Month: March 2011
SREITs – OCBC
Impact of interest rates hike on S-REITs
Debt profile varies among the S-REITs. We consolidated the debt profiles of the S-REITs under our monitor, and we think that any impending interest rates hike will add on to borrowing costs, and thus affect distributable income for unitholders. However, not all S-REITs will be impacted similarly. Some of the S-REITs have more fixed-rate borrowings than others (using instruments such as fixed rate CMBS, fixed rate term loan, fixed rate MTN, convertible bonds, retail bonds etc.) S-REITs also have varying degrees (as % of total borrowings) of hedging their outstanding loans using interest rate swaps. The debt maturity profiles are different for different S-REITs. Some are weighted more towards short-term borrowings, while others are contracted on longer-term basis, which may or may not be fixed rated. The resulting refinancing risks are thus different for different S-REITs.
Impacting S-REITs differently. We think any rate hike is likely to have a greater impact on S-REITs that 1) have a lower percentage of fixed rate borrowings, and 2) have a substantial amount of borrowings maturing near the interest rate hike period (likely 2H11-FY12), or if they still have not refinanced to a latter date. Any refinancing done thereafter will be at much higher rates, even for fixed rate borrowings.
Mitigation tactics. Generally, all S-REITs under our monitor have some form of fixed rate contractual agreements or hedge using interest rates swaps to mitigate the effects of interest rate risks. For FY10/11, some S-REITs have taken the following actions in anticipation of the interest rate hike, 1) lengthening the debt term-to-maturity with more fixed rate borrowings, 2) hedging using Interest rate swaps, and 3) cash hold-up for some since FY10, in anticipation of borrowings maturing in 2011-2012.
Conclusion. Overall, we think fundamentals for the majority of the S-REITs remain strong, and any increase in interest rate will have some, but not material impact on their financials (since most of them are already expecting a hike in interest rate and have been preparing for it). This is corroborated by our correlation analysis of the percentage change of the FSTREI index vis-à-vis pp change of the 3-month Sibor, which registered a low -3.4% from 2006 till to-date. Factoring in delay effects of 1-24 months, the correlation is also marginal, ranging from -7.8% to 8.6%. Maintain our OVERWEIGHT rating on the S-REITs sector.
CDL H-Trust – BT
CDLHT acquires Studio M Hotel for S$154m
No immediate need for equity fund raising, says trust manager’s CEO
AS expected by the market, CDL Hospitality Trusts has announced the purchase of Studio M Hotel, which soft opened in March last year, for $154 million or about $428,000 per room. The seller is a fully owned unit of CDLHT’s sponsor, London-listed Millennium & Copthorne Hotels.
The yield-accretive acquisition will initially be fully funded by debt, resulting in the trust’s debt-to-assets ratio rising to around 26.5 per cent post-acquisition, from 20.4 per cent at end-2010.
Asked if CDLHT had plans for equity fund raising, the trust manager’s CEO, Vincent Yeo, said: ‘There is currently no immediate need to raise funds due to our ample and diversified funding sources. At a post-acquisition gearing level of only 26.5 per cent and with the current favourable financing environment, we are likely to finance this acquisition with other debt facilities including the S$1 billion Multi-currency Medium Term Note Programme established last year.’
The $154 million price reflects a 6.1 per cent pro forma property yield for financial year ended Dec 31, 2010 – above the 5.3 per cent implied property yield for the trust’s existing portfolio over the same period. Assuming CDLHT had bought Studio M Hotel on Jan 1, 2010 and held and operated it through to end-2010, the trust’s proforma distribution per unit (before deducting income retained for working capital) for FY2010 would increase by 5 per cent or 0.56 cent to 11.74 cents.
On the stock market yesterday, CDLHT closed three cents lower at $1.94 amid a broad market fall.
CDLHT will issue a master lease for at least 20 years and up to 70 years on the hotel to M&C group. The 360-room hotel is in the Mohamed Sultan area. For the first 12 months, CDLHT will receive guaranteed net rent of $9.24 million from M&C group, which reflects about 6 per cent net yield on the $154 million purchase price.
The total acquisition cost will amount to $156.2 million, including the one per cent acquisition fee of $1.54 million to the trust’s manager (to be paid through the issue of new CDLHT units) and about $700,000 in other expenses relating to the deal.
Standard Chartered Bank said in a research note yesterday: ‘We expect (Studio M’s) net property income yield to rise to 7 per cent in 2011 and we estimate this acquisition to be 3 per cent accretive to 2011 estimated DPU (distribution per unit).’
The 26.5 per cent gearing level following the purchase of Studio M still leaves CDLHT with capacity for $350 million of new acquisitions, Stanchart added. The trust raised equity in 2007 and 2010 when gearing was 43 per cent and 31 per cent respectively.
The acquisition is subject to approval by CDLHT’s unit holders. The trust is a favourite among many analysts as it is a good proxy for Singapore’s booming hospitality business.
Studio M will be CDLHT’s sixth hotel in Singapore. Following the purchase, the trust’s hotel rooms inventory on the island will grow 15.3 per cent to 2,711 rooms, boosting the trust’s exposure to the buoyant Singapore hospitality market.
The nine-storey hotel was built on a 99-year leasehold plot that M&C group clinched for $45.8 million or $518 per square foot of potential gross floor area, at a state tender in November 2006.
In terms of future acquisitions for CDLHT, Mr Yeo said: ‘Singapore remains our favourite market in terms of prospects. By far, it is the most attractive market in the Asia-Pacific. We are also looking around South-east Asia and other growth markets like India and Vietnam, as well as Japan.’
