Month: July 2012
FirstREIT – OCBC
STEADY QUARTER, NO SURPRISES
•2Q12 DPU of 1.93 S cents (+22% YoY)
•Acquisitions possible in 2H12
•Yield still decent, but valuations rich
2Q12 results were within expectations
First REIT’s (FREIT) 2Q12 results were within our expectations. Gross revenue increased 6.1% YoY to S$14.0m. This was driven by contribution from its Sarang Hospital which was acquired in Aug 2011 and higher rental income from its remaining portfolio. Distributable amount to unitholders and DPU jumped 23.1% and 22.2% YoY to S$12.2m and 1.93 S cents, respectively. This is payable on 29 Aug 2012 (ex-div: 30 Jul). The hike in DPU was boosted by a special distribution of S$2.2m (S$0.34 per unit) which arose from a gain from the sale of the Adam Road property. This is the last tranche of special distribution arising from this divestment gain. Sequentially, revenue and DPU were both flat. For 1H12, gross revenue rose 6.2% YoY to S$28.0m and constituted 47.4% of our full-year projection. DPU increased 22.2% to 3.86 S cents. Excluding the special distribution highlighted earlier, DPU would have formed 50.1% of our FY12 forecast.
Acquisitions likely to complement organic growth
Looking ahead, we believe that acquisitions could possibly take place in 2H12, given FREIT’s low leverage ratio of 15.1% and ongoing negotiations with its sponsor Lippo Karawaci over the past several months. We had previously factored in acquisitions amounting to S$88.9m in our model assumptions, with details delineated in our 29 Jun 2012 report.
Downgrade to HOLD on valuation grounds
Following our last upgrade on FREIT to Buy on 29 Jun 2012, the stock has since appreciated 6.0%, outperforming both the STI and FTSE ST RE Invest Trust Index. Although FREIT offers an FY12F yield of 7.6% (6.9% if we strip out the special gain distributions), while providing income streams that are largely resilient in nature given its long-term master leases, valuations appear rich at current price level, in our opinion. The stock trades at FY12F P/B of 1.23x, a significant 26% premium to the S-REIT universes’ average P/B of 0.98x. Hence we downgrade FREIT from Buy to HOLD on valuation grounds, with an unchanged fair value estimate of S$0.96. We believe that it is also possible for FREIT to fund its next acquisitions via a combination of debt and equity given its current rich valuations.
CLT – CIMB
Resilience in current times
2Q12 was another steady quarter, reflective of a resilient portfolio. Its acquisition of assets in April and July was testament to management's ability to deliver acquisition-led growth. A Malaysian asset was added into the ROFR pipeline with Cache exploring options there as well.
2Q/1H12 DPU came in within expectations at 24%/48% of our FY12 (back-end loaded contributions), and consensus. We tweak estimates, lift acquisition assumption to S$100m in 2013, and lower risk premium on proven resilience in portfolio yields. We raise our DDM target price (disc rate: 8.1%). Maintain Outperform with accretive acquisitions as catalyst.
Steady quarters ahead
2Q12 NPI grew 8.1% yoy, led by acquisitions and rental step-ups. DPU declined by 5% yoy due to enlarged share base from the private placement in March. We estimate a moderate 4% yoy growth otherwise. Rents are likely back-end loaded with newly acquired Pandan Logistics Hub and Pan Asia Logistics Centre to fully contribute in 2H12. Organic growth continues to stem from the 1.5-2.5% step-up rental escalation structured into master leases. Management has already begun renewal of master leases due in FY15/16 at similar step-up rates.
What's next for growth?
Management remains committed to acquisition-led growth. Following the acquisition of a pipeline asset from CWT, ROFR to a Malaysian warehouse was secured in 2Q12, bringing assets in the pipeline back to 13 properties with c.3.5m sf GFA. The asset will be completed in 2012. Cache continues to explore the Malaysian market to gain familiarity, and stated preference for larger assets (for more discernable impact to the bottom line), albeit harder to come by.
Stability in current times
We like Cache for its resilient yields, backed by a 100% occupied portfolio and master leases with rental step-ups. Triple net leases (WALE: 4.4 years) further mitigate exposure to inflationary cost pressures. Management's prudence leaves us confident of accretive acquisitions: we factor in S$100m for 2013.
MCT – CIMB
Strong rental reversions
MCT kicked off FY13 with strong rental reversions for both VivoCity and its office portfolio. This bodes well for 2H when the effects will flow through DPU as more leases are expected to lapse then. With healthy operating metrics, MCT’s organic growth outlook remains strong.
1Q13 DPU was slightly above street and our forecasts, at 25% of our FY13 forecast on stronger reversions. We expect a backend-loaded FY13 as committed rental reversions kick in towards 2H. We up DPU and DDM target price (8.1% disc. rate) for stronger reversions. Maintain Outperform.
Backend-loaded year
We expect positive rental reversions to flow through in 2H when more leases expire. 1Q13 NPI was up 14% yoy from 1Q12 (restated to one quarter), reflecting positive rental reversions and slight margin upticks. Management has finalised close to 50% of lease renewals even though the majority expires towards 2H.
