Month: June 2011
ART – DBSV
Journey to the West
• It is all about location – a visit to Ascott REIT’s prime properties in Paris/London
• Tapping the low hanging fruits, planned refurbishment to underpin earnings growth
• Maintain BUY and S$1.38 TP
It’s all about location. In our recent site visit to selected Ascott REIT’s serviced residences (or “apart’ hotels”) in Paris/London, we note a distinct feature – properties are strategically positioned in key business districts or major tourist attractions in London and Paris with good access to public transportation (most properties are within walking distance to the Metro in Paris and The Tube in London). Hence, these apart’ hotels attract a sustainable flow of guests – we understand that the Paris/London properties enjoy a healthy annual occupancy rate of between 75-85%.
Upgrading works at selected properties to underpin stronger operational performance. Ascott REIT has embarked on a refurbishment exercise for its European portfolio. We visited selected properties in Paris/London, which are currently undergoing renovation. We understand that Ascott REIT will be able to fetch average room rates in excess of 20% higher when the newly renovated rooms are re-opened, impressive given the competitive landscape in London/Paris. The manager targets an average payback period of 4-5 years on renovation capex spent in London.
DPU Growth of 8% expected. We project Ascott REIT to deliver a DPU growth of 8% in 2011, one of the strongest amongst its SREIT peers. Growth is expected to continue to be driven from a turnaround in its Asian operations, led by Singapore (contributing c19% of EBITDA in 2011) while London properties (29% of European EBITDA, 12% of EBITDA on a portfolio basis) are poised to be the strongest performer after its planned refurbishment exercise towards the run-up of the London Olympics in 2012, on top of a projected +2% adjustment in master leases in FY11.
BUY, DCF-based TP of S$1.38 maintained. Ascott REIT continues to offer an attractive above sector average FY11-12F yield of c7.0%-7.1%, which is unwarranted in our view, given its capable management track record, sponsor links and a portfolio of largely freehold properties. There is potential for further earnings upside if the manager executes on acquisitions.
CMT – OCBC
Acquisition of the Jurong Gateway site
$S969m tender award. CapitaMall Trust (CMT) has been successfully awarded the Jurong Gateway site, located at Boon Lay Way by URA on 30 May at a tender price of S$969m (S$1,1012 psf ppr). This was a joint tender by CMT, CMA and CapitaLand, of which CMT has a 30% stake in the JV. The total development cost is expected to be about S$1.5b (S$1,566 psf ppr).The land parcel has a prime location next to both Jurong East MRT station and Jurong East bus interchange. Jurong is slated to be the largest regional centre in Singapore for commercial developments outside the city centre (under URA’s Jurong Lake District Masterplan). Jurong Gateway is about 2.5 times the size of Tampines Regional Centre.
“3-in-1” Mega Mall in Jurong. CMT will be building a 25- storey retail-cum-office property at the new site, adjacent to another upcoming Lend Lease office/retail building, scheduled for completion in 2014. With two other CMT malls in the vicinity (IMM and JCube), CMT’s selling proposition is to create a “3-in-1” mega mall in Jurong, offering 1m sqft of retail NLA within three minutes’ drive from each other in Singapore’s soon-tobe largest regional hub. CMT intends to finance the development by internal funds and debt.
Downgrade to HOLD on valuation grounds. We have factored in contributions from both the retail mall and office building into our valuation, commencing on Dec 2013 and Jun 2014 respectively. Our total development costs for CMT works out to about S$469m, which accounts for 5.8% of CMT’s total assets as of 31 Mar (within the property fund guideline of 10% development cap). CMT has guided that it is targeting rentals of S$16-S$18 psf pm and S$7-S$8 psf pm for the retail and office segments respectively, with an initial yield-on-cost of 6%. According to our model, these targets are fairly tight and require somewhat vigorous occupancy rates in the first year to attain the desired 6% yield. In addition, unlike the Tampines Regional Centre, which is hailed as the “financial hub in the east”, the Jurong precinct does not have a strong financial institution catchment base. We therefore remain wary of (1) the office take-up in that area, with the nearby International Business Park, JTC summit and iHub buildings offering cheaper alternatives and (2) “retail tenants’ fatigue” among the four malls within a 500m radius from the MRT station. Moreover, CMT’s share price has appreciated 6.5% since our last report dated 21 Apr. Downgrade to HOLD on valuation grounds with an increased fair value of S$2.05 (prev: S$2.02). We will turn buyers at S$1.93.
PCRT – TODAY
Perennial on fast track
Singapore’s next big listing, Perennial China Retail Trust (PCRT), is hopping on board the transportation phenomenon that is sweeping over China. Plans for developments in high-speed rail are already underway across the country, such as the line between Beijing and Shanghai which cuts travel time in half.
PCRT may not be involved in the development of such tier one city stations but it does have second-tier cities in its sights.
