Month: March 2011
Industrial REITs – OCBC
Sanguine outlook; maintain OVERWEIGHT
Increasing rentals. Singapore’s industrial property market closed the year on a positive note, with 4Q10 rental values experiencing their fastest pace of growth since recovery. According to Colliers International, average monthly gross rents of factories and warehouses rose by 4.1%-5.0% QoQ, the fastest pace of growth since their recovery a year ago. YoY, rentals grew by a healthy 8.1%-11.9%. There was also increased demand for business parks and high-specs industrial space. Companies that are not sensitive to CBD locations are increasingly looking at high-specs space as office alternatives because of rental savings as well as the narrowing gap in terms of offerings between the two spaces.
Acquisition spree continuing. In 4Q10, we also witnessed the acquisition spree continuing from early quarters, with the economy awash with liquidity and low interest rates. MLT acquired three more properties in Singapore at a total consideration of S$85.6m. A-REIT made its foray into Shanghai with the forward-purchase of a Jinqiao business space property at S$117.6m. AAREIT also completed its acquisition of 27 Penjuru Lane at S$161m and recently announced the acquisition of Northtech (S$72m) in Feb 2011. CIT completed its acquisition of 1 & 2 Changi North Street 2 and 511 & 513 Yishun Industrial Park A. These acquisitions were in line with the manufacturing sector growing at a brisk pace. Manufacturing output increased 10.5% YoY in Jan 2011, while PMI was 50.5-52.3 from Oct 2010-Feb 2011, which indicated an expanding manufacturing sector for the fifth straight month.
Singapore Land Acquisition Act. The last quarter also saw some REITs affected by SLA’s compulsory land acquisition for the construction of the Tuas West MRT extension and road works along PIE. CIT has three properties affected to varying degrees by the acquisition, which will be possessed by the government by Jan 2013, affecting 58,439 sqm (12.8% of portfolio) of total land area. Sabana REIT’s property at 1 Tuas Avenue 4 is also affected, with 691.7sqm (5.04% of total land area of property) to be possessed by the government by 25 Nov 2011. Both REITs are entitled to receive compensation based on the market value of the acquired land.
Sanguine Outlook. The outlook for industrial segment remains sanguine on the back of strong economic fundamentals, as well as the government’s continued commitment to stimulate growth in the manufacturing sector. Demand for high-specs space is expected to trend upwards as companies move up the value chain from manufacturing and assembly activities to innovation-related development works. At 1.04x P/B versus a historical P/B of 1.10x, valuations remain compelling. Maintain OVERWEIGHT for the industrial-REITs subsector.
PCRT – BT
Perennial trust may cut IPO size in deferred listing
It cites volatile market, HPH Trust offering as reasons for shelving IPO
PERENNIAL China Retail Trust (PCRT), which on Saturday announced the deferment of its proposed initial public offering, is looking to cut the amount of equity to raise.
‘We are tweaking the deal to adapt to the current market conditions and hope to bring the deal to the market soonest possible,’ said Pua Seck Guan, CEO of the trustee-manager Perennial China Retail Trust Management, which is a wholly-owned subsidiary of Perennial Real Estate.
Mr Pua spoke to BT yesterday, a day after PCRT said it was shelving plans for an IPO. The business trust was expected to raise some $1.1 billion in gross proceeds, by issuing units at an indicative price of $1 each.
PCRT cited volatile global market conditions as a reason behind the move. The local stock market has been on shaky ground of late, pressured by political crisis in the Middle East and a reversal of funds from emerging to developed markets.
‘We started to plan the offering at the end of last year, but the market in the last two months has changed so much,’ Mr Pua said. ‘We have also bumped into the big offering of Hutchison Port Holdings Trust (HPH Trust).’
HPH Trust could raise as much as US$4.91 billion to US$5.83 billion in its proposed listing, potentially setting a new IPO record in Singapore. It issued its preliminary prospectus just days after PCRT did so.
PCRT had attracted a fair amount of interest, and managed to secure a cornerstone tranche amounting to 39.2 per cent of the proposed size of the IPO. CB Richard Ellis Global Real Estate Securities, Henderson Global Investors and Lion Global Investors were some of the participants.
