Month: September 2010
Cambridge – RBS
Restructuring debt
CREIT’s recent acquisitions have led to an upgrade in portfolio quality. Management intends to restructure debt to bring down gearing and interest costs. We raise our TP to S$0.58 and reiterate Buy.
Upgrading quality of property portfolio
CREIT’s recent acquisition of two properties has upgraded its property portfolio. CREIT’s asset lease expiry profile and tenant mix has improved after the S$37.7m acquisitions. To fund them, CREIT raised S$40m from a placement of 86.7m of new units at S$0.478/unit. Of the proceeds, S$24.7m will be used to finance the purchase, with the rest kept for future acquisitions. Following the purchase, CREIT’s gearing ratio falls to 41.5% from 42.6% as only 34% of the acquisition will be funded by debt.
Potential debt restructuring should improve earnings
Management expect CREIT to realise S$90m from the sale of non-core assets by the year end. In August, CREIT paid down its existing debt facility by S$32m bringing its gearing down to 39.5% from 42.6% as of June 2010. Management plans to pay down a further S$30m of the proceeds and use the rest for asset upgrades. The company also intends to restructure its current debt of S$360m which was refinanced at the peak of financial crisis in February 2009 at 5.9% vs current spot rate of 3%, on our estimates. This raises our distributable income by 6.9% for FY10-11F.
Slight dilution expected on acquisitions
The new properties generate a net property income yield of 8.3%, akin to CREIT’s yield prior to the acquisition. Given the expected dilution from the placement, we estimate distributable income per unit (DPU) dilution of 3% in both FY11 and FY12. The new properties will have built-in rental escalation of 2% pa on average during the lease period of seven years vs 2.5% for CREIT pre-acquisitions. Gross floor area at one of the acquisition targets (Chin Bee) may be enhanced by 40%. This should reduce dilution to just 2% in both FY11F and FY12F.
Reiterate Buy with higher target price
Our DCF-based target price is raised to S$0.58/unit (from S$0.53) on the back of our earnings upgrade. We have reduced our cost of equity to 12% (from 13.2%) as bond yields continue to trend down. The stock yield is attractive, in our view at 9.2% in FY10 and 10% in FY11 vs peer average of 7.9% and 8.4%, respectively. It trades at 13% discount to book value vs 0.8% discount for peers, on our analysis.
CMT – RBS
Seems fully valued
We expect a stable performance from CMT’s retail portfolio, although its city centre malls may underperform slightly due to competition. The REIT has sufficient fire power for acquisitions, but it is difficult to acquire as retail assets are in high demand. We retain our Hold rating as the stock seems fully valued.
On the prowl for greenfield projects
We believe CMT will pursue greenfield projects this year, given there are a number of commercial sites on the government’s land sales programme this year. CMT has the capacity to undertake S$680m worth of construction projects, based on regulatory limit. It also has debt headroom of S$1.4bn for acquisitions, assuming a maximum target gearing of 45%. In June, a JV between CMT and its parent CapitaMalls Asia lost (by a slim margin) to Lend Lease in the bid for a plum commercial development site in Jurong.
Building fire power for acquisitions
CMT is issuing a total of S$300m in notes in September, comprising: 1) S$150m due in four years at 2.85% pa; and 2) S$150m due in seven years at 3.55% pa. With this, S$200m will remain outstanding from its S$2.5m MTN established in 2007. We believe the REIT is taking advantage of the low rates to build up fire power for future acquisitions.
Portfolio performance should remain healthy
We expect earnings to result in stable rental growth in CMT’s retail portfolio and occupancy to remain close to 100%. However, growth at its city centre malls could be slower or stagnant given the high supply of malls at Orchard Road last year. About half of CMT’s portfolio is in the city centre.
Reiterate Hold
We maintain our Hold recommendation, with our DCF-based target price at S$2.10. Any yield-accretive acquisitions will be positive, but strong demand for retail assets makes it challenging for CMT to acquire. We think the stock is fully valued, trading at a 28% premium to its current book value. CMT yields 5.0% in FY10F and 5.3% in FY11F. We prefer Frasers Centrepoint Trust, which is pure suburban mall play and a clear acquisition pipeline.
CCT – RBS
Office offering
CCT may redevelop Market Street Car Park if it fails to acquire an existing grade A asset, in our view. We view this as a positive, given the low holding cost for the asset. CCT may not require to raise equity for any acquisitions, given its significant cash pile. We remain positive on the office sector. Reiterate Buy.
Potential redevelopment of Market Street Car Park?
We think the time is ripe for CCT to redevelop Market Street Car Park into a grade A office given good visibility on office rents and relatively low construction costs. If redeveloped, the property could be ready by 2013-14, during which time we expect office supply to be tight. We estimate a redevelopment cost of S$1,125 psf for a new grade A office on this site, which seems more attractive than the seller asking price of at least S$2,000 psf for existing grade A assets. However, CCT would have the capacity to redevelop only 60% of the asset solo, based on the regulatory limit. This is the main drawback for any redevelopment, in our view.
