Month: September 2011
Suntec – BT
It makes sense for Suntec Reit to divest Chijmes
BT WEEKEND recently reported that Suntec Real Estate Investment Trust has appointed a property agent to handle an expression of interest exercise for the sale of Chijmes, an iconic conservation development at Victoria Street that houses within it two national monuments.
Whether Suntec actually sells the asset will depend on whether it can make a nice profit from it. The asset was valued at $134 million at the end of last year, higher than the $128 million Suntec paid for it in late 2005.
Back then, Suntec spoke about potential for asset enhancement, synergy with the Reit’s Suntec City Mall and Park Mall, and scope for ‘organic growth’ within the portfolio.
But five to six years on, Suntec could have found it challenging to do all these. After all, there are a lot of restrictions unique to a conservation property. Chijmes Hall (the former CHIJ chapel) and Caldwell House are gazetted national monuments. Suntec would have found it requires a lot of effort on this property, and the returns may not be commensurate.
Back in 2005, Suntec was hungry for assets. It had just bought Park Mall opposite Dhoby Ghaut MRT Station from Wing Tai for $230 million, while another deal to buy 11 properties from City Developments for $788 million was in the midst of coming apart.
Today, Suntec has a much bigger office portfolio, having acquired one-third stakes in One Raffles Quay and Marina Bay Financial Centre (the latter at $1.496 billion late last year). Last month, the trust raised its effective stake in Suntec Singapore International Convention & Exhibition Centre to 60.8 per cent.
Chijmes, a somewhat dated retail and entertainment development, seems less and less important in Suntec Reit’s portfolio. Suntec may not find it worth its while to devote more resources to spruce up the asset, which certainly needs some rejuvenation. But there could be other parties that may find Chijmes appealing.
Despite the current weaker property investment climate among institutional investors such as property funds against the backdrop of global economic uncertainty, there is no dearth of private wealth and sovereign wealth funds (SWF) looking for a place to park their monies, especially in a relatively safer place such as Singapore. Raffles Hotel, diagonally opposite Chijmes, belongs to one such SWF, Qatari Diar.
Who knows, Chijmes could find a new lease of life if part of the space is transformed into a luxury boutique hotel in a charming historic building, taking after the Raffles Hotel on one side and the future luxury hotel coming up on levels two to four of Capitol Building and Stamford House, on the other side. And both are also conserved properties.
More facilities may need to be incorporated and, of course, the permission of the authorities, including the Urban Redevelopment Authority (URA), would have to be secured first.
Some well-heeled educational institutions may also find value in buying Chijmes with the intention of using it as a campus – again assuming URA approves such use for the site. This would return the grounds to their original use and would go well with the presence of Singapore Management University and National Library nearby.
And who knows, a church may end up holding weekend services at the old chapel on the former convent grounds with multimedia link-up to the classrooms.
The prospects for extracting greater value from a historic property such as Chijmes may appeal to many investors. But perhaps Suntec Reit may have set its sights on new acquisitions in the segments of the property market where it has been more successful. The cash and other resources released through the sale of Chijmes could also come in handy against a weakening global economic climate. 
CLT – CIMB
Earnings stability with growth to boot
• Earnings stability, high yields and acquisition growth. Cache offers one of the most attractive and defensive yields in our coverage, with CY12 DPU yields of 8.0%. In the event of an economic downturn, a potential flight to yields could provide support for its share price, we believe. Further, we like its earnings stability, low gearing and acquisition pipeline from its strong sponsor, CWT. We maintain our earnings estimates and DDM-based target price of S$1.15 (discount rate 8.6%), anticipating re-rating catalysts from lower financing costs and accretive acquisitions.
• Earnings stability in a downturn. CWT is Cache’s main sponsor and master tenant for the bulk of its portfolio. With triple net master leases and rental escalation for all its warehouses, Cache’s earnings are largely guaranteed.
• Low gearing with no immediate refinancing pressure. Cache has one of the lowest gearing ratios among peers. Near-term refinancing risks are low, as no major refinancing is expected until 2014.
• Growth from acquisitions and lower financing costs. We believe sponsor CWT could monetise one of its warehouses in 2012, offering acquisition opportunities to Cache. We also expect a near-term DPU uplift as management attempts to lower its all-in financing costs.
HPH Trust – BT
Have a little faith in HPH Trust
THE thing about businesses that bill themselves as cash cows is that cows are plodding creatures. In good times, this was not a problem for Hutchison Port Holdings (HPH) Trust.
All it had to do then was be the yawning maw at the gateways of Hong Kong and China, sucking in port fees from the deluge of cargo passing through its jaws. But times are lean now, and in lean times, global trade is part of the fat that falls away first. Since HPH Trust was listed in March this year, the business trust has fallen about 36 per cent from its listing price, closing at 65 cents yesterday.
It would be tempting to offer, ‘It’s the economy, stupid’ as an explanation, but China Merchants Holdings and Cosco Pacific – two of HPH Trust’s competitors – lost only 30 per cent and 29 per cent of their value in the same period.
While a significant part of the selldown had been industry-related, investors are – for reasons that are not entirely clear – taking a more narrow view of HPH Trust, relative to its competing port operators.
To be sure, there are some causes for concern that have been well-visited over the past few months. The ports in the trust’s portfolio have seen the direct impact of slowing global trade, with revenue falling about 2.6 per cent short of the forecast figure for the period ended June 30, 2011 – even as it grew year on year.
The distribution that is denominated in Hong Kong dollars remained a bugbear, as the US dollar – to which the HK dollar is pegged – continued on its merry way southwards.