Vivo still the key driver
Positives came from stronger rental reversions of 37.4% at VivoCity, albeit not entirely comparable with FY12’s 24.9% as 1QFY13’s rental reversions are pegged to fixed rents rather than gross rent in FY12. The strong reversions reflect partly 2009’s low base. We understand that reversion trends would have been fairly similar to last year’s if we were to compare expected gross rents pegged to new tenants’ projected sales. Retention fell to 75% vs. 92% last quarter, mainly due to tenant management. Tenant demand remains strong, with some open to renewals and negotiations ahead of expiries. Shopper traffic growth of 6.5% is higher than other retail REITs while tenant sales growth of 2% (affected by fit-outs) is healthy.
Some progress at ARC; strong office reversions
Committed and physical occupancy at ARC crept up to 63% and 59% from 50% and 57% in 4QFY12, respectively. PSA Building saw higher committed occupancy of 97.9% while positive rental reversions jumped to 39.5% due to lower expiring rent of ~S$5 psf vs. signing rents of S$6-7 psf and improved connectivity of property. Effects should flow through in later quarters when more leases lapse.
FCOT – OCBC
MORE TO COME
•Good 3QFY12 showing
•Healthy operating numbers
•Expecting interest savings
3Q results were within expectations
Frasers Commercial Trust (FCOT) turned in a strong set of 3QFY12 results last evening. NPI and distributable income were up 7.1% and 16.7% YoY to S$26.6m and S$15.6m respectively. DPU for the quarter came in at 1.70 S cents (+23.2% YoY), after netting off S$4.7m in distribution to CPPU holders. For 9MFY12, DPU totaled 4.94 S cents, representing a growth of 16.8%. This is roughly in line with our estimates, given that it formed 73.1% of our full year DPU forecast.
Improvement from all fronts
The robust quarterly performance was mainly driven by the acquisition of the balance 50% interest in Caroline Chisholm Centre (CCC) and higher income from direct tenant leases at China Square Central (CSC) following the expiry of the master lease. Leasing activities within FCOT’s portfolio has also remained robust. Overall portfolio occupancy as at 30 Jun was at 96.7%, up marginally from 96.1% in the previous quarter, thanks to improved occupancy rates at its Singapore and Australia properties. FCOT also secured a number of lease renewals during the quarter, such as leases with Cerebos Pacific at CSC. Together with long-term lease at CCC, the portfolio weighted average lease to expiry was strengthened to 4.2 years, up from 3.4 years in 2Q.
Retain BUY, raising FV to S$1.16
Management also updated that it has successfully completed the early refinancing of its S$500m term loan facility using two new facilities (S$320m and S$185m loans). Notably, blended interest margin is ~1ppt lower than its previous borrowing margin. Hence, we expect FCOT to gain from interest savings going forward. We also understand that unitholders had approved the sale of KeyPoint. We believe FCOT may possibly use the proceeds to redeem 50% of its CPPUs and pare down its debts, given that its aggregate leverage is at 39.5%. After factoring in the results and redeployment of KeyPoint sale proceeds, our fair value is now raised to S$1.16 from S$0.97 previously. Maintain BUY on FCOT.
MIT – DBSV
Pushing ahead
• 1Q13 results stellar at 2.26 Scts
• Resilient portfolio; reversions and retention rates remain at healthy levels
• Forward yields of 7.1-7.4% attractive; BUY with higher TP of S$1.35
Highlights
1Q13 DPU of 2.26Scts in line. Mapletree Industrial Trust (“MINT”) reported gross revenue and net property income of S$66.9m and S$48.3m, which were higher by 22% and 26% y-o-y respectively. The stronger performance was largely attributed to contribution from its newly acquired JTC portfolio of 8 flatted-factories and 3 Amenity Centers (accounting for 60% of the S$11.9m y-o-y topline growth). Excluding new acquisitions, MINT posted strong organic performance, with its portfolio achieving higher rental and occupancy rates. As a result, distributable income came in 25% higher at S$36.9m, translating to a DPU of 2.26 Scts, forming c.27% of our full year forecasts. On a sequential basis, performance was relatively stable, with a slight improvement in new property income margins due to lower maintenance expenses in 1Q12; we estimate margins to normalise back to c.70% level in the coming quarters.
Our View
Resilient portfolio, healthy reversions. The performance of MINT’s diversified portfolio of industrial properties was resilient, achieving higher average occupancies q-o-q of 94.9% in 1Q13, stable qoq, with portfolio seeing healthy retention rates of 71.1%. Portfolio average rentals inched up higher to S$1.56 psf/mth with new leases and renewals averaging hikes of c9.3-31.7%. Amongst the subsectors, the flatted factories space is the most stable – with new leases/renewals ranging between 5-21% above passing levels, ahead of our forecasts. As such, we tweak our earnings estimates slightly to account for higher reversions in FY13/14.
Manager expects stable operations. Looking ahead, MINT’s operational performance should be relatively stable, given a portfolio where occupancies are almost full while having only 13% of topline that is up for renewal over the rest of FY13. This limits downside risks in our view. The manager continues to improve portfolio WALE (currently at 2.6 years) and income certainty for the REIT through offering tenants longer-term leases with staggered rental escalations which we understand have seen good take-ups.
Recommendation
BUY call maintained, TP raised to S$1.35. MINT continues to offer attractive forward yields of 7.1-7.4%, supported by a diversified portfolio and strong sponsor backing. TP of S$1.35 offers total return of 16%.