Month: June 2010
CDL H-Trust – JPM
Looking beyond 2010
• Reiterate Overweight rating and Dec-10 DDM based price target at S$2.10/unit. CDREIT has underperformed FTSE STI and S-REITs Index by 8.5% and 7.5% in the last month. The stock is currently trading at 5.8%/6.7% FY10E/FY11E dividend yield and 1.0x FY10E forecast book, a level that is attractive in our view. Our recent meeting with management has also assured us that hotels under its portfolio, Singapore hotels in particular, are benefiting from increasing global travel and visitor arrivals. The upcoming 2Q results to be announced in July and the wholesale contract renegotiation also in July would be the two near-term catalysts in our view.
• Beginning of the rate recovery cycle. Occupancy for Singapore hotels remained at 85% despite an 11% jump in room rates and the increase in supply in April, indicating strength in the sector thanks to strong visitor arrivals, amounting to 3.6million Jan to Apr. Management indicated that it will continue to push up room rates given stable occupancy seen for its Singapore hotels at above 80% level. Given relatively little supply to come onstream in 2011, we see potential upside risks to our 2011 DPU estimates. Every 10% increase in Singapore hotel’s RevPar would increase our estimates by 11%.
• Accretive acquisitions are on the cards. Singapore and Japan would likely be the trust’s main target markets given the deal flow and the pricing. We see likely accretion of 2-4% to 2011E distributable income assuming a S$300million acquisition. The trust’s sponsor M&C currently owns Studio M Hotel in Singapore.
• Key investment risks: 100% of the trust’s debt is currently floating, any potential increase in interest rates would adversely impact CDREIT’s DPU. Gearing for the trust is currently at 30.7%. Potential acquisitions would likely require financing from equity fundraising in our view.
MLT – CIMB
In acquisition mode
Three properties for S$83.5m
Maintain Neutral. MLT will be acquiring three assets in Singapore, Japan and Vietnam for a total of S$83.5m. Their blended net property yield of 7.9% is above MLT’s existing portfolio yield of 6.2%. DPU accretion is estimated at 0.12ct, or 2% of our FY10 DPU forecast of 6.14cts. We maintain our estimates as we had already assumed S$357m of acquisitions for this year. Our target price of S$0.86 (discount rate 8.6%) based on DDM valuation is intact. Maintain Neutral as we remain cautious on upcoming acquisitions depending on country-specific risks and the possible need for equity which could dilute acquisition yields.
Assets from Vietnam, Japan and Singapore. The three assets are Mapletree Logistics Centre in the Vietnam Singapore Industrial Park, Binh Duong Province, Vietnam; Sendai Centre in Miyagi Prefecture, Japan; and Natural Cool Lifestyle Hub, 29 Tai Seng Avenue, Singapore. Mapletree Logistics Centre and Sendai Centre are to be acquired from MLT’s sponsor. All the assets are fully tenanted with long leases with the exception of Mapletree Logistics Centre in Vietnam whose leases will expire in 1-3 years’ time.
First foray into Vietnam. Mapletree Logistics Centre will be MLT’s first acquisition in Vietnam. Vietnam is an emerging market in Asia which offers a competitive cost structure and a growing middle-class population. Real GDP growth averaged 7.3% from 2005 to 2009, while forecasts for 2010-11 are 6.5%. Vietnam is also attractive to the logistics, manufacturing, retail, information technology and basic materials industries, among others. The Vietnamese government intends to improve infrastructure by investing as much as 10% of GDP on the transport, energy and telecommunication sectors. This is likely to boost demand for logistics services, and warehouse space. We believe the decision to enter this market is also related to the sponsor’s presence there. The sponsor is developing two more projects in Vietnam. The company hopes to acquire these over the next few years.
Comments
Accretive acquisitions. The three acquisitions are rather attractive in terms of yields. The Vietnam acquisition offers the highest net property income (NPI) yield of 10.3%, which is attractive against MLT’s current portfolio NPI yield of 6.2%. However, there could be some near-term risks in renewals with leases expiring over the next 1-3 years. The Japanese property has a high NPI yield of 6.8% vs. MLT’s Japanese portfolio yield of 5%, and an existing 10-year lease that will expire in 2019. The Singapore asset also has an attractive yield of 8.05% vs. the Singapore portfolio yield of 7.1% with a 10-year leaseback arrangement with the vendor, Natural Cool Holdings.
