Month: July 2012
CIT – DMG
New acquisition in the pipeline
Acquisition of 30 Teban Gardens Crescent. The management of Cambridge Industrial Trust (CIT) just announced the proposed acquisition of the property at 30 Teban Gardens Crescent for a purchase consideration of S$41.0m. 30 Teban Gardens Crescent is a purpose built 3-storey industrial building with a single storey factory cum car showroom. Upon completion of the acquisition, the building will be let out to Eurosports Auto Pte Ltd, a representative of luxury European automotive brands such as Lamborghini and Lotus, for a period of 6 years. Under the terms of the contract, a brand new annex block of a 2-storey showroom with ancillary office is to be built by Eurosports Auto prior to the acquisition. The gross floor area of 30 Teban Gardens Crescent is expected to be approximately 12,922 square meters upon completion of the construction works. Given a forecasted annual NPI of S$3.2m, the cap rate of this property is estimated at 7.8%. Maintain BUY on CIT with a DDM-based TP of S$0.605.
Extension of lease with the addition of a building. 30 Teban Gardens Crescent has an initial lease term of 10 years, commencing from 1 June 2007. A further lease term of 22 years will be granted by JTC on the condition that the proposed 2-storey showroom with ancillary office is constructed. As this acquisition is expected to be completed only in 4Q13, no announcement has been made with regards to the method of financing this acquisition at the moment.
Pro-active management and extension of WALE. Although the lease on this piece of land is comparatively shorter than CIT’s portfolio (38 years), we view this acquisition as an effort by the manager to diversify the income stream while at the same time enlarging their tenant base. As indicated by management, with this acquisition, CIT’s WALE will be extended to 3.3 years from the current 3.2 years.
Minimal impact to DPU. Upon completion of this acquisition, we believe the additional NPI contribution will have minimal impact on the DPU of Cambridge Industrial Trust. We maintain our BUY call with an unchanged DDM-based (COE:10.7%, terminal growth: 1.0%) TP of S$0.605.
K-REIT – Kim Eng
Actively Improving Yields
Busy improving unitholders’ returns. In a space of two weeks, K-REIT announced that it had obtained tax transparency for rental income from MBFC Phase 1, and that it had acquired another 12.39% stake in Ocean Financial Centre (OFC). We recognize that these are proactive steps to improve unitholders’ returns. As we raise our DPU forecasts, we are also upgrading K-REIT to a HOLD recommendation.
Greater tax transparency. One of the advantages of investing in a REIT for individual unitholders is the tax transparency. However, K-REIT’s one-third stake in MBFC Phase 1 was previously held by a private limited company, which meant that the rental income attracted corporate income tax of 17%. The vehicle was recently converted to a limited liability partnership (LLP), which is tax exempt. This should result in estimated annual tax savings of SGD2.2-5.2m for FY12-15F, leading to higher distributions to unitholders.
Almost full control of OFC. K-REIT also acquired an additional 12.39% stake in Ocean Properties LLP, taking its 99-year interest in OFC to 99.9%. Including rental support of SGD24.1m, the stake is valued at SGD285.7m, or SGD2,600 psf – in line with what K-REIT had paid for the original 87.51% in Oct 2011. The acquisition will be partly funded by a placement of 60m new units to the Vendor, pegged at a price of SGD1.17 per unit, which was at a 14.6% premium to the VWAP then. With the remainder funded by borrowings, K-REIT’s look-through gearing is expected to increase to 43.9% from 41.8% as at 1Q12.
Raising our estimates. On the back of these corporate actions, we have raised our DPU estimates by between 6% and 12% for FY12-14F respectively. DPUs are expected to remain fairly stable up till FY15, with further upside possible if the vehicle holding its one-third stake in One Raffles Quay is also converted to an LLP for tax transparency. With a long WALE of 6.4 years as at 1Q12 (peers average at 3-4 years), K-REIT will be able to weather the near-term market volatilities.
Upgrade to HOLD. We raise our DDM-derived target price to SGD0.99, on the back of higher DPUs and a terminal growth rate assumption of 1.5% (previously 0.5%) as we become less pessimistic on the long-term prospects. 1H12 results will be released on 16 July.
