Month: July 2011
New Reit – Kim Eng
New REIT in the making – Another property stock enters the spotlight. A news report today revealed that private developer Far East Organization (FEO) is said to be planning to raise at least $500m through the listing of its hotel and serviced residence assets in a REIT as early as next year. What is interesting is that one of the assets to be spun off into the REIT is Orchard Parade Hotel, owned by FEO’s listed entity, Orchard Parade Holdings (OPH). In fact, in a statement last evening, OPH confirmed that it is in preliminary discussion with FEO over the injection of assets into the REIT. Other assets owned by OPH include Albert Court Village Hotel near the upcoming Rochor MRT Station, and Central Square Village Residences along Havelock Road. Both would fit the REIT’s profile well. A possible scenario is the privatisation of OPH before the formation of the REIT next year. This is because the hospitality assets are worth an estimated $500m collectively, and that already makes up 90% of OPH’s current market capitalisation. We had earlier identified Orchard Parade as a potential privatisation target on the premise that the stock trades at a large discount to book and has substantial shareholders with deep pockets.
CRCT – BT
CRCT’s Q2 DPU rises 3.9%; gross revenue up 10.9%
Trust observing market, doesn’t rule out pursuing a yuan-denominated dual listing
CONSUMERS in China are spending and CapitaRetail China Trust (CRCT) has ridden on that trend to post strong results for the second quarter ended June 30.
As more property groups eye yuan-denominated real estate investment trust (Reit) listings, CRCT does not rule out pursuing a yuan-denominated dual listing itself, although it is only watching the market for now, said chief executive officer of the trust’s manager Tony Tan.
Mr Tan was speaking at a briefing yesterday.
In Q2, CRCT posted a 10.9 per cent increase in gross revenue over the year to 161 million yuan (S$30.4 million), as occupancies and tenant sales at its malls rose.
Net property income went up by 11.3 per cent to 108.1 million yuan. Income for distribution – converted to Singapore dollars – was $13.5 million, up 11.5 per cent from the previous year.
Distribution per unit (DPU) for the quarter rose 3.9 per cent to 2.15 Singapore cents, and the annualised DPU also climbed 3.9 per cent to 8.62 Singapore cents.
The annualised distribution yield, based on CRCT’s closing unit price of $1.22 on June 30, was 7.1 per cent.
For the first half, CRCT’s income for distribution rose 2.7 per cent over the year to $26.9 million.
DPU for the period increased by 2.1 per cent to 4.3 Singapore cents.
CRCT is positive about China’s retail sector, notwithstanding talk of a hard landing in the country earlier.
It drew confidence from the rental reversion it has seen – of the 104 leases it renewed in Q2, the average rental increase over preceding rents was 17 per cent.
‘It takes a while to get the tenant and the shopper to understand our malls. Once you get that traction – you always have this inflection point – then a lot of people would be interested,’ Mr Tan said.
‘I think we are just beginning to reach that point for some of the malls,’ he added.
Of late, yuan-denominated Reit listings in Hong Kong have come under the spotlight.
Asked if CRCT would pursue a yuan-denominated dual listing, Mr Tan said that it is observing the market and has not ruled out this option.
Such a listing would make sense for CRCT because its cash flows are in yuan, he said.
But he added that careful consideration was needed.
One thing he noted: The performance of Hui Xian Reit – Hong Kong’s first yuan-denominated IPO – has not matched the initial hype surrounding the listing.
CRCT closed unchanged on the stock market yesterday at $1.23.
CCT – DBSV
A “sweetener” in place
• 2Q results inline with expectations, on better operational performance
• Market Street CP redevelopment plans firmed up, call option to purchase remaining stake granted
• Maintain BUY, TP S$1.59
Results in line with expectation. On a yoy basis, 2Q gross revenue and NPI declined by 9.6% and 5.9% to S$91m and S$69.8m respectively. However, performance remained relatively stable on a qoq basis. Meanwhile, portfolio occupancy dropped marginally to 97.7% affected by 6 Battery Road AEI. The trust also recorded a revaluation gain of S$153.4m (+2.8% yo-y). Stripping that off, 2Q DPU was at 1.92cents, making up 56% of our FY11 numbers or 52% of street estimates.