Full debt funding for now; gearing to reach 40%. Due to the small quantum of the acquisitions, MLT will be funding its purchases fully with debt for now. It has sufficient credit lines although it is not clear what the cost of debt will be. The manager estimates that asset leverage will reach 40.2% (from 38.6%) after the acquisition.
Impact on DPU positive though not material. We estimate an incremental DPU of 0.12ct, assuming the properties are held for a full year, and cost of debt of 2.5% (the current portfolio’s cost of debt). This is about 2% of our FY10 DPU forecast of 6.14cts. Although the acquisitions are accretive, the impact on DPU will not be material.
Valuation and recommendation
Maintain Neutral. We maintain our estimates as we had already assumed S$357m of acquisitions for FY10. Blended yields of 7.9% meet our net-yield expectations. We maintain our Neutral rating as risks in a developing market like Vietnam are high particularly with leases expiring in the short term, and MLT could possibly require equity at a later stage, which could dilute its acquisition yields.
MLT – OCBC
Another round of acquisitions
Another round of acquisitions. Mapletree Logistics Trust (MLT) intends to acquire three properties in Vietnam, Japan and Singapore for a total consideration of S$83.5m. This is MLT’s first Vietnam purchase, where it sees the opportunity for “strong growth as [Vietnam] increasingly becomes a major manufacturing hub and consumption market”. The purchases come on the heels of the S$145m in assets acquired over 4Q09-1Q10 utilizing funds from the November private placement. MLT’s portfolio now consists of 87 properties in seven countries.
Sponsor pipeline in play. Natural Cool Lifestyle Hub, the distribution centre in Singapore, is being acquired by way of a put and call option agreement with a wholly-owned subsidiary of SGX-listed Natural Cool Holdings Ltd [NOT RATED]. The two warehouses in Vietnam (Mapletree Logistics Centre) and Japan (Sendai Centre) are being acquired by way of a conditional sale and purchase agreement with MLT’s sponsor Mapletree Investments Pte Ltd. MLT has thus begun to dip into the S$300m logistics development projects in the sponsor pipeline that are completed or nearing completion; other assets in this pool are located in Vietnam, China and Malaysia.
Fully debt funded for now. The three properties are being acquired at net property income yields of 6.8% (Japan), 8.05% (Singapore), and 10.3% (Vietnam) or a weighted NPI yield of 7.9% (existing portfolio: 6.2%). The manager intends to finance all three acquisitions fully by debt in the interim, which would bring the REIT’s leverage up to 40.2% debt-to-assets compared to 38.6% as of 31 Mar; this is within MLT’s medium-term target of 45%. MLT estimates that, on a pro forma annualized basis, the purchases add 0.157 S cent to DPU (2.62%). The accretion drops to 0.039 S cent or (0.64%) by the manager’s estimate if the assets were 40% debt funded instead.
Valuation. The purchases are expected to be completed by Sep; we have updated our earnings estimates accordingly. The acquisitions were as per prior guidance and are likely, in our view, to be the first of several transactions over the next two years. Those acquisitions are likely to be financed using a combination of debt and equity. We continue to price in a further S$200m equity issue in our valuation of the REIT, but reflect the lower unit price in our issue price assumption. We also increase our discount rate assumption by 100 bps to incorporate increased macro-economic and regional risks. This reduces our fair value estimate from S$0.93 previously to S$0.84, or an estimated total return of 11.6%. Maintain BUY.
SREITs – BT
Moody’s revises S-Reit outlook to stable from negative
Rental decline in office, retail and industrial sectors slowing down
MOODY’S Investors Service has revised its outlook for Singapore’s real estate investment trusts (S-Reits) to stable from negative, reflecting its view that the sector’s fundamental credit conditions will neither erode nor improve materially over the next 12 to 18 months. ‘The stable outlook is supported by three primary factors: the strong rebound in Singapore’s economy; the stabilisation of rents across the retail, office and industrial property sub-sectors; and the steady performance and lower refinancing risk of the rated S-Reits,’ said Peter Choy, a Moody’s vice-president and senior credit officer.
Moody’s is bullish as it feels the rental decline in the office, retail and industrial sectors is slowing down.
