Month: June 2011
MLT – BT
MapletreeLog prefers natural hedging
GIVEN the strength of the Singapore dollar, investors of Mapletree Logistics Trust (MLT) were keen to know more about its currency hedging policy, says Citigroup after hosting MLT on a non-deal road show in Europe.
‘Natural hedging remains its (MLT’s) preferred hedging strategy with local currency loans set up to offset currency fluctuations,’ commented Wendy Koh from Citigroup.
Ms Koh added that MLT has also hedged its exposure to the Hong Kong dollar, Japanese yen, Malaysian ringgit, and Korean won, resulting in 89 per cent of its amount distributable being hedged for FY2011. Other aspects that drew investors’ attention also included the impact of Japan’s recent earthquake on MLT assets.
Notably, only one of MLT’s 15 properties in Japan was damaged by the earthquake. With regard to the costs required to rectify the damaged property, the logistics real estate investment trust (Reit) guided that it should come in at about $3 million as opposed to the $9 million previously estimated.
On a more macro level, things have been looking good for the Reit as demand for logistics space has been robust, especially in Singapore and Hong Kong as occupancy rates improve.
In addition, rental reversions came in higher, up 5 per cent versus one to 2 per cent in the past.
With regard to future plans, MLT highlighted that it intends to adopt an acquisition strategy to focus on yield optimisation and growth. To jump-start this strategy, MLT’s lower yield assets are being divested to fund acquisitions of properties which generate higher returns.
Asset enhancement initiatives also seem to be on MLT’s cards as management continues to evaluate and identify properties for such purposes.
Citigroup currently has a ‘buy’ recommendation on MLT with a target price of $1.00. Yesterday the stock closed one cent higher at 91 cents.
Starhill Global – DBSV
Store of opportunities
• 0.7x P/NAV ratio is attractive vs commercial peers
• Multi-prong growth: organic expansion, asset enhancement exercises and acquisitions
• Maintain BUY and S$0.73 TP
More value in store. We are retaining our Buy call for SGReit following updates from management and the HK NDR. SGReit’s unique value proposition lies in its prime retail offering and niche office exposure along the Orchard Rd belt. FY11-12F yields of 6.9%-7.3% imply attractive 280bps spread over the risk free rate, backed by the top class commercial assets in town and a reputable sponsor. There is good earnings visibility going forward, led by organic growth potential and proactive asset enhancements. At current valuations of 0.7x P/book NAV vs its commercial peers’ 0.8–1.3x, valuations are attractive. At S$0.73 target price, the stock offers 23% total return.
Stronger organic growth. Earnings growth will be driven by (i) positive rental renewals from two master tenants, Toshin and David Jones, which contribute a quarter of its portfolio revenue. Toshin’s lease reversions are capped at 25% above preceding levels, but we conservatively imputed only 10% despite 20% adjustment in the last cycle. For David Jones, we expect 6%-8% rental hike; (ii) robust outlook for Singapore’s commercial industries along with stronger tourist arrivals, which should have a knock on effect on portfolio performance; and (iii) proactive asset management exercises e.g. reviewing tenancy mix at Wisma Atria, to enhance shoppers’ experience and footfall.
Optimising yields, growing portfolio. SGReit will spend c.S$41m to create more prime space at Wisma Atria and Starhill Gallery, and is targeting 7-8% IRR within the next few quarters. Despite the small impact, we are encouraged by its efforts to create more value for unitholders. Gearing remains low at 30% with no refinancing requirements this year, placing it in good position to make acquisitions.
A-REIT – OCBC
Awarded site at Fusionopolis
Award of the Fusionpolis site. A-REIT announced on 8 Jun that it has been awarded the Fusionopolis site by JTC for S$110m, which will be developed into a modern suburban business space facility. The public tender for the 6,253 sqm site at Fusionopolis Link by industrial landlord JTC Corp was launched on 28 Feb and closed on 20 May. The site, which lies within the 200-hectare one-north development housing research facilities and business parks, has a 60-year land lease and is on the confirmed list of the government’s industrial land sales programme for 1H11. It has a maximum plot ratio of four and can be developed up to 160 metres above sea level.
Development Plans. A-REIT will develop a suburban business facility of 25,000 sqm GFA comprising 60% business park space and 40% office space1 to cater to prospective tenants in the ICT and media industries as well as R&D activities in physical science and engineering. The expected completion date is 3Q2013. The strategic location of the site will also reinforce A-REIT’s presence and market share within the business & science parks segment while achieving economics of scale in operations. This 6,253-sqm site is located within walking distance to the one-north MRT station which is expected to be operational in 4Q2011 and easily accessible via the AYE. A-REIT believes that this development will provide unitholders with potentially greater returns compared to outright acquisitions of income-producing properties. It will also improve the NAV of its portfolio as A-REIT will receive any benefit of unrealised valuation gain from the development of the site.
Maintain BUY. We have factored in contributions from the new site into our valuation. Our assumptions place the total development costs, financed entirely by debt, at S$178.8m (S$665 psf ppr), with a modest initial NPI yield-on-cost of 7% and 6.5% for the business park and office segments respectively. This is slightly above A-REIT’s existing NPI yield of 6.46% in FY2010/2011. Nonetheless, we remain skeptical of the clear differentiation between the two segments, and presume A-REIT will probably market the business park segment with a more R&D slant. We expect rental income to be streaming in from Oct 2013 onwards. Our RNAV-derived fair value increased from S$2.04 to S$2.08. Maintain HOLD.