The initial portfolio of the trust includes retail space connected to metro stations. The trust has also secured the option to invest in a pipeline of commercial development sites which are directly connected to high-speed railway stations in Chengdu and Xi’an. And with some 400,000 passengers expected to flow through Chengdu East Railway Station when it is completed, it is easy to see where the attraction and potential is for the retail developer and its partners.
Mr Pua Seck Guan, CEO of the Trustee Manager for PCRT, says that in an increasingly competitive environment, customer catchment is key, “I think it must be within the population catchment, well served by the transportation network, i.e. roads, MRT. I think these are very important because more than 60 per cent, 70 per cent of our customers come from means of transportation other than cars, so transportation network is very important.”
Mr Pua adds that he is already in discussions with other cities to develop retail and transportation models similar to PCRT’s current projects.
Industry players say that retail rentals in strategically located malls in Shenyang and Chengdu could climb at a pace of 10 to 15 per cent annually for the next eight years.
The bustling transportation hubs have also had an impact on the surrounding residential prices. For example, some experts note that residential property prices have doubled in value in the last two years in select areas surrounding new transportation infrastructure on the back of anticipated economic progression.
But while rental prices may be moving up at a rate akin to the high-speed transport they link too, market watchers say the verdict is not yet out on PCRT’s offerings. PCRT says yield for forecast year 2011 will come in at 5.30 per cent and 5.51 per cent for next year.
However, Mr Gabriel Yap, executive chairman at GCP Global, says: “The offer yields are even below 6.8 per cent yield of CapitaRetail China Trust, whose assets are in relatively better located areas in first and second tier cities in China.”
PCRT plans to raise S$776.2 million in gross proceeds from what is set to be the third-largest initial public offering in Singapore this year, behind Hutchison Port Holdings Trust and Mapletree Commercial Trust.
Funds will be raised from the offer and the issuance of sponsor units, as well as cornerstone units at 70 cents each. The business trust is offering about 564 million units and is expected to start trading on the SGX on June 9.
FSL – BT
FSLT buys product tanker in sale-and-leaseback deal
This will raise the trust’s portfolio size to 24 vessels
FIRST Ship Lease Trust (FSLT) is buying a product tanker for US$46 million and leasing it out on a seven-year bareboat charter.
The Long Range II (LR2) product tanker – FSLT’s first – will be bought from Torm Singapore Pte Ltd, a wholly owned subsidiary of Torm A/S, and leased back to Torm Singapore. The vessel is expected to be delivered within this month.
‘The bareboat charter agreement is structured with recourse to Torm and contains a purchase option at the expiry of the base lease term, an early buy-out option on or after the fifth anniversary of the lease term, as well as three extension options of one year each,’ FSLT’s trustee manager said in a statement on Wednesday night.
The purchase of the vessel will be fully financed by the drawdown of US$23 million from the trust’s existing revolving credit facility and the utilisation of US$23 million from the previous equity issue in September 2009, which raised net proceeds of US$28.3 million.
After funding this transaction, the trust’s total projected outstanding secured debt as at July 1, 2011, will be about US$460 million.
This deal will be immediately cash flow accretive to the trust and will increase its total remaining contracted revenue to US$602 million, excluding extension options.
‘We believe that the growing demand for alternative shipping finance such as ship leasing will present a healthy pipeline of transaction opportunities that we are well-positioned to take advantage of,’ said Vijay Kamath, senior vice-president and head of sales of First Ship Lease Trust Management.
‘While we now have the flexibility to take on both time and bareboat charters with terms shorter than seven years, our ship leasing business will remain ‘long-biased’.’
The average remaining lease term of the trust’s portfolio remains at the current 6.8 years.
The acquisition of the 109,672 deadweight ton product tanker – called the MT Torm Margrethe – will bring the trust’s portfolio size to 24 vessels. Including Torm, the trust will have eight lessees.
StarHill Global – CIMB
Attractive yields for well-heeled retail malls
• Attractive yields for well-heeled retail malls; initiate with Outperform. Starhill’s portfolio is dominated by high-end retail properties located in prime shopping districts in Singapore, Malaysia, China, Australia and Japan. We use DDM (discount rate 8.4%) to value Starhill and arrive at a target price of S$0.74. We believe its well located assets, master leases and low asset leverage offer income stability. FY11 DPU yield of 6.7% is also the highest among retail REITs under our coverage. We see catalysts from higher rental revisions, asset-enhancement initiatives and accretive acquisitions.
• Master leases for income stability. While exposure to discretionary spending (in high-end retail malls) typically increases volatility, we expect master and long leases, which anchor about 44% of our FY11 revenue forecast, to mitigate these volatilities. Master and long leases on its overseas assets, likewise provide income stability as the REIT ventures overseas for growth.
• Growth catalysts. Its Toshin and David Jones master leases will be up for reviews in FY11. With both properties substantially under-rented, we see room for upward rental revisions. Management has also announced asset-enhancement plans for Wisma Atria, which should drive rental growth on completion. Meanwhile, low asset leverage at 30% leaves room for acquisitions without the need for substantial equity fund-raising.