The trust secured ‘strong cornerstones’ which ‘indicated that they will stay in the deal for the re-launch’, Mr Pua said.
Nevertheless, PCRT could be making some changes to its listing to draw more demand. It might raise less equity, meaning that the offer price could be less than $1 per unit.
‘At the moment for example, we have close to nil leverage. We can therefore explore taking on a bit of leverage to make the size of the equity fund-raising smaller,’ Mr Pua said.
PCRT’s aggregate leverage was to be 1.8 per cent post-listing, after paying down part of a loan. According to its preliminary prospectus, it has voluntarily adopted an aggregate leverage limit of 60 per cent.
PCRT was to start off with an initial portfolio size of $1.1 billion with four properties in China, and there was to be another $3 billion worth of assets in the pipeline. ‘We want to assure that our stock will do well post-listing,’ Mr Pua said.
A number of market watchers BT spoke to were surprised by news of PCRT’s deferred listing. But a banker reckoned that the trust’s projected distribution yields – lower than HPH Trust’s – could have affected investors’ interest.
‘We are a growth story, we are not a yield story,’ Mr Pua said in response to this suggestion. ‘We offer good total returns to investors.’
HPH Trust – BT
Hutchison port units’ sale here from March 7
HUTCHISON Whampoa Ltd will start the Singapore public offering of its Chinese port-asset trust on March 7 and close it at 10am local time on March 14, according to a filing with the Hong Kong stock exchange yesterday.
The Hong Kong preferential offering will start on March 7 and end at 4.30pm on March 11, Hutchison said.
The port units will start trading in Singapore on March 18. The company is offering up to 3.9 billion units at 91 cents to US$1.08 each. — Bloomberg
CDL H-Trust – CIMB
Increasing Singapore exposure
Proposes to buy Studio M for S$154m
Maintain Neutral and target price of S$2.14. CDLHT has entered into a conditional sale and purchase agreement with Republic Iconic Hotel (wholly-owned by its sponsor, M&C Hotels) to acquire the 360-room Studio M hotel in Robertson Quay for S$154m or S$428,000/key. The hotel will also be master-leased to the sponsor for 20 years on a fixed plus variable structure, for a guaranteed initial net yield of 6%, above CDLHT’s FY10 dividend yield of 5.2%. We are positive on this long-anticipated accretive deal. We fine-tune our estimates with no material changes to our DPU estimates or DDM target price (discount rate 8.6%). Despite our positive view, expectations have been priced in, we believe, and upside remains limited in the short term. Re-rating catalysts could include announcements of accretive acquisitions and stronger-than-anticipated REVPAR growth in 2011.
REVPAR of S$155. Studio M is a contemporary hotel comprising two wings with 360 rooms. Completed in mid-2010, it is located at 3 Nanson Road, in the Robertson Quay entertainment precinct. The hotel is a short distance from the CBD and close to other portfolio hotels including Grand Waterfront Copthorne and Copthorne Kings in the Havelock Road area, the stronghold of the sponsor. Occupancy is high at 88.9% with average room rates of S$174 in the six months of operation from Jun to Dec 10. This represents REVPAR of S$155/day. Room revenue contributed more than 90% to hotel revenue.
Lease structure improved to capture REVPAR upside. Studio M will come with: 1) a fixed rent component, set at S$5m for the first 10 years and adjusted every 10 years; and 2) a variable component comprising 30% of revenue and 20% of gross operating profit less fixed rent. With more than 90% of hotel revenue from rooms, this lease structure will position CDLHT for capturing REVPAR upside.
Sweetener 1: fixed rent escalation every 10 years; downside protected. The fixed rent of S$5m for 10 years will be adjusted higher every 10 years to an equivalent to 50% of the average annual aggregate fixed rent and variable rent for the five fiscal years preceding the rent revision date. However, if this amount is lower than prevailing fixed rents, the fixed rent for the next 10 years will be unchanged.
