manager. The remaining stake will be held by ARA Asset Management Limited – a real estate fund manager tied to Hong Kong tycoon Li Ka-shing’s Cheung Kong group.
The trust’s property manager will be Cache Property Management Pte Ltd. CWT will have a 60 per cent stake in the property manager and the remaining 40 per cent stake will be held by ARA.
CWT said it will book a one-off gain of $157.7 million from the sale of the two logistics facilities, which are valued at $443 million. They are part of CWT’s primary assets, located close to PSA Terminals, major ports and Singapore’s central business district.
Cache will pay $445 million for the two facilities, of which $65 million will be settled in the form of Cache units. The rest will be paid for in cash.
CWT will use the sale proceeds to expand its logistics business and to settle its outstanding borrowings early, which it says will result in a significant boost to the group’s financial muscle and competitiveness in the region.
In its statement yesterday, CWT also explained that Cache will be the first of its kind in Asia to capitalise on the positive outlook of the global logistics sector and the synergistic business models of CWT and Cache.
Cache holds an investment mandate that targets logistics properties in the Asia-Pacific region, with an initial portfolio of six logistics properties in Singapore, including CWT Commodity Hub and CWT Cold Hub.
CWT said Cache is expected to leverage on the rights of first refusal granted by CWT and the strengths of CWT to ‘pursue yield-accretive acquisitions to achieve long term, regular and predictable distributable income for unitholders’.
Loi Pok Yen, group CEO of CWT, said: ‘The creation of CLT (Cache) to invest in yield-accretive logistics properties in Asia is a historic milestone and enables CWT to own a capital-efficient asset-owning vehicle to complement our core logistics business operations as well as enhance the group’s ability to expand its business regionally and globally.’
‘In addition, the sale and leaseback will enable the group to participate in CLT through its holdings of Cache units and derive a stable income stream from CLT’s distributions,’ he said.
CWT is the largest listed logistics company in South-east Asia, offering integrated logistics solutions to the chemicals, commodities, automotive, marine, oil & gas, defence and industrial sectors.
Its shares closed half a cent down at 93 cents.
ART – OCBC
Still a compelling story
Scope for high yielding acquisitions. Ascott Residence Trust’s (ART) peer CDL-Hospitality Trusts [CDREIT, NOT RATED] announced last week that it intends to acquire five hotels in Australia. The assets were acquired from Tourism Asset Holdings, a private entity that we understand was
previously linked to Australia’s beleaguered Babcock & Brown. The assets were acquired on fairly attractive terms with the purchase price estimated to be at a discount of up to 66% to the current replacement value (including land cost). This deal, in our view, indicates scope for distressed or at least stressed acquisitions in the hospitality space.
Higher leverage than CDREIT not insurmountable to accretion. CDREIT is leveraged at 19.1% debt-to-assets as of Dec-09 and currently plans to fund the purchases using debt alone, taking its leverage to a still healthy 30%. ART, on the other hand, has a different balance sheet profile as it is already leveraged at 41.2% debt-to-assets. ART’s manager said it was comfortable going up to 45-50% debt-to-assets. With the easing of credit conditions and the re-rating of equity markets versus a year ago, we believe ART could make an accretive purchase using a combination of both debt and equity (potentially improving free float). A virtuous cycle of cheap acquisitions at cheaper capital is achievable if the manager maintains its focus on value protection and creation.
Asset enhancement plans in the meantime. Meanwhile, ART is targeting refurbishments of five properties each in 2010 and 2011. This includes Somerset Liang Court and Somerset Grand Cairnhill in Singapore and Somerset Grand Hanoi in Vietnam. These properties were last refurbished 11-13 years ago. ART is planning to spend roughly S$24.5m on the aforementioned three properties and expects payback within five years. The planned works will be funded using a combination of debt and operating cash flows.
Still a compelling story. As mentioned in our last report, we expect a pick-up in RevPAU in Singapore, China and Australia this year itself. We believe ART makes for a compelling earnings recovery story over 2010 and 2011 on the back of increasing business confidence and a revival of corporate travel. ART is currently trading at 0.85x book and a FY10F yield of 7%. We maintain our BUY rating with S$1.38 fair value estimate (28% total return). Key risks to our thesis are a slower-thanexpected global economic recovery and heightened regional economic risk, which could dampen investor sentiment towards diversified REITs.