Month: March 2010
LMIR – OCBC
Implications of Matahari Department Stores sale
Matahari sale. Matahari Department Stores (MDS), a related company of LMIR Trust (LMRT), is being sold by its 90.8% owner PT Matahari Putra Prima (MPP). MPP, Indonesia’s largest retailer, owns retailing formats including MDS, Hypermart, Foodmart, Boston Healthcare, Times Bookstore, and Timezone. Its majority owner is the Lippo Group. MDS is being sold to CVC Capital Partners, a private equity group, for IDR 7200b. Most of the cash proceeds will be used by MPP to repay debt. MPP will also get a 20% stake in Meadow Asia, a joint venture that will hold the MDS stake. The proposed deal is currently in process as MPP addresses concerns raised by the local regulatory agency1.
Major tenant. Several MPP businesses including MDS, Hypermart, and Times Bookstore are tenants at LMRT properties. MDS, which has over 80 department stores in Indonesia, is LMRT’s second largest mall tenant – it contributed 4.1% of mall portfolio gross income in FY09. Meanwhile, all seven retail spaces are leased to MPP for a term of 10+10 years starting from 2007, and a significant portion of that space is utilized by MDS. The spaces contribute 18% of portfolio income as of 31 Dec.
Implications. We spoke to LMRT’s manager regarding MDS. The sale has no impact on the current lease agreements between MDS and LMRT. We understand that the people running the business are unchanged – so the ground level relationships between LMRT’s leasing team and MDS should remain largely intact. We also note that Lippo Group will continue to have an interest in MDS through MPP’s stake in Meadow Asia. More broadly, we believe the commercial relationship between LMRT and MDS still makes sense – both on a target customer level and also because LMRT has consistently been able to maintain portfolio occupancies significantly above market. Still there could be a risk of tighter negotiations on rents and lease terms. As for the seven retail spaces, MPP is the master lessee and the option to renew the agreements come 2017 still remains with MPP.
Our view on LMRT is unchanged. Issues that adversely impacted FY09 earnings such as early lease terminations and low retailer budgets for advertising & promotion expenditure will be less of a factor in FY10, in our opinion. We also see increasing chances of an acquisition in the next six to 12 months. A strong IDR, which may continue to be a drag on distributions, is a key risk to our estimates. We maintain our BUY rating and S$0.59 fair value.
SREITs – BT
S-Reits outperform peers for total returns in 2009
They posted returns of 85.6%; Asian Reits performed well as a region: study
REAL estate investment trusts (Reits) in Singapore have outperformed their counterparts in other major markets in terms of total returns in 2009, according to a report released yesterday.
Ernst & Young’s study showed that Reits Singapore and Hong Kong posted returns of 85.6 per cent and 64.5 per cent respectively in 2009.
Malaysia (38.6 per cent) and South Korea (28.4 per cent) also put up strong showings.
By contrast, total returns in the more mature Reit markets were much lower. Returns for Australian Reits were 10.4 per cent in 2009, while Japan’s Reits came in at 6.7 per cent. The largest single Reit market in the world, the United States, witnessed returns of 27.9 per cent.
‘Asian Reits performed well as a region because the Asian economies have generally been more resilient to the financial crisis, underpinned to some extent by China’s economic performance and favourable long-term growth outlook,’ said Liew Choon Wai, assurance partner and head of Singapore real estate for Ernst & Young.
The performance of each country’s Reit market appears to reflect the broader economic sentiment, he added: ‘For Singapore, the economy was seen as particularly vulnerable during the financial melt-down, and it was not surprising that we saw a plunge in Reit returns in 2008 to early 2009, which has subsequently rebounded strongly since March as financial markets stabilise.’
But only Singapore recorded a negative three-year rate of return – of minus 4.15 per cent – of the Asian countries outside of Japan. Rates of return for South Korea, Malaysia and Hong Kong are all in positive territory over the last three years. Japan, a mature economy, had a three-year rate of return of minus 19 per cent.