He remained upbeat on prospects for Singapore’s tourism and hospitality sector, reiterating that there has been a ‘structural boost in accommodation’ since the opening of the integrated resorts last year. Hotel room demand will remain robust based on the official projection that visitor arrivals will increase from 11.6 million in 2010 to 17 million in 2015, he added. ‘The phased opening of new attractions at the IRs as well as other upcoming attractions in Singapore can be expected to sustain the growth momentum of the tourism and hospitality sector.’
CDL H-Trust – Lim and Tan
• CDLHT has, hardly surprisingly, acquired the Studio M Hotel from Millennium & Copthorne, for $154 mln ($156 mln including fees to be paid via issuance of new CDLHT units). (CEO Vincent Yeo had, in recent weeks, “hinted” of this possible transaction.)
• Studio M, which has 360 rooms and located in the Robertson Quay precinct, was completed only about a year ago.
• The acquisition is necessarily yield accretive, with net property yield of 6% based on the expected first year rent of $9.24 mln from M&C, which has been granted the master lease.
• On a pro-forma basis, DPU will rise 5% from 11.18 cents to 11.74 cents for a yield of almost 6% at $1.97.
• The acquisition is to be fully funded by debt given CDLHT’s debt headroom. Indeed, aggregate leverage will rise to a still comfortable 26.5% from 20.4%.
• We maintain BUY.
CMT – DBSV
Illuminating Bugis
• Acquisition to expand portfolio size by 4%, create synergies with Bugis Junction
• Small but positive move, able to grow organically almost immediately
• Maintain Buy, TP $2.08
4% growth in portfolio value. CMT announced it is purchasing Illuma, a retail and entertainment complex at Victoria Street, for S$295m or S$1593 psf, in line with valuations. All-in cost works out to S$299m or S$1614 psf. The mall, spread out over seven floors with 321 carpark lots, has GFA and NLA of 297,399 sf and 185,190 sf respectively. Under the URA guideline, at least 60% of the GFA has to be used for entertainment purposes. The trust intends to fund this purchase using its cash balance of S$713m as at Dec 2010.
Organic uplift immediately. We view the acquisition price as fair, taking into account the shorter land lease and the potential for a quick ramp-up from the initial yield of 3.8%. Current occupancy at Iluma is 83.7% with about 129 tenants. Major tenants include Filmgarde Cineplex, K Suites, Arcadia and Ebisboshi Shotengai. Iluma is connected to Bugis Junction via an overhead link bridge, creating a seamless connection. With a combined NLA of 606,000sf, the manager intends to transform it into a retail destination, a magnet for both locals and tourists in the Bugis area. The mall has a high entertainment component, which could complement CMT’s Bugis Junction. In the near term, we believe the low-hanging fruit could come from raising occupancy levels at the property. Medium term, pro-active asset management exercises will drive returns, which include reviewing tenancy mix as c50% of its leases are expiring over the next 2 years as well as improving property utilisation rate.
Maintain Buy. We continue to like CMT for its execution track record and we believe it will be able to improve Illuma’s property returns in the medium term. We view this deal as positive for CMT’s growth strategy. However, initial impact on earnings and valuation is limited given the modest asset size (c. 2% of FY2011 NPI, 4% of AUM). Maintain Buy with unchanged TP of $2.08.
CMT – OCBC
Acquisition of Iluma; turnaround play for CMT
Acquisition of Iluma for S$295m. CapitaMall Trust (CMT) has announced that it has entered into a sale and purchase agreement to acquire Iluma, located opposite Bugis Junction, (one of CMT’s existing properties) for S$295m from Jack Investment Pte Ltd1 . The mall has a NLA of 185,190 sq ft and leasehold of 60 years commencing from 30 Sep 2005. Based on the current rental rates and occupancy of 83.7%, the entry yield is 3.8%. CMT has also committed to lease certain units, specifically the units which house Filmgarde cineplex and a multi-purpose performance hall2 . CMT intends to wholly finance the acquisition through internal sources of funds. Following the acquisition, CMT’s aggregate leverage will remain unchanged at 38.2%. With this inclusion, CMT’s total deposited property will increase from S$8.1b as at 31 Dec 2010 to approximately S$8.4b.
Turnaround play. We attended the analyst briefing yesterday. CMT is positioning the acquisition as a turnaround play. It believes that given its strategic location next to Bugis Junction (the two malls are already connected by an overhead linkbridge) and by leveraging on its pro-active asset and lease management capabilities, there will be further opportunities to improve the occupancy rate, tenancy mix and utilisation of space at Iluma. In terms of rental upside, there’s 16.3% of immediate vacancy and 10.4% and 40% of leases are up for renewal in 2011 & 2012 respectively. It also estimates that Iluma presently attracts shopper traffic of more than 1m per month, compared to 3.2m at Bugis Junction. There is thus scope for more synergistic values to be created through the integration of Iluma with Bugis Junction, with a combined NLA of more than 606,000 sq ft – about the size of Ion Orchard. The combined offerings of the integrated mall will further strengthen its overall attractiveness to shoppers. This bundling approach is similar to what CMT has initiated for Plaza Singapura and the Atrium@Orchard at the moment.
Maintain BUY; fair value estimate of S$2.00. Turnarounds are often difficult to execute and we believe this is likely the case here, at least in the short-term. Without further capex for redevelopment works, it is unlikely that significant rental escalation can happen soon. A gestation period is inevitable and we estimate that it may take till 2014 before occupancyrates and average rents can match those of Bugis Junction. As such, our fair value estimate edged up marginally to S$2.00; maintain BUY.