Month: October 2010
K-REIT – Lim and Tan
• K-Reit expects its DPU for 2011 to be 10.2% higher at 6.68 cents as a result of the recent transactions:
a. acquisition of 77 King Street property in Sydney for A$120 mln / S$145 mln and announced in July;
b. acquisition of one-third stake in Marina Bay Financial Centre‘s Towers ! & 2 for $1,426.8 mln;
c. disposal of GE Towers and Keppel Towers for $573 mln.
• K-Reit will borrow a net S$821 mln for the latest transactions, and will not issue new units.
• At $1.37, prospective yield is 4.9%.
• K-Reit merits an upgrade to BUY with the removal of the “uncertainty”, whether the Singapore transactions would be yield accretive.
(For Q3 ended Sept ’10, K-Reit’s Distributable Income rose 26% to $22.7 mln reflecting the additional 29% interest in Prudential Tower as well as the 50% stake in 275 George Street, Australia. DPU for the first 9 months came to 4.65 cents or 6.22 cents annualized.)
K-REIT – CIMB
Positives priced in
• 3Q10 in line; maintain Underperform and target price of S$1.26. 3Q10 DPU of 1.69 Scts met our expectation and consensus, forming 25% of our full-year forecast. 9M10 DPU of 4.65 Scts represents 70% of our forecast, in line considering backend-loaded contributions expected from Australian assets acquired in the year. K-REIT also released a forecast of its consolidated statement from its recent acquisitions and divestments. We fine-tune our FY10-12 DPU estimates by -1% to +1% but keep our DDM-based target price of S$1.26 (discount rate 7.2%) intact. Maintain Underperform with limited accretion from its recent asset swap, and unattractive FY10 DPU yields of 4.8% vs. Suntec REIT’s 6.5% and CCT’s 5.2%. Derating catalysts could include lower-than-expected rental reversions.
• 3Q10 NPI grew 42% yoy. 3Q10 net property income of S$17.5m was up 42% yoy on contributions from additional stakes in Prudential Tower and 275 George Street. A 37% yoy decline in DPU was attributable to an enlargement in its share base after its Nov 09 rights issue though total distributable income grew 26% on the back of the NPI increase. Qoq, 3Q10 DPU was up 3% on lower borrowing costs.
• Occupancy rose to 99.2%. Portfolio occupancy improved 1.3% pts qoq to 99.2%, largely due to new tenants secured at Bugis Junction Towers. Leasing demand was driven by a mix of new tenants and expansion by existing tenants. Though average portfolio rent was not disclosed, we believe this could have been flat or marginally lower qoq. The 100% completion of FY10 rent reviews should, however, help to curb any near-term decline in average portfolio rents.
• Release of forecast statement. Accompanying the results, K-REIT released a FY11 forecast of the consolidated statement from its recent acquisitions (Marina Bay Financial Centre Phase 1 and 77 King Street) and divestment of Keppel Towers and GE Tower. K-REIT’s FY11 DPU estimate of 6.68 Scts for its enlarged portfolio is lower than our assumed 7.23 Scts due to lower rental and occupancy assumptions for its local portfolio. We have kept our FY11 DPU estimate largely unchanged.
A-REIT – CIMB
Intact for the year
• Results in line; maintain Neutral. 1HFY11 results met Street and our expectations. DPU of 6.67cts forms 47% of our full-year forecast of 14.2cts. If retained income of S$3.5m (pending approval for tax-transparency treatment) had been distributed, available DPU would have been 6.86cts. We add in S$97m of asset enhancement initiatives (AEI) as announced and lower our cost-of-debt assumptions. Our DPU estimates increase by 1-4% for FY11-13. We roll over our DDM target price to CY11, raising it to S$2.13 (from S$2.02) with an unchanged discount rate of 8.4%. We expect weakening occupancy rates to be compensated by higher yields after AEI and build-to-suit opportunities. Despite a still attractive yield of 6.8%, we believe its management premium and track record have been priced in, at a 34% premium to book value, particularly given still-weakening occupancy. Re-rating catalysts could include announcements of accretive acquisitions and development projects.
• Weaker qoq, with more conversions to multi-user buildings. Net property income of S$83.9m for 2QFY11 was down 3.9% qoq as property expenses increased with more single-user buildings (where tenants usually bear most property-related expenses) converted to multi-user facilities. Weakening occupancy despite positive macros is in line with our view of a lag time between the two. Buildings converted in the quarter included 12 Woodlands Loop, 3 Tai Seng Drive and 53 Serangoon North Ave 4.