Operations gaining traction. The trust has another 7.5% of its office leases (in terms of gross revenue) up for renewals for 2H11. With the recovery in office rents, the spread between current and expiring leases is narrowing, indicating lower downside risk from negative rental reversion. Meanwhile, precommitments for 6 Battery Road AEI had risen with 74,400sf or 79% of the total upgraded space (93,700sf) taken up.
MSCP redevelopment to commence in Sept. Tenants in the carpark had vacated the building since June 2011. A Grade ‘A’ office building will be jointly developed by MSO Trust, which is held by CapitaLand (50%), CCT (40%) and Mitsubishi Estate Asia (10%). Total development cost is expected to be S$1.4 b. The site, currently held by CCT, will be acquired by MSO at S$56m which is 5.1% above its latest valuation. CCT is also granted a call option to buy the completed asset within 3 years after the TOP date at the prevailing market value or not lower than 6.3% pa CAGR on the estimated cost of return.
Maintain our buy call with an unchanged TP at $1.59. Balance sheet is strong with a gearing of 26.9%. The group has also just completed its refinancing exercise for the year and should be in a good financial position to undertake the MSCP project, which will start in Sept. Our TP at $1.59 offers 14% total return.
CCT – CIMB
DPU uplift from MSCP to come later
• Negative reversions for rest of 2011; maintain Underperform. 2Q11 results met expectations, at 25% of our FY11 forecast and consensus estimate. Despite a 15bp cap-rate compression for its Grade-A assets, operational indicators continued to decline with revenue down 9.2% yoy on negative rental reversions from 6BR and OGS. This trend is expected to persist in 2H11 with expiring leases locked in at peak levels in 2008. Plans for MSCP redevelopment have been finalised with CCT potentially gaining full stakes by 2015. However, the DPU uplift is also not expected until then. We raise our DDM-based target price by 7% to S$1.46 (8% discount rate) to account for this. Maintain Underperform on valuations (1x P/BV), with limited near-term catalysts in sight for organic growth in the next 6-12 months.
• Renewal rents in 2011 locked at peak levels. Cap rates for CCT’s Grade-A assets (Cap Tower and OGS) fell from 4.15% to 4%, resulting in a S$145m revaluation gain for 2Q11. Operationally though, gross revenue continued to trend down by 9.2% yoy, primarily from negative rental reversions for 6BR and OGS and lost rental income from earlier disposals. Debt headroom is ample for acquisition growth, but the likely lack of immediately DPU-accretive assets for purchase is evident given physical cap rates of 3-4%. 6BR which makes up 20% of CCT’s rental income, with average expiring rents this year locked in at a peak of S$15.4psf. We expect (so does CCT) negative rental reversions to persist in the remainder of 2011.
• Plans for MSCP redevelopment firmed, but uplift to come only in 2015. CCT has firmed up a 40:50:10 JV agreement with CapLand and Mitsubishi Estate Asia to redevelop MSCP into a Grade-A office tower. The development is expected to cost S$1.4bn (CCT’s share S$560m) and would be completed by 2015. CCT expects a yield on cost of 6% or S$12-14psf gross rents on completion, a level we think is achievable. More meaningful upside potentially could come from its call option to acquire the remaining stakes from its partners upon completion, at a minimum price that must yield a least a compounded return of 6.3% p.a. to the sellers. The option is valid for three years starting at the completion date, giving CCT the flexibility to optimise yield upside. For the MSCP redevelopment, execution will be its priority for now, with the DPU uplift coming much later in 2015.
CCT – BT
CCT posts drop in Q2 distributable income
Mitsubishi Estate Asia to take 10% stake in Market Street project
CAPITACOMMERCIAL Trust (CCT) yesterday said it posted lower Q2 and first-half distributable income compared with the same year-ago periods following the divestment of two office blocks in Singapore and negative rent reversions.