‘Although developers are launching a strong supply of office, retail and industrial properties in Singapore during the rest of 2010 and into 2011, the downward adjustment in rents of the last 12 months has already – and substantially – reflected the coming increase in inventory,’ said Mr Choy. ‘We therefore expect a slowing in the decline in rents for these sectors.’
Most S-Reits also saw some improvement in their first-quarter revenue year on year, Moody’s noted. Its report also pointed out that since the second half of 2009, S-Reits have taken action to improve their capital structure.
In addition, the decline in acquisitions has alleviated the need for short-term bridging loans.
As a result, the amount of debt maturing in 2010 is quite low. Those S-Reits with a higher amount of debt falling due in 2011 have already proved their ability to refinance their debt during challenging conditions, as they did in 2009, Moody’s said.
But in a separate report, Fitch Ratings pointed out that recent Australian acquisitions made by a few S-Reits come with some risks.
Fitch said that while there are benefits to offshore acquisitions – in terms of geographic and cashflow diversification – such expansion needs to be managed well from a property management viewpoint and with prudent balance sheet management.
Recent Australian acquisitions by S-Reits have spanned sectors across hotels retail, and office properties. Notable deals in Q4 2009 and Q1 2010 include CDL Hospitality Trust’s purchase of several Australian hotels, K-Reit Asia’s acquisition of a 50 per cent interest in an office building in Brisbane and Starhill Global Reit’s acquisition of the David Jones building in Perth.
‘S-Reits are expected to benefit from a more diversified cashflow arising from their Australian acquisitions, reducing their reliance on cashflows from a single market in Singapore,’ said Peeyush Pallav, a director with Fitch’s Reit team. ‘Furthermore, outside of Singapore, Australia benefits from a well-established legal framework and liquid property markets in comparison to many other Asian countries.’
But the impact of Australian acquisitions on the S-Reits’ credit profiles is expected to be varied – depending on the assets acquired and the funding, hedging and property management strategies adopted, Fitch added.
And while such expansion brings benefits such as cashflow and tenant diversification, it also increases the risks in terms of newer markets potentially less understood by external investors and exchange rate volatility that can impact capital values and income streams, Fitch warned.
CCT – OCBC
Asset enhancement at 6 Battery Road
Asset enhancement at 6 Battery Road. Last week, CapitaCommercial Trust (CCT) unveiled its asset enhancement initiative (AEI) at 6 Battery Road (6BR). The upgrade will focus on improving the building’s energy efficiency, environmental sustainability, as well as the facilities in the building. The AEI will commence in Oct 2010 and carried out in phases until 2013 in order to minimize the inconvenience to its tenants. Upgrading of common facilities ground floor lift lobby, turnstiles and reception area will start first while the enhancement of office space will be carried out upon the lease expiry of tenants. The building will remain tenanted during the upgrading period. Estimated capex for the AEI is ~S$92m and the cost is equivalent to 8% of the building’s valuation at the end of Dec 2009.
Positioning for long term growth. With Nomura likely to move out of 6BR to Marina Bay Financial Centre and Standard Chartered downsizing its office space in 6BR by 70,000 sq ft when their leases expire, near term outlook for CCT remains challenging. Nevertheless, we view this AEI positively. We believe that the completion of the upgrading works will place 6BR in a better position to compete with the newer office buildings and thus leading to higher rental rates. The AEI is expected to complete in 2013 and with no new supply of new office space in that year, we believe that CCT will have better bargaining power to negotiate for higher rental rates from its tenants.
Maintain BUY. According to CCT, the AEI is expected to generate incremental gross revenue of S$9.2m pa and incremental net property income (NPI) of S$7.4m pa. Management estimates that 20% of the incremental NPI (~S$1.5m) will come from cost savings due to reduction in energy consumption. The other 80% of the increment NPI (S$5.9m) will come from higher rental rate that the building is expected to achieve post-AEI. However, we think that it is too early to make any adjustments to our rental assumptions from 2013 onwards as there is still a lack of clarity on the recovery in office rents, which will depend on the take-up rate of the upcoming supply of office spaces in 2010-2012 and the sustainability of the economic growth. As such, we leave our estimates unchanged. Our fair value also remains at S$1.26. With a total return of 16.4%, we reiterate our BUY rating on CCT.