Month: July 2012
K-REIT – Kim Eng
Strong Showing at Half-Time
Growth led by OFC contributions. K-REIT reported a stellar 94.6% YoY increase in its 1H12 distributable income of SGD98.4m, underpinned predominantly by the contributions from Ocean Financial Centre (OFC). 1H12 DPU came in at 3.84 cents, broadly in line with expectations. On a QoQ basis, DPU rose by 2.1% mainly on OFC’s improved occupancy rate. The REIT has been a strong outperformer year-to-date as investors remain yield-hungry. Maintain HOLD.
Portfolio occupancy stays robust. K-REIT currently enjoys a very healthy portfolio occupancy rate of 97%. The occupancy rate at OFC has also improved to 92.3% compared to the 85% as of end-2011. Outstanding lease renewals and rent reviews for 2012 are negligible. Management revealed that recent leasing enquiries had come mainly from legal firms, some of which are new-to-market names, but their appetite had been restricted to smaller spaces. Nonetheless, K-REIT’s high occupancy rate and long portfolio WALE of 6.2 years should mitigate any potential downside if office rents continue to slide.
No immediate capital management woes. Even though K-REIT’s look-through gearing is relatively high at 43.9%, we believe this is still very manageable. Its current average all-in interest rate is at a low 2.0%, and management is confident of refinancing the SGD598m worth of debt maturing on 31 Dec 2012. In addition, the acquisition of MBFC Tower 3 does not appear on the cards in the immediate term, especially when commitment rates there are still fairly low at about 67%.
HOLD for the stable yields in the near term. We are keeping our forecasts and target price of SGD0.99 unchanged. We estimate that KREIT should be able to maintain DPU yields of ~6.6% (at current share price) each year till FY15, even if in our view, office spot rents are not likely to see a significant rebound within the next 12 months. Maintain HOLD.
Hospitality REITs – OCBC
OVERWEIGHT, PREFER CDLHT
•ART’s portfolio is resilient
•CDLHT has better growth profile
•We favor CDLHT
Initiate with OVERWEIGHT view
We initiate with an OVERWEIGHT on Singapore Hospitality REITs. We prefer CDL Hospitality Trusts [BUY, FV: S$2.04] to Ascott Residence Trust [BUY, FV: S$1.23].
More organic growth for CDLHT
The buoyant Singapore hotel industry has been the key driver for CDLHT, whose six Singapore hotels accounted for 77% of its FY11 gross revenue. In 1Q12, CDLHT’s Singapore hotels registered an average RevPAR higher than all previous 1Qs and that quarter also marked the third consecutive one, starting from 3Q11, to set RevPAR records. We estimate that for 2012-2015 the demand for hotel rooms in Singapore will grow at 6.4% p.a., outstripping the hotel rooms supply growth, which we project will be 3.7% p.a. over the same period. We prefer CDLHT’s positioning (Upscale/Mid-tier) relative to others more clearly situated in the Mid-tier/Economy categories, as we see higher growth in hotel rooms supply for these latter tiers at 5.3%, versus 3.0% for the Luxury/Upscale categories.
ART’s master leases and management contracts
ART’s portfolio is diversified with properties in 12 countries. As of 31 Mar, 78% of its assets were spread over five countries (Singapore – 22.2%, France – 19.1%, UK – 15.9%, Japan – 12.9%, Vietnam – 8.0%). 40% of ART’s assets are in Europe. Despite the economic problems there, income from ART’s European assets is reasonably resilient, underpinned by master leases arrangements for the 17 properties in France and two in Germany, which contributed a total of 26% of gross profit for 1Q12. In addition, management contracts with minimum guaranteed income are in place for seven properties in Belgium, Spain and the UK, which contributed 12% of 1Q12 gross profit.
Lower gearing for CDLHT
Apart from its stronger potential growth profile, we like CDLHT because of its low gearing of 25.6%, versus ART’s 39.2% (enlarged portfolio excluding new Cairnhill serviced residence), which gives CDLHT more flexibility to acquire yield-accretive properties. We expect that CDLHT may make an acquisition within the next one year, either in Singapore or potentially higher yielding markets abroad.
MLT – OCBC
LIKELY TO REPEAT ITS SUCCESS
•Recent additions to contribute positively
•Well positioned for growth
•Attractive total expected returns
Good results to continue
Mapletree Logistics Trust’s (MLT) financial performance for the trailing four quarters ending 31 Mar 2012 had been outstanding, buoyed by a slew of yield-accretive acquisitions and healthy organic growth from its existing portfolio. In the year ahead, we expect MLT to deliver again, as it continues to optimize its portfolio yield and invest in quality assets. YTD, we note that MLT has acquired close to S$390m worth of properties with initial NPI yields of 6.2-9.9%. The last of the announced acquisitions (Fuji warehouse and Celestica Hub in Malaysia) was completed in May, and is expected to contribute positively to its distributable income going forward.