Sitting on a cash pile
We estimate CCT will sit on a cash pile of about S$780m after the sale of Starhub Centre. We also estimate it will have debt capacity to acquire up to S$0.8bn-1.4bn worth of assets based on a gearing of 40-45%. Hence the company may not need to raise equity once it acquires a grade A office or redevelops the Market Street Car Park.
Office leasing activities gather steam
Leasing deals for grade A offices have intensified, with financial institutions such as Citigroup and BoA in negotiations to move into the upcoming Asia Square Tower 1 and 50 Collyer Quay, respectively. Industry sources said that monthly rents are now transacted at S$8.50-10.00 psf vs S$7-8 psf for uncompleted offices at end-2009 and current average grade A rents of S$8.45 psf. Where previous preleasing involved companies effectively swapping office space, the firms are now increasing headcount. Therefore, for instance, BoA may be doubling its office space to 120,000 sq ft. Higher demand and a corresponding decline in office stock (due to conversions into residences) bodes well for the office sector. We estimate 2m sq ft of office stock will be removed from the system over the next two years.
Maintain Buy
We have a Buy rating on CCT with our DCF-based target price of S$1.50, which includes potential upside from the acquisition of a grade A office. We like CCT as we see it is the largest pure office play in Singapore. The REIT is expected to yield 5.4% in FY10 and 5.0% in FY11 and is trading on a par with its current book value of S$1.36.
CMT – Macquarie
Focused on growth
Event
• We met with the management of CapitaMall Trust for an update. The group continues to execute well on its strategy of deriving DPU growth from active leasing, asset enhancement and acquisitions. Maintain Outperform.
Impact
• More positive on rental reversions. Management was decidedly more positive on rental reversions than during the 2Q10 results briefing. For 2H10, the group is looking to maintain or exceed 1H10’s rental reversion (~+6%), despite renewals off a high 2007 base. Going into 2011 (where rentals are off an even higher rental base), negative reversions are not expected.
• Tighter cap rates to come. Cap rates remained stable in the June 2010 valuation versus December 2009, but the group sees rate compression in the retail space this year. When asked if this would make growth more challenging since asking prices would also rise, management said it would remain disciplined and acquire accretively.
• Focus on development projects. This makes development projects more likely given a higher yield on cost, versus chasing completed projects at higher prices. In terms of targets, the group will evaluate all the retail sites in the government land sales programme in the next 6-9 months.
• Given its substantial S$780m capacity (regulatory limit of10% of asset base) for development projects, it may not need to develop in joint-venture with sponsor CapitaMalls Asia depending on the size of the project. However, management may also evaluate if it wants to use all of this capacity on one site, or spread it out over a few developments.
• Lengthening debt maturity. The group has S$1.06bn of borrowings to refinance next year (S$685.3m convertible bond due 2013 with put option in 2011, and S$346.4m for its share of the fixed rate term loan for the purchase of Raffles City) and it will take the opportunity to lengthen debt maturity. The aim over time is for a less lumpy refinancing profile that better matches its distributable income per annum (~S$300m).
Earnings and target price revision
• No change.
Price catalyst
• 12-month price target: S$2.20 based on a DCF methodology.
• Catalyst: Potential development projects in the next 6-12 months.
Action and recommendation
• CapitaMall Trust is our top pick amongst the SREITs. We believe that execution on its fourth leg of growth, being development projects, will be a catalyst for the stock.
REITs – BT
Asia Reit market cap up by a quarter
(HONG KONG) Asia’s total market capitalisation for real estate investment trusts (Reits) rose by a quarter in the first six months to US$69 billion, global property services firm CB Richard Ellis said yesterday.
However, the weighted average dividend yield for Asian Reits contracted to 6.86 per cent in the first half of 2010 from 8.06 per cent during the same period last year, US-based CBRE said in a statement.
‘The fortunes of Asian Reits still remained mixed. During the first half of the year, some markets have seen strong growth in IPO and acquisition activity and others have witnessed delisting applications, mergers and consolidations,’ said Andrew Ness, executive director at CBRE Research Asia.
‘Reits in Japan, Taiwan, Korea and Hong Kong outperformed their respective stock markets, all of which suffered downward adjustments in the second quarter amid concerns over the pace of the global economic recovery,’ Mr Ness added.
Acquisitions in the market totalled US$5.7 billion during the first half of 2010, surpassing the US$4.2 billion recorded for the whole of 2009, with Japan being the most active market for asset purchases, CBRE said.
Singaporean and Malaysian Reits were active buyers of office, retail, industrial and healthcare assets while Reits in Hong Kong, Taiwan, South Korea and Thailand remained inactive, it said.
While a few Reits were delisted, South Korea, Singapore and Thailand saw new listings, such as Cache Logistics.
Reits invest in mainly commercial property and pay rent collected from their properties to shareholders as a dividend and also usually offer returns that are higher than yields of government bonds. — Reuters