Month: February 2011
A-REIT – DBSV
First deal in China
• Sealed S&P contract of a business space property for RMB587.9m
• Earnings impact is small, but acquisition is a test of its execution ability in China
• HOLD Call, TP S$2.19 maintained.
Acquiring a business space property under construction The 79,880 sqm GFA business space property is well located in Jinqiao Export and Processing Zone (“JEPZ”), a well established and connected development zone in Pudong New District, Shanghai. The purchase will cost RMB 587.9m (S$117.6m) and complete towards end 2012 upon TOP of the property.
No pre-commitments yet. It seems to us that A-REIT has taken a leap of faith in acquiring the development project without any pre-commitments to-date. This, in our view, deviates from management’s more conservative approach towards acquisitions where the property usually comes fully/partially leased. Nevertheless, we believe this will provide A-REIT with the opportunity to showcase its execution ability, while there is ample time of 2-years to fill the space – concerted marketing efforts through its existing tenant network and leveraging on its parent, Ascendas Group’s established presence in China. In addition, the vendor has undertaken to guarantee RMB67m rental, (or a gross rental yield of 11%), hence mitigating leasing risk for A-REIT.
Assuming that (i) A-REIT is able to fill up the space upon completion by end 2012, (ii) at an average rental rate of RMB 2.30/day or a topline of RMB 67m, and (iii) funded with a 60-40% equity/debt ratio, DPU impact is estimated to <1%.
Maintain HOLD, TP S$2.19. While we like A-REIT for its diversified portfolio and management’s track record of delivering earnings growth for unitholders, current upside to our TP is limited. As such, we maintain our HOLD rating and DCF-derived TP of S$2.19. A-REIT currently offers a yield of 6.4-6.9%
Cambridge – DBSV
Like a high yielding bond
At a Glance
• Stronger financials with gearing heading towards 33.3% target
• More acquisitions to boost earnings in 2011
• Attractive and highest yield in SREIT sector. BUY and TP S$0.58 maintained
Comment on Results
4Q10 results in line with expectations. Cambridge REIT (“CREIT”) posted gross revenues and net property income of S$19.1m (+1%yoy) and S$16.8m (+0.7% yoy) respectively. The slight uplift in rental income was attributed to contributions from 3 new properties acquired in 4Q, offsetting income loss from certain properties and strata units in Enterprise Hub divested in the FY. Distributable income fell 0.4% to S$12.0m, translating to a DPU of 1.14Scts. CREIT also reported a 5.7% increase in portfolio valuation compared to Jun 10 and raised NAV slightly to 60.7 Scts.
Gearing level to head towards 33.3% target. CREIT has lowered its gearing through periodic repayment of debts with monies from its divestment activities. It will further lower its current gearing of 34.7%, after repaying S$20m loans.
Acquisition strategy to continue in 2011. CREIT will complete the acquisition of 2 assets and embark on its first built-to-suit project in coming months, funded by the placement proceeds raised in 4Q10. The manager is likely to seek out more acquisitions in 2011 backed by its improved financial flexibility and lower gearing position.
Recommendation
BUY, TP S$0.58 based on DCF. CREIT continues to offer an attractive FY11-12F yield of 9.5-9.7%, the highest in the S-REIT sector. With improved income visibility post restructuring, we believe CREIT deserves higher valuation. Maintain BUY and TP of S$0.58, offering a total return of 20%.
A-REIT – BT
A-Reit buys Shanghai property for 587.9m yuan
ASCENDAS Real Estate Investment Trust (A-Reit) has made its foray into China by buying a business park building in Shanghai for 587.9 million yuan (S$113.8 million).
The industrial Reit will continue looking for more investments in Singapore and beyond, including the major Tier One cities of China.
A-Reit announced its forward purchase in China yesterday, almost three months after it first unveiled plans to venture into the mainland.
The property’s location is in the Jinqiao export and processing zone in Pudong New District, with expected gross floor area of around 79,880 square metres.
A-Reit is buying the property from Hyday Holding and the latter’s parent Qingjian International (South Pacific) Group Development Co.
The sellers will provide A-Reit with a rental guarantee of 67.6 million yuan upon completion of the deal, which should happen in the second half of next year.
Assuming that A-Reit had held the property for the whole of FY2009/10, the DPU for that period could have been 0.07 cent higher, on an annualised pro forma basis, and after considering applicable taxes in China.
A-Reit plans to market the property through its network of existing tenants, and through its sponsor Ascendas’s operating platform in China.
Tan Ser Ping, CEO and executive director of A-Reit’s manager, said that A-Reit will continue searching for investment opportunities in Singapore and the region. In China, it will focus on major Tier One cities such as Shanghai.