In a sturdy financial position
As at 31 Mar, MLT’s aggregate leverage was at a comfortable 35.2% mark, bolstered by the issuance of S$350m perpetual securities and asset revaluation gain of S$113.0m (~3% increase). Even with the completion of all committed acquisitions, we estimate its gearing ratio to inch up to only ~37% – a level we deem is still healthy. Notably, its weighted average debt duration has also been extended from 2.2 years in prior year to 4.2 years as a result of management’s proactive capital management initiatives. Hence, we believe MLT is well positioned to pursue its growth strategy, with minimal refinancing baggage to carry through the coming year.
Maintain BUY
MLT’s unit price has also performed well, raking up a return of 17.2% YTD as opposed to 13.0% gain in the benchmark index. While the REIT was sold down by as much as 4.9% from its peak on 10 Jul, we note that it was due to a sale in Alliance Global Properties’ 5.7% stake in MLT via a block trade, and not a drastic change in its fundamentals. At current price, MLT still offers an attractive upside potential and respectable FY13F yield of 7.1%. We maintain our BUY rating on MLT, with a revised fair value of S$1.19 (S$1.20 previously) after fine tuning our model to incorporate the exact acquisition completion dates.
ART – CIMB
Asset swaps not game-changer
We are net-neutral on the divestment of Somerset Grand Cairnhill to Capland for redevelopment. The deal is not a game-changer given marginal near-term accretion, and with longer-term accretion beyond 2017 dependent on future REVPAU and interest-rate trends.
We raise DPUs and our DDM-based target price (disc. rate: 8.5%) to factor in transactions such as the acquisition of the New Cairnhill serviced residences (SR) in 2017 via a mix of debt and perpetuities. Maintain Neutral on limited near-term catalysts and drag from Europe.
What Happened
ART has announced the proposed divestment of Somerset Grand Cairnhill for S$359m (3.8% yield, S$87m gross divestment gain) and the proposed acquisitions of Ascott Raffles Place Singapore and Guangzhou for S$220m (4.1% yield) and S$63m (5% yield), respectively. ART previously secured an OPP to redevelop Somerset Grand Cairnhill: Capland will redevelop the asset as a 40:60 hotel-residential development with higher GFA and divest the hotel portion back to ART on completion (expected in 2017) for S$405m (4.5% yield). The deal is subject to EGM approval on 27 Jul.
What We Think
The asset swaps and perpetuities were not unexpected – we previously highlighted these possibilities. We are net-neutral. We believe ART could have secured better divestment and acquisition pricing and accretion had it divested just the residential portion of the project to third-parties and kept the hotel portion for its own development. This would also allow it to retain a foothold within the Orchard area and to deploy excess divestment proceeds for acquisitions. That said, positives from the current structure come from Capland’s assumption of development risk while the asset is not generating income, and limited time-lag in capital deployment. 4.5% EBITDA yield on redeveloped Somerset Grand Cairnhill looks achievable (see Fig. 4) though accretion will be dependent on future REVPAU and interest-rate trends. Asset leverage should drop to 39.2% (from 41.6% as at end-1Q12) while rising to 43% come 2017 when New Cairnhill SR is acquired through a mix of debt and perpetuities.
What You Should Do
We expect marginal near-term accretion before 2017, when the redeveloped asset is to be reacquired. We maintain Neutral on limited near-term catalysts and Europe drag.
MCT – DBSV
Ride the southern wave
• Boost from VivoCity’s healthy rental reversion, opening of ARC and PSAB’s higher occupancy
• Gearing moved down in line with peers with no refinancing needs
• Maintain BUY at an unchanged TP of S$1.12
Anticipating another good wave. Performance for VivoCity, the largest asset in Mapletree Commercial Trust’s (MCT) portfolio continues to exceed expectations. We noted that the spike in visitors to Universal Studios in the last few quarters and the opening of final 12 new MRT Circle staions since October 11 have had a positive impact on VivoCity’s footfall and tenant sales. Given its exposure of up to 18% gross turnover (GTO) revenue component (based on FY12 gross revenue), we believe VivoCity is the only mall that has the biggest leverage to another year of strong visitors to Resorts World Sentosa as the hotels and the West Zone open progressively.
Moving up the tracks. Office portfolio occupancy has reached a high of 98.2% with the incremental 15ksf of office space at PSA Building (PSAB) leased out to Mapletree Investment- another quality tenant. We visited Alexander Retail Centre (ARC) recently and were pleased to see that the newly minted mall, with popular F&B operators, are drawing good lunch time crowds. Committed occupancy rate has crossed 60% and should filter down to FY13F earnings as tenants opened progressively.
The wild card. With Mapletree Business City (MBC) still operationally ramping up, we believe an acquisition is unlikely to be on the cards in the immediate term. Nevertheless, we conducted a scenario analysis to assess the impact of the potential acquisition on DPU. In our analysis, we assume an acquisition price of MBC is S$1.25-1.58b or NPI yield of 5-6%, we estimate that FY14F DPU could see a –3% to +5% impact.
Maintain BUY. We continue to like MCT’s defensive nature backed by quality assets. There is no refinancing due this year and gearing has moved to 37.7% in line with the bigger cap reits. Yields of 6.1-6.5% are attractive given its strong sponsor links. Our DCF-backed TP of S$1.12 offers total return of close to 17.5%.