Month: July 2011
SREITs – DBSV
Sustainable growth
• High yield spreads and a strong S$ continue to attract investors to S-REITs
• MCT, FCT, MLT expected to deliver strong earnings growth in coming quarters
• Relative value in smaller cap REITs like Cache and FCOT
S-REITs outperformed benchmarks but still offer an attractive 350 bps over long bonds. Having outperformed the FSSTI and developers by 3% and 13% respectively YTD, S-REITs currently offer a weighted average yield of 5.9%, which remains an attractive c350bps over the long-term government bond. The current high yield spread and a strong S$ will continue to sustain investor interests in S-REITs.
Looking for “positive earnings surprises”. As we approach the upcoming second reporting quarter for 2011, we believe that earnings growth sustainability will remain a key focus. We remain positive that Hospitality S-REITs should continue to deliver strong results, judging by latest statistics posted by the Singapore Tourism Board, but we believe that street has already priced in strong growth expectations. Retail REITs are expected to see positive rental reversions going forward supported by the current positive consumer sentiment. FCT (BUY, TP S$1.73) is expected to deliver a good set of numbers in the coming quarters, as reconstruction works at Causeway Point have passed the most crucial stage, with committed occupancy at over 99%. In addition, the impending purchase of Bedok mall will act as a re-rating catalyst for the stock. MCT (BUY, TP S$1.05) should also see strong reversionary rental growth of c10% in the coming quarters, coming off from a first renewal cycle at its Vivo city retail mall.
Acquisition-driven growth. S-REITs have collectively acquired cS$1.9bn of assets YTD, which should start contributing to earnings in the coming quarters. After two months of relatively flattish DPU, we believe MLT (BUY, TP S$1.07) is poised to deliver a strong uptick in earnings momentum, boosted by recently completed acquisitions.
Value proposition in smaller cap S-REITs. We see relative value amongst certain smaller cap S-REITs. Cache ( BUY , TP S$1.11), which currently offers a yield of over 8.0%, is attractive, backed by transparent earnings structure and armed with a low leverage of 26%, has the headroom to acquire further. FCOT (BUY, TP S$1.05), at a P/BV of 0.6x, is unjustified in our view, given the yield enhancing steps taken by management and plans to re-finance its expiring loans should result in future interest savings.
A-REIT – CIMB
Further enlarging business-park presence
Acquires Nordic European Centre for S$121.6m
Moderate DPU accretion. AREIT has acquired Nordic European Centre, its sixth property in the International Business Park (IBP) for S$121.6m. This translates to S$512 psf NLA and an initial yield of slightly above 6%, a slight premium to yields for its current portfolio. We are neutral on the acquisition with the improvement in its asset quality overshadowed by the small accretion and a slightly high acquisition price. Nevertheless, we recognise benefits through an expansion of AREIT’s leading market share in the business-park space, strong leasing and renewal expectations (with its proximity to the Jurong Lake District) and operational efficiencies (as AREIT’s sixth asset in IBP). We factor in the acquisition and adjust our FY12-13 DPU estimates by – 0.6% to +0.6% and our DDM target price to S$2.18 (from S$2.17) (discount rate 8.2%). We continue to like AREIT for its quality management and asset portfolio and see catalysts from higher-than-expected occupancy and rentals and accretive acquisitions.
The news
AREIT has acquired Nordic European Centre, its sixth property in IBP for S$121.6m from a fund managed by Alpha Investment Partners Ltd. This works out to S$398 psf GFA and S$512 psf NLA. The pro-forma annualised financial effect is estimated by management at 0.02 Sct (0.2% of FY12 DPU), assuming 40:60 debt:equity funding. After the acquisition, business and science parks will account for 39% of its portfolio (by asset value) from 37%. The acquisition will also bring in more quality tenants such as Merck Pte Ltd, Evonik Degussa (SEA) Pte Ltd and Thyseenkrupp Mannex Asia Pte Ltd.
Comments
Initial yield estimated at slightly above 6%. Pegging the property to rentals for its business-park assets, we estimate an initial yield of 6.2-6.3%, slightly below the NPI yield of 6.5% for its overall portfolio. At S$512 psf NLA, the acquisition is also priced at a 15% premium to AREIT’s business-park valuation of S$443 psf as at end-Mar 11. We believe AREIT paid the slight premium as it wants to expand its leading market share in the business-park space further and on expectations of strong leasing and renewals and operational efficiencies.
Expectations of strong leasing and operational efficiencies. The asset is located in the Jurong Lake District, which will be developed into a major commercial and leisure hub. This could allow AREIT to ride rental upside as the hub develops. Notwithstanding a lower occupancy of 83% currently, we do not foresee difficulty in leasing out the remaining space in view of its quality specifications. As AREIT’s sixth asset in the IBP, AREIT is also likely to extract operational efficiencies and cost savings with economies of scale in managing its assets.
Accretion could be enhanced by debt funding. Notwithstanding management’s plans to redeploy the net proceeds from its previous placement (previously to fund development and AEI projects in Shanghai and Singapore) for this acquisition, we expect management to draw down its borrowings eventually for development and AEI projects with its current low gearing of 32-33%. We have thus factored in full debt funding. There could be upside to management’s annualised DPU accretion of 0.02 Sct from this acquisition in view of current low interest rates.
Valuation and recommendation
Moderate DPU accretion on full-year contribution in FY13. Overall, we are neutral on the acquisition. We adjust our FY12/13 DPU forecasts by -0.6% to +0.6%, assuming full debt funding. Accordingly, our target price rises to S$2.18 (discount rate: 8.2%) from S$2.17. We continue to like AREIT for its quality management and asset portfolio. We see catalysts from higher-than-expected occupancy and rentals and accretive acquisitions.