It also announced yesterday that Japan’s Mitsubishi Estate Asia will take a 10 per cent stake in its Market Street Car Park (MSCP) redevelopment project. CapitaLand will take a 50 per cent stake and CCT 40 per cent.
CCT has been granted a call option to acquire CapitaLand’s and Mitsubishi’s interest in MSO Trust – an unlisted special purpose sub-trust set up to undertake the $1.4 billion project – or the completed development. It may exercise the call option any time over a three-year period after the new office tower obtains Temporary Occupation Permit (TOP). The purchase will be at market valuation that must reflect at least a compounded return of 6.3 per cent per annum – CapitaLand’s estimated cost of capital – to the sellers.
CCT also gave details of the MSCP redevelopment. A sum of $672 million is payable to the state comprising mostly differential premium or DP (equal to 100 per cent of the enhancement in land value resulting from the change of use of the site from ‘transport facilities’ to ‘commercial’), and other land-related costs.
MSO Trust will buy MSCP, currently owned by CCT, for $56 million, which reflects a 5.1 per cent premium to the $53.3 million average of two independent valuations (by Jones Lang LaSalle and CB Richard Ellis) in May this year.
The valuations were done based on the residual value of MSCP to be redeveloped into an office building, taking into account the DP payable to the state.
MSCP’s valuation as a car park facility as at end-December 2010 was $48.6 million. Construction and professional fees are estimated at $550 million. The new project’s gross floor area (GFA) will be about 887,000 sq ft and its net lettable area 720,000 sq ft.
The project is slated for completion before end-2014, when no major Grade A CBD office supply is slated for completion.
The new project can have about 170-180 car park lots which would be excluded from the GFA calculation – down from 704 lots in the existing MSCP building, which was shut on June 30.
Lynette Leong, CEO of CCT’s manager, said the group has applied to the authorities to allow the building of additional car park lots which would be excluded from the GFA.
CCT is not undertaking the MSCP redevelopment solo as it would exceed the 10 per cent limit on development projects (to total asset size) for Singapore Reits.
The trust’s portfolio of eight investment properties (excluding MSCP) was valued at $5.6 billion at end-June 2011 – up 2.8 per cent from their valuation at end-December 2010.
CCT’s total asset size stood at around $6.2 billion at end-June 2011, down 0.1 per cent from end-December 2010. Net asset value per unit, excluding distributable income to unitholders, was $1.52 at end-June 2011, an increase from $1.47 at end-December 2010.
Distributable income to unitholders dipped 2.3 per cent year on year to $54.4 million for Q2 ended June 30, 2011. Gross revenue slid 9.2 per cent to about $91 million while net property income declined 5.9 per cent to $69.8 million. Distribution per unit (DPU) fell 2.5 per cent to $1.92.
For the first-half, CCT’s distributable income eased 3.2 per cent to about $106.5 million; gross revenue fell 9.9 per cent to $182 million and net property income declined 7.9 per cent to $139.8 million. First-half DPU fell 3.3 per cent to 3.77 cents, translating to a 5.2 per cent annualised distribution yield based on CCT’s July 13 closing price of $1.46.
The counter ended one cent lower yesterday at $1.45. Unitholders can look forward to receiving their semi-annual DPU payout on Aug 26; the books closure date is July 28.
The weaker showing for both periods was due to lower revenue from Six Battery Road, where occupancy rates are lower as the office tower is being revamped; loss in rental income from the sale of Robinson Point and StarHub Centre; and negative rent reversions (that is, leases signed or renewed at lower rental rates than the previous lease agreement).
‘Current signing rents for office space are still substantially below the expiring rents for the leases due this year as they were predominantly signed during the peak of the previous cycle in 2008.
‘Hence, negative rent reversions for most of the trust’s properties are expected to persist through the rest of this year. We will continue our proactive leasing and cost management strategies to mitigate the expected fall in distributable income,’ said Richard Hale, chairman of CCT’s manager.