Sweetener 2: safety net of guaranteed rent. For the first 12 months of the master lease, CDLHT will receive a minimum rent (net of property taxes and insurance premiums payable by the H-REIT trustee under the master lease agreement) of S$9.24m, which represents a net yield of 6%, based on the purchase consideration of S$154m. The minimum rent was derived out of the actual operational performance of the hotel in the last six months.
Sweetener 3: master lease could be extended up to 70 years. Studio M will be master-leased to the sponsor for 20 years, with a renewal option for two terms of 20 years each, and a third term of 10 years. The total lease thus could extend to 70 years, the longest for any SREIT lease. This represents considerable income stability for CDHLT.
Fully funded by debt; gearing to reach 26.5%. The manager intends to fund the acquisition by drawing down its S$1bn MTN programme. Cost of debt is expected to be about 2%. The manager expects asset leverage to rise to 26.5% from 20.4%. This leverage would still be low against the average SREIT average of 33%. Acquisition fees payable to the manager will be paid in units.
EGM required by end-April. As this is a related-party transaction, unitholders’ approval would be needed in an EGM by end-April. We anticipate deal completion by June.
Valuation and recommendation
Positive on the deal. We estimate FY11 DPU accretion of 4.2%. We believe that average room rates would trend up further over the next three years given that occupancy at 88.9% is already above technically full levels, and room revenue constitutes more than 90% of the hotel’s revenue. With this acquisition, CDLHT’s total fixed rent component will increase 8% to S$66.2m or about 47% of our FY11 revenue forecast. This represents considerable downside protection for a REIT positioned with the biggest upside in this hospitality upcycle. With this acquisition, CDLHT’s exposure to Singapore would increase, with a 15% addition to its Singapore hotel rooms to 2,711.
Maintain Neutral and target price of S$2.14. We earlier expected CDLHT to make an acquisition of S$150m at 6% net yields. We fine-tune our estimates, factoring in the lease structure. Changes to our DPU estimates are not material and our DDM target price remains S$2.14 (discount rate 8.6%). Although the manager has not disappointed us with this acquisition, given the keen competition for hotel assets in the past 12 months, expectations of Studio M have been priced in, we believe, and upside remains limited in the short term. Re-rating catalysts could include announcements of accretive acquisitions and stronger-than-anticipated REVPAR growth in 2011.
CDL H-Trust – DBSV
M-plifying growth
• Studio M hotel acquisition is attractive; initial yield of 6.1% has more upside
• Singapore exposure deepens; contributes 82% of forward earnings
• BUY, TP S$2.30 maintained
Buying Studio M Hotel for S$154m. CDL Hospitality Trust (“CDL HT”) is acquiring the 360-room Studio M hotel for S$154m or $428k/key. The hotel comes with a master 20 years lease, renewable for 70 years. The revenue sharing lease structure is pegged at 30% of hotel revenues + 20% of gross operating profit, with earnings downside protected through a fixed rent component amounting to S$5m. The vendor has guaranteed net rent of S$9.24m (c6.1% initial yield) for the first 12 months of operations under CDL HT.
Attractive deal to strengthen Singapore’s portfolio. This acquisition is considered attractive with an initial yield of 6.1%, above its implied yield of 5.85% and we believe there are avenues for further growth. Studio M’s average room rate of S$174/night is lower than industry average and we see more upside in 2011 backed by a sustained high occupancy of 88.9%. Its Singapore portfolio, which contributes a lion 82% share of topline, will continue to be the main driver of organic growth over the next 2 years.
Tweaked earnings, gearing is still low at 26%. Given the trust’s low gearing level of 20%, this acquisition will be debt-funded at an estimated cost of c3%. Gearing will head up to 26% post-acquisition, but still below management’s longer-term optimal level of 30-35%.
Maintain BUY and DDM-based TP of S$2.30. With Studio M hotel, CDL HT will further consolidate its pole position as Singapore’s largest hotel owner (c6% of Singapore room inventory) and continue to be the prime leverage on the robust tourism outlook in Singapore. CDL HT currently offers a yield of 6.1-6.8%.