Even so, HPH Trust’s unit price has come down, making another bugbear more of an advantage – its distribution yield. When it was first listed, the yield was knocking about in the 5-6 per cent range.
It was consequently sniffed at, since real estate investment trusts offered comparable – and even higher – rates. Shipping trusts, as well, offered rates in the region of about 12-13 per cent.
Now, however, at 65 cents, the trust’s yield – estimated at about 5.9 US cents for a full year – is about 9.1 per cent. This far outstrips the average yield offered by Reits in the 5-7 per cent neighbourhood. You could compare it to the shipping trusts that offer two-digit yield percentages, but analysts will wearily tell you that the comparison is unfair.
Shipping trusts have ships that are depreciating assets, while ports sit on land that appreciate over time if no one does anything silly.
The higher yield that investors get from shipping trusts is also something of a stress premium, given the myriad uncertainties that exist in the form of refinancing and counterparty risks.
There is the question, however, of whether HPH Trust will keep up its promise of paying out 100 per cent of distributable income or if distributable income will shrink, especially if trade worsens.
In pricing in this eventuality, however, the market appears to have crossed the line by so much that the line is now a dot, according to some analysts’ estimates.
Volume, while not expected to grow at the 7-8 per cent clip previously expected, will probably still grow at a lower rate.
‘Current valuations seem to be implying negative trade growth and negative Ebitda growth of almost 20 per cent in FY2012, which we don’t think is a realistic possibility even if the world goes into similar levels of recession as in 2008-09,’ said DBS Group Research analysts Suvro Sarkar and Paul Yong in a report last month, when the stock hit 67.5 US cents.
They have a ‘buy’ rating on the stock with a target price of US$1.05.
HPH Trust does look rather dear, relative to its rivals – Hong Kong-listed Cosco Pacific and China Merchants Holdings. While HPH Trust trades at a price-to-earnings (PE) ratio of the high teens, Cosco Pacific and China Merchants have PE ratios in the high single-digits.
This disparity in PE ratios, however, is balanced out by the edge that HPH Trust holds in terms of dividend yield – 9.1 per cent at its current price, compared to 4.55 per cent and 4.5 per cent for China Merchants and Cosco Pacific, respectively.
At this price, HPH Trust is a relatively superior dividend play and when trade turns around, potentially a capital gains one as well.
The call that the investor will have to make, however, is how much a depreciation in the US dollar would erode the gain in dividend. By the time the greenback loses enough value to eat through a dividend yield of 9 per cent, perhaps an investment in HPH Trust will be the least of one’s worries.
StarHill – BT
Starhill Reit’s rent review application dismissed
It’ll appeal the High Court ruling, file a stay of execution
THE High Court has dismissed the application from Starhill Global Reit, which had asked the court to declare as non-operable the rent review mechanism in its lease agreement with Toshin Development Singapore.
YTL Starhill Global Reit Management, the Reit manager, said yesterday that it would be filing an appeal against the decision and a stay of the High Court’s orders.
Toshin is the subsidiary of Takashimaya and leases over 225,000 square feet of retail space in Ngee Ann City as master tenant and sub-leases to luxury brands such as Chanel, Louis Vuitton, Burberry and Shanghai Tang.
Inked in 2008, the lease agreement between Starhill Reit and Toshin will expire in 2013 and rental renewals are due every three years. The next rental term of two years starting on June 8, 2011 was up for review.
Under the rent review mechanism, both parties will agree on the new rental rate, which has a cap of not more than 25 per cent from the current rates.
If no consensus is reached, both parties would jointly nominate three valuers. Should there be no agreement on the nomination, they could jointly request for the three valuers to be nominated by the president of Singapore Institute of Surveyors and Valuers.
But Starhill claims, in its application to the court, that this rent review mechanism is no longer operable and requests that the High Court proceed to determine the prevailing market rent of the Toshin lease.
Toshin, on the other hand, takes the view that this rent review mechanism is still operable.
Since the new rental rate has not been determined before the start of the new rental term, the current rate will continue to apply until the new rent has been determined.
The rental rate shall be adjusted retrospectively from the start of the new rental term as soon as the new rent has been determined and any accumulated arrears of rent, if any, shall be paid by Toshin.
Starhill’s stake in Ngee Ann City represents 27.23 per cent of the total share value of strata lots in Ngee Ann City.
PLife – CIMB
Assurance in tough times
• Maintain Outperform. Amid global uncertainties and persistent inflationary pressures, PLife is likely to enjoy both DPU stability and upside, owing to its CPIpegged rents and portfolio of long-dated leases. We also expect management to exercise prudence in new partnerships and acquisitions, mitigating risks from nonaccretive M&As. Although current valuations (1.3x P/BV) reflect those positives, we believe its premium pricing can be justified by the assurance of defensive, resilient yields. We maintain our assumptions and DDM-based target price of S$2.05 (discount rate 7.4%), anticipating catalysts from accretive substantially debt-funded acquisitions. We advocate PLife as an ideal inflation hedge.
• Guaranteed rent increases set the backdrop for strong, stable DPU growth. PLife has announced minimum guaranteed rent increases of 5.3% for its Singapore assets for the year commencing 23 Aug 11. We expect another 4% minimum rental increase in Aug 12-13, underpinning 3.4% and 2.7% minimum DPU growth in Aug 11-12 and Aug 12-13 respectively, stronger than for most SREITs.
• Acquisitions in core markets. Management is on the lookout for overseas acquisitions, while exercising prudence in the current environment. We expect more reasonably priced assets amid global uncertainties and 3-5% DPU accretion from acquisitions. With S$261m debt headroom to a 45% gearing ratio and its strong share price thus far, PLife should be well-positioned to finance its acquisitions.