Even as the Reit expands abroad, its portfolio will comprise largely ‘Singapore-based assets in the foreseeable future’, he said.
A-Reit lost four cents on the stock market yesterday to close at $2.06.
Office REITs – OCBC
Common Themes of FY10 results; Maintain OVERWEIGHT
Negative rental reversion bottoming out. After FY10 results, we found a few common themes in the guidance given by Office REITs managers. Firstly, most Office REITs with Grade-A office assets expect negative rental reversions to bottom out by end 2011. In FY10, negative rental reversions were still prevalent in some Grade-A properties such as Six Battery Road and One George Street. One Raffles Quay and Suntec City1 also saw YoY declines in gross revenue contribution, but this is expected to turn around in 2011-2012. According to CBRE, Grade-A rents averaged S$9.90 psf/month in 4Q10, reflecting an increase of 10% QoQ and 22.2% YoY. Grade-A rents bottomed at S$8 psf/month in 1Q10 and have since risen some 23.8%. We see room for more rental upside ahead and forecast Grade-A rents to hit S$10.50 psf./month in 2011, more than S$11 psf/month in 2012 and above S$12 psf/month in 2013. However, non-Grade-A properties will see more gradual recovery, where they will bottom out possibly only after 2012-2013.
Hollowing-out concerns a passé. Most Office REITs hold the view that earlier concerns of the “hollowing-out effect”, as the vacated space is readily being taken up by existing tenants wanting to expand or occupiers from other buildings. This is corroborated by CRBE findings which reported that that Grade-A vacancy dipped to 2.7% in 4Q10 from 2.8% in 3Q10 and a notable turnaround from 6.2% in 4Q09, despite the new supply including MBFC Tower 1 in 1Q10 and MBFC Tower 2 in 3Q10.
40% leverage is the new norm. On the back of the low interest rate environment and mega acquisitions completed in 2010 (MBFC Phase 1), we are seeing more Office REITs shoring up their aggregate leverage ratios, with Suntec leading the pack with 40.4% on end-Dec 2010 from 33% on end-Sep 2010. K-REIT’s gearing also increased from 15.1% to 37%, while FCOT’s leverage remains flat at 39.8%. With the exception of CCT2 which had pared down its debt in 4Q10, most of the Office REITs seem comfortable reverting back to the pre-crisis target gearing levels of 40-45%. We think the 40% will be the new norm for FY2011. Debt headroom of S$1.18b in for the local Office REITs subsector indicates that sizeable debt-funded acquisitions are still possible.
Valuations. The four local Office-REITs, namely CCT [BUY, FV: S$1.61], Suntec [HOLD, FV: S$1.60], K-REIT [NOT RATED] and FCOT [BUY, FV: S$0.90] trade at an averageprice-to-book of 0.81x, which compares favourably to the broader S-REIT sector of 0.93x. We remain upbeat on the office sector recovery; and maintain OVERWEIGHT for the local Office REITs subsector.
CCT – BT
CCT still mulling Market Street Car Park project despite official nod
CAPITACOMMERCIAL Trust (CCT) confirmed yesterday that it has obtained provisional permission for the redevelopment of Market Street Car Park, but stressed that it has not decided if it would embark on the project.
CCT was responding to a BT report last Saturday, which said that the commercial real estate investment trust received provisional permission in November last year to turn Market Street Car Park into an office tower.
Market Street Car Park is located at 146 Market Street and its lease expires in 2073. The new office building could have a gross floor area of around 854,400 square feet.
CCT said that its manager was evaluating the redevelopment and ‘has not arrived at any decision at this point’. It advised unitholders to exercise caution in trading CCT units as there is no certainty that the proposed project would materialise.
Back in January 2008, CCT announced that it had obtained outline planning permission (OPP) to redevelop Market Street Car Park into a Grade A office tower.
The authorities granted the OPP on two conditions: there would be no extension of the present lease, and CCT would have to pay a development premium equal to 100 per cent of the enhancement in land value. CCT estimated then that the total project cost would be $1 billion to $1.5 billion.
Later in 2009, CCT dropped the project, citing its significant size, the high redevelopment cost, an uncertain market outlook and tight credit conditions as reasons. The OPP was allowed to lapse.
CCT said yesterday that its manager submitted a new application and obtained provisional permission for the redevelopment of Market Street Car Park as part of a portfolio evaluation exercise.
‘However, material issues, such as the determination of the differential premium payable to the Singapore Land Authority for the lifting of the title restriction of the property and other matters, are still being evaluated,’ CCT added.
‘It is premature to make any definitive conclusion regarding the feasibility of the proposed redevelopment.’
On the stock market yesterday, CCT lost three cents to close at $1.43.