Ernst & Young also noted that since March 2009, many Reit markets around the world have seen significant increases in share prices and Reits have raised billions of dollars by going back to the stock market for secondary (or follow-on) equity offerings to reduce debt, recapitalise their balance sheets and prepare their businesses for the next wave of growth.
CDL H-Trust – UOBKayHain
CDL Hospitality Trusts
Key takeaways from company visit
Management reiterates our positive view on the stock. CDREIT is a key beneficiary of the expected recovery in visitor arrivals in Singapore. Maintain BUY with a target price of S$2.25.
Corporate Event
We met the management of CDL Hospitality Trusts (CDREIT) on 8 March. Investor queries were centred on the following: a) occupancy levels and average room rates, b) impact of opening of integrated resorts (IR), c) recent acquisition of Australian portfolio, d) potential acquisitions, and e) buyer profile.
Stock Impact
Occupancy levels to remain close to 90%. CDREIT’s 4Q09 occupancy rate stood at 88.9%, better than the pre-crisis occupancy levels of 2007-08 during the same period. November’s occupancy of 93% is the highest monthly occupancy since CDREIT’s listing in 2006. Management remains upbeat that the high occupancy levels are here to stay and expects demand to remain strong even after the opening of 1,350 rooms at Resorts World at Sentosa (RWS). We expect CDREIT’s occupancy levels to stay close to 90% in 2010 on the back of a strong recovery in visitor arrivals in 2010 (January visitor arrivals up 17.6% yoy) combined with an increase in ALOS.
Weekend occupancy to be boosted by opening of IRs. CDREIT’s customer base comprises about 70% business travellers and 30% leisure travellers. Its hotels generally enjoy very high occupancy levels of above 85% on weekdays and 75% on weekends. Management expects a strong
pick-up in demand for its hotels from leisure travelers during weekends as Singapore gains traction as a mono tourist destination with the opening of the IRs. CDREIT will also benefit the most from the spillover effects of the strong demand for RWS hotels, with its strategically-located hotels being close to the IRs.
ARR to spike in 2011. Management notes that the increase in ARR has not kept up with the pick-up in occupancy levels as close to 30% of room rents were locked in last year from their corporate clients. Management expects room rents to start picking up in 2H10 with the sustained high occupancy levels. We forecast ARRs to increase 10% in 2010 and 15% in 2011.
Australian acquisition done at near distressed levels. CDREIT recently acquired five hotel properties in Brisbane and Perth for A$175.1m, or A$153,600 per key. The acquisition was done near distressed levels at steep discounts of up to 66% to the current replacement. Management noted the occupancy levels for these hotels have remained above 83% over the last three years despite the economic crisis, and expects RevPAR to improve in the coming years on the back of high occupancy levels, fuelled by economic growth and tight supply of hotels in these regions.
Actively seeking more acquisition opportunities. CDREIT’s net debt-toasset ratio stands at 0.3x with the acquisition of the Australian portfolio.
Management views 0.45x as a comfortable gearing level in the present conditions, giving an additional debt headroom of about S$200m, and is on the active lookout for acquisition opportunities in Australia, Thailand and Japan. In Singapore, management sees the possibility of Studio M and St.Regis hotels, owned by parent City Developments and Millenium & Copthorne Hotels, being injected into its portfolio over the next two years, and South Beach hotel in the long term.
Earnings Revision
We maintain our earnings estimates.
Valuation/Recommendation
Maintain BUY with a 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%).
Hospitality REITs – OCBC
Riding on earnings recovery
Growth projected for tourist arrivals. The Singapore Tourism Board (STB) is projecting 11.5m to 12.5m visitor arrivals to Singapore in 2010, up 18.6% to 28.9% from the 9.7m visitors in 2009. It also projects S$17.5b to S$18.5b in tourism receipts this year – up a whopping 40% to 49% from S$12.4b in receipts last year. Catalysts include the opening of the two Integrated Resorts (IRs), the 2010 Youth Olympic Games, and the recovery in the global economy. The STB has a 2015 target of 17m visitor arrivals and S$30b in tourism receipts.