• S$97m worth of new AEI at 8.5% yields. Management announced new AEI, totalling S$97m, which would reposition 1 Senoko Avenue, Techview and 10 Toh Guan Road for higher-value use. 1 Senoko Avenue would be redeveloped into a dedicated food hub with additional GFA of 34,519 sq m. Techview would be repositioned to court hi-tech users rather than manufacturing users which it used to house. Finally, 10 Toh Guan Road (previously occupied by TT International), would try to attract hi-tech users rather than its current logistics users. While regulatory approval is pending for Techview and 10 Toh Guan Road, management anticipates the three new projects to fetch an estimated weighted yield in excess of 8.5%, above its FY10 portfolio NPI yield of 7.3%.
A-REIT – DBSV
AEI to optimize yields
• Positive leasing efforts to boost occupancy levels in coming quarters
• S$97m enhancement works underpin earnings growth in longer term
• Maintain HOLD and raised TP to S$2.19 as we roll forward valuation to FY12.
DPU of 3.3Scts in line. A-REIT reported higher topline and net property income of S$111.1m (+8.6% yoy, -4.0%qoq) and S$83.9m (+3.5% yoy, -4% qoq) respectively, helped by contributions from completed development projects and acquisitions. Performance on a sequential basis was slightly lower due to a one-off gain reported in 1Q11. Distributable income in 2Q11 was S$63.1m (+2.5%yoy) but retained S$1.4m pending tax clearance from the authorities. DPU of 3.3 Scts was 5.2% lower due to a larger unit base but will have been 0.3% higher on a pro-forma basis.
Stable portfolio occupancy of 95.3%, expected to improve come 3Q11. While A-REIT multi-tenanted buildings have seen slight decline in average occupancy levels in recent quarters, we expect a rebound come 3Q11 due to positive results from newly secured leases from the manager’s active releasing efforts (estimated to increase by 1% qoq).
S$97m planned for enhancement works (“AEI”) to underpin higher asset yields in medium term. Plans include major construction works to increase the properties’ average net lettable area as well as refurbishment & repositioning of the properties for higher value use. The manager targets a weighted average return of 8.5% from these AEI plans when completed from 1Q12 onwards.
HOLD call maintained, TP S$2.19. We lowered our FY11-12 earnings by 2% as we adjust our revenue recognition from the above AEI works. TP is raised to S$2.19 as we roll forward our valuation to FY12. However, given limited upside from current level, we maintain our HOLD call. A-REIT currently offers a prospective FY11-12 yield of 6.4-6.7%.
K-REIT – DBSV
Results in line
• 3Q10 distribution income up marginally 3.2% qoq, in line
• Revenue is likely to see limited near term upside
• Maintain Hold with TP S$1.20
In-line set of results. Kreit reported a marginal 6.3% qoq decline in topline to $21.8m in 3Q10, mainly due to a correction to the straight-line accounting of rental income reported in 2Q10 from the 50% stake in 275 George Street, while NPI dipped a smaller 4.8% to $17.5m on lower property expenses. However, the adjustment had no impact on the distributable income, which rose by a modest 3.2% to $22.7m (DPU: 1.69cts). The increase in distributable income was largely due to lower borrowing costs of 3.4% (vs 3.54% in Q2). Occupancy rate increased by a slight 1.3ppt qoq to 99.2% with an additional 29100sf of new take up.
Limited upside in the near term. Its portfolio is running at almost full capacity, and there is limited rental reversion upside as most of the leases up for renewal would be inked at the peak in 2007. However, downside risks are now capped as demand improved. As highlighted in our previous report, we view the purchase of MBFC1 and sale of KTGE as a longer term positive for the Reit. The acquisition will upgrade its portfolio quality and extend the average portfolio lease expiry profile from the present 5.7 years to 7.8 years, although near term income boost would be relatively small. In their 2011 forecast, the group has indicated a net 5.3% rise in distribution income and 4% better DPU impact from the purchase of MBFC1 and sale of KTGE. Post acquisition, Kreit’s gearing would rise to 39.1%.
Maintain Hold. Although we see limited revenue upside in the near term, the improving office rental and capital value cycle is likely to benefit the group’s underlying rental and asset value in the medium term. This will underpin Kreit’s income. Maintain Hold and DCF-backed TP of $1.20.