FirstREIT – BT
First Reit buys Korean hospital
FIRST Real Estate Investment Trust (Reit) has purchased South Korea’s Sarang Hospital for US$13 million.
Sarang Hospital – said to be one of the largest rehabilitative and nursing facilities in Yeosu – is a six-storey hospital with one basement accommodating 217 beds. Yeosu is the city that will host the World Expo next year.
The hospital boasts a gross floor area of nearly 5,000 square metres on a total freehold land area of 2,142 sq m.
The acquisition, funded entirely by a bank loan, is expected to be completed by next month.
Upon completion, the master lease agreement for Sarang Hospital will start for a 10-year lease term, with an option to renew for a further term of 10 years.
According to First Reit, Sarang Hospital has an initial net property yield in excess of 9 per cent and its annual rental income is expected to climb 2 per cent annually.
After the acquisition, First Reit’s total asset size is expected to grow to S$602.6 million, and its gearing to increase 16.4 per cent before transaction costs.
‘The quality of healthcare in South Korea is among the highest in Asia, supported by top-notch medical professionals, facilities and technology,’ said Ronnie Tan, CEO of Bowsprit Capital Corporation Ltd, manager of First Reit. ‘Operating in such an environment, Sarang Hospital provides a very niche service in rehabilitative care and enjoys a high occupancy rate throughout the year.’
First Reit also saw the opening of its Mochtar Riady Comprehensive Cancer Centre (MRCCC) in Indonesia yesterday.
Located in the heart of Central Jakarta, the 29-storey MRCCC is said to be the first of such facilities in Indonesia that specialises in cancer diagnostics and treatment.
Moving forward, the healthcare real estate investment trust plans to expand its portfolio size to S$1 billion in the next 2-3 years as it seeks out yield-accretive assets throughout the Asia Pacific region.
The company’s shares rose one cent to close at 80.5 Singapore cents yesterday.
A-REIT – DBSV
Ascendas REIT acquires Nordic European Centre at International Business Park for S$121.5m
In the News
Ascendas REIT announced the acquisition of Nordic European Centre – a 7 Storey business park building located in International Business Park within the Jurong Lake District masterplan. The property has a total GFA
of 28,378 sqm (NLA of 22,066 sqm) and located in close proximity to Ayer Rajah Expressway. This is the 6th property within the International Business Park that AREIT owns, which empowers the landlord with
significant presence to extract possible operational efficiencies. In addition, the acquisition will bring in quality MNCs tenants like Merck Pte Ltd, Evonik Degussa (SEA) Pte Ltd and Thyseenkrupp Mannex Asia
Pte Ltd. The building was previously owned by a fund managed by Alpha Investment Partners Limited since July 2006.
The purchase consideration is S$121.5m representing a price/GFA of S$398 psf.
Our thoughts:
(1) Initial yield is estimated to be c6.0%; accretive to earnings. This compares favorably against the current NPI yield of c.5.9% on its portfolio of Business Parks assets, based on latest valuation and reported numbers
by the REIT. Current occupancy level of 83% also offers opportunity for further earnings upside going forward. We note that this acquisition will be funded through proceeds of recent placement/debt and will be accretive
to DPU. However, the acquisition is relatively small in comparison to its portfolio, and DPU is estimated to increase by only c 0.02 Scts or <1%.
(2) debunks “excess capital theory” in the street; acquisition within our estimates. With this acquisition, Ascendas REIT deploys a major part of its “excess capital” that was raised in previous placement exercise.
We understand that the manager will continue to hunt for assets in Singapore and could possibly tie up a couple of other opportunities over the coming quarters. We have assumed S$200m worth of acquisitions in our numbers for FY12.
We maintain our TP and Call.
MIT – DBSV
Looking for synergies and benefits
• Creating synergies from latest acquisition from JTC
• “Strategic Premium” paid for exclusive assets
• BUY maintained, DCF-based TP S$1.21
Creating synergies from latest acquisition from JTC. Mapletree Industrial Trust (“MINT”) has been awarded tranche 2 of the latest JTC tender exercise of 11 properties (8 flatted factories and 3 amenity centers) of over 2.1m sqft, increasing its total portfolio size by 18% to S$2.6bn. A key advantage is the ability for MINT to create operational efficiencies given its leadership & experience in managing the flatted factory space. MINT is expected to extract the embedded earnings growth from this target portfolio through (i) improving current occupancy level, which is at c95%; (ii) higher rents as the current passing rent is more than 30% below JTC’s latest posted rents as at 1st July’11; and (iii) asset enhancement works on certain assets to improve efficiency and/or GFA. This implies further earnings upside in the coming years when these expiring leases are renewed.
“Strategic Premium” paid for exclusive assets. While we like the attributes of this target portfolio, we believe that the purchase consideration of S$400.3m, translating to an initial yield of 5.0%, appears to have factored in a fair amount of forward growth in our view. We have raised our earnings to account for the contribution from this portfolio, assuming rental reversions of 15% in FY12-13 and 5% thereafter for the new portfolio, funded by a 40-60% debt-equity scenario, keeping gearing at 36.5%.
Longer term benefits, BUY, TP maintained at S$1.21. We believe that synergies from an enlarged portfolio will flow through in the longer term. In addition, we have not factored in any potential enhancement works that would be yield accretive.