Riding on earnings recovery. The estimates bolster the earnings recovery theme for hospitality REITs CDL-Hospitality Trusts [CDREIT, NOT RATED] and Ascott Residence Trust (ART). The two REITs saw RevPAR1 declines of roughly 28% and 14.5% respectively in FY09 on subdued individual and corporate travel expenditure. We expect hospitality players to enjoy revenue growth this year on the back of improving occupancy and a stabilization (and potential recovery) in room rates. CDREIT is a more direct beneficiary of the new developments on the local scene due to its shorter stay profile and its larger exposure to Singapore vis-à-vis ART. Both REITs should benefit, in our opinion, from the increased MICE space and the potential draw of the IRs (Las Vegas rents more convention space than any other US city).
Earnings growth from acquisitions. CDREIT took advantage of its low leverage (19.1% as of 31 Dec 2009) and the availability of distressed opportunities to enter the Australian market through the acquisition of five hotels. The properties were acquired at a discount of up to 66% discounts to their current replacement value (including land costs). We see limited debt headroom for ART at its current leverage level (41.2% as of 31 Dec) but believe it may still be able to make accretive acquisitions through a combination of debt and equity. Its manager is also focusing on asset enhancements.
Valuations still compelling. CDREIT and ART are up 302% and 251% from their 2009 lows. Nevertheless, we believe ART’s valuations remain attractive at 0.92x book. Depending on the trajectory of the hospitality recovery, there could be room for further upwards earnings revisions (we are currently below consensus). CDREIT and ART are trading at 6% and 6.4% FY10F yields respectively (based on consensus for CDREIT). We do not have a rating on CDREIT. Maintain BUY with S$1.38 fair value for ART, one of our top picks for the S-REIT sector.
CCT – OCBC
Working towards refinancing
Tapping on the MTN market. Recently, CapitaCommercial Trust (CCT) issued S$70m of fixed rate notes under its S$1bn Multicurrency Medium Term Note (MTN) Programme and proceeds will be used for repayment of borrowings and working capital purposes. At the same time, CCT also announced that it had repurchased an aggregate principal amount of S$15m of its convertible bonds (CB) that mature in 2013. This is part of the effort to prepare for its refinancing requirement in 2011 as the CB holders have a put option exercisable in May 2011 that would require CCT to redeem the CB. The CB is currently deep out-of-the-money (conversion price of S$1.8349) and the possibility of share price reaching the conversion price by May 2011 seems low. We expect CB holders to exercise the put option next year, which would bring forward the maturity of the CB.
Higher average cost of debt expected. In comparison to other recent MTN issues, interest rate secured by CCT is on the high side among the MTNs with 5-year maturity (3.288%-3.64%). This came as no surprise, given the weak office sector outlook and thus the higher risk premium compensating the MTN holders. Despite the low interest rate environment, we expect average cost of debt to trend higher in 2010 as the cheaper MTN issued prior to the crisis matures this year and is refinanced by new MTNs with higher cost of debt.
Pro-active efforts towards refinancing. While recent capital management efforts may not have significant impact, we are still encouraged by the pro-active efforts that the management took to prepare for refinancing next year. As much as S$1,010m of borrowings could be due for refinancing in 2010 (CB holders exercise put option) but unencumbered assets of S$2.6bn (after sale of Robinson Point) should provide sufficient collaterals to secure new loans for refinancing. A reconstitution of CCT’s asset portfolio may also have the positive impact of lowering its risk profile and thus, give CCT better leverage to negotiate for more attractive cost of debt going forward.
Looking for a better entry level. We maintain our estimates and keep our RNAV and fair value unchanged at S$1.16. With a projected total return of 8.4%, we maintain our HOLD rating on CCT. Potential share price catalyst could come from the outcome of the review for Starhub Centre and acquisitions. S$1.05-S$1.10 would be good entry level for accumulation, which would translate to a potential total return of 11.3%-16.6%.