ART – OCBC
Potential headwinds may tamper growth
Global air travel softening. The IATA has recently revised its yearly profit outlook for the global airline industry with a 54% cut from US$8.6b three months ago to US$4.9b. This represents an almost 80% nose-dive from last year’s US$18b profit. Total passenger traffic is also expected to grow by just 4.4% this year compared to last year – slower than the 5.6% forecast three months ago. Asia Pacific is expected to be the most profitable while Africa is deemed the worst performer. Airlines also continued to be plagued by high taxes imposed by European governments and exorbitant charges imposed by some airports and service providers. We think ART’s hospitality growth, with its 43.2% and 10.7% exposure (asset values) in Europe and Japan respectively as of 31 Mar, may be tampered by the easing of air travellers ahead.
Euro Debt Woes. In Europe, business sentiments continue to be plagued by lingering debt crisis. Moody downgraded Greece credit rating from B1 to Caa1 (on par with Cuba). Italy and Belgium’s rating outlook were also cut from stable to negative by S&P. In UK and France where ART has the largest exposure in Europe (16.6% and 21% respectively), inflation and unemployment rates remain stubbornly high. The British recorded an inflation of 4.5% in Apr and unemployment of 7.7% for 1Q11. In France, inflation is 2.1% in Apr while unemployment is 9.7%, only slightly lower than the peak of 9.9% registered during the financial crisis. We noted that ART’s Citadines properties in France are on master leases and this provides some form of safeguards against deteriorating economic conditions. However, we remain wary of the prospects of ART’s properties in UK, Belgium and Spain, on the back of further fiscal tightening and rising inflationary pressures. The performance of the service residences industry has historically been correlated to GDP growth and FDI inflows, and the current state of affairs in UK, France, Belgium and Spain certainly suggests a less positive outlook.
Singapore’s prospects better. According to STB, international visitor arrivals reached 3.12m in 1Q11, representing a 15.7% YoY growth. RevPau also increased 15.7% YoY to S$191, on the back of robust performance in both room rates and occupancy rates. ART, with its largest asset exposure in Singapore (21.5%), looks poised to benefit from the uplift in its home country. Nonetheless, given ART’s exposure in Europe and Japan, its share price may face further secular headwinds in the form of weakening demand and continued inflationary worries. Maintain BUY albeit with a reduced fair value of S$1.30 (prev: S$1.34).
TCT – Phillip
Proactive asset management
•We visited commercial properties of TCT recently in Shanghai and Qingdao
•High quality of assets demonstrate capability of team in managing property
•Strong refurbishment and development pipeline, imply rental upside in future
•We have no rating on TCT
Background
Treasury China Trust (TCT) is a property owner, developer and manager with exposure purely in China commercial real estate market. Listed on SGX in June 2010, the trust is positioned as a ‘total return vehicle’ aims to increase shareholder value via both capital appreciation and income growth. These can be achieved by holding both income producing commercial real estate as well as development properties. Listed as a business trust also allows TCT to undertake higher component of development, up to 30% of total assets, compared to REIT. Currently the trust holds commercial property portfolio worth over RMB11.5bil (circa S$2.18bil).
Key takeaways
• Central Plaza is a showcase of TCT’s ability to carry out asset enhancement initiative to increase the assets rental and capital value. Current rental yield on cost improved from 5.5% to 6.7%.
• A sizable extension is being built to enlarge City Centre by ~50%. Higher rental reversion is expected when the current anchor tenant, Parkson, vacates the mall in 2012 as the existing rent is well below market rate. TCT has secured Marks & Spencer to be the next anchor.
• TCT is in the process of acquiring Huai Hai Mall, located in one of the high-end shopping precinct in Shanghai. Thorough refurbishment work is planned to reposition the status of the mall. We see great potential on this acquisition due to its prime locality.
• Out of Shanghai, TCT acquired Central Avenue Mall in Qingdao earlier this year with an attractive gross yield of 10% on the current operating mall, in addition to 3 adjoining land parcels to be developed into retail malls by 2015. The sites are situated in the centre of activities in the Laoshan District.
Investment merits
• Rental income upsides substantiate by the strong pipeline activities.
• Potential divestment of majority stake in Central Plaza allows redeployment of cash to other high-yielding investment opportunities.
• Expansion in Tier 2 and 3 cities, with the fast growing Xi’an is next in the line.
• Professional management team.
Key risks
• Interest rate hike and credit tightening are concerns to TCT as the Chinese government continues to curb runaway property price and inflation.
• Concentration risk is high with main exposure in Shanghai commercial market, and rental income is 70% derived from City Centre.
• Supply glut in Shanghai office sector may pose pressure on rental yield going forward.
Total Return Strategy
TCT’s total return strategy is to acquire, own, develop and manage commercial properties in China and thus diversify risks and income sources across the real estate spectrum.
Flexible investment vehicle
TCT is listed as a business trust featuring a more flexible capital and operating structure. Compared to conventional REIT, business trust has higher development cap of 30% of total asset value compared to 10% for REIT, and a self-imposed debt covenant of 45% gearing limit compared to 35% for REIT. The Manager has the discretion to make distribution from net distributable income as well as from realised and unrealised gains from asset enhancement of its properties. That aside, TCT is committed to distribute 80% of net rental income for the first 3 years compared to 90% compulsory distribution in REIT, which allows more funding capacity for future growth.