FortuneREIT – OCBC
SUBURBAN SHOPPING MALLS ARE MORE DEFENSIVE
•HK retail rents increased in Apr
•HK retail sales grew slower in May
•But supermarket sales beat luxury sales
Retail rents climbed in Apr
The HK private retail rent and price indexes set new records in Apr, the third consecutive highs starting from Feb. Compared to the Mar figures, the rent index and the price index were up 1.4% and 2.9% respectively. New Territories, where the majority of Fortune’s malls are located, saw average private retail rents climb a respectable 15.2% YoY in Apr.
Retail sales grew slower in May
For May, retail sales in HK climbed 8.8% YoY to HK$36.0b. While this is the lowest pace of growth since Sep 2009 (excluding seasonal distortions during Jan and Feb each year due to Chinese New Year), we believe that Fortune will continue to have good positive rental reversions this year. China’s slowdown is manifesting itself in the decline in HK luxury sales – jewellery, watches and clocks, and valuable gifts saw a 2.9% YoY decline in sales volume in May.
Supermarket sales beat luxury sales
In contrast, supermarket sales climbed 9.1% by volume. Last month, two dairy companies in China, Inner Mongolia Yili Industrial Group and Bright Dairy & Food Co., recalled their products from the market due to contamination. As food safety continues to remain a concern, grocery purchases by Mainlanders in HK should continue to be resilient, thus helping to support suburban shopping malls such as those owned by Fortune. Suburban shopping malls also see a lot of non-discretionary purchases by local HK residents.
Maintain BUY
Fortune’s stock price has climbed 17.5% to a one-year high since we initiated coverage on 14 Mar and we think further upside is possible. 2Q12 will be the first quarter to see full contributions from Belvedere Square and Provident Square, which were acquired in mid-Feb. Fortune is trading at a P/B of 0.6x (NAV per unit of HK$7.81) and an estimated FY12 dividend yield of 6.8%. We maintain our BUY rating and our fair value of HK$5.22.
AIMSAMPReit – Kim Eng
Making good progress in restructuring
Background: AIMS AMP Industrial REIT (AAREIT) was originally listed as Macarthur Cook Industrial REIT in 2007. However, the trust ran into liquidity problems during the GFC, as it had a debt of SGD202.3m due on 17 Apr 2009, along with an unfunded SGD90.2m contractual obligation to acquire 1A International Business Park. Meanwhile, the trust’s sponsor, Macarthur Cook Limited, was acquired by the AIMS Financial Group in Jul 2009, which resulted in the latter being the new sponsor of the trust. AAREIT’s principal investment objective is owning and investing in a diversified portfolio of income-producing industrial real estate assets in Singapore and Asia including warehouse and logistics centres, manufacturing facilities, business parks, and hi-tech spaces.
Why are we highlighting this stock? We recently met up with Management to find out more about the trust, in view that the counter has risen by 29.6% YTD and offer an attractive DPU yield of ~9% (one of the highest amongst Industrial REITs). It presently has 25 properties valued at SGD914.5m as of 31 Mar 2012. AAREIT is also redeveloping 20 Gul Way that will quadruple its annual rental income and triple its gross floor area on that property when fully completed in Dec 2013.
Our view
• Attractive DPU Yield. DPU grew by 5.3% in FY12 to 10.45 SG cts. Upon the completion of 20 Gul Way, management would expect incremental DPU to be 1.465 SG-cts and AAREIT would become the second-largest ramp-up warehouse landlord after CACHE. According to street estimates, FY13 DPU yield is forecasted at 9.2%. (DPU of 11.3 SG cts). AAREIT’s aggregate leverage remains healthy at 30% as of 31 Mar 2012. We note that AAREIT’s gearing may escalate to ~35% after the redevelopment of 20 Gul Way (SGD150m debt-financed).
• All Singapore-based assets. AAREIT enjoys high portfolio occupancy of 99.2% with an average security deposit of about 8.1 months per property. It has divested several low-yields properties such as 23 Changi South, Asahi Ohmiya Warehouse, and 31 Admirality Road in 2011–2012. It also has six properties, apart from 20 Gul Way, whose plot ratio utilisation is below 60%, thus making them potential candidates for redevelopment. AAREIT is presently in a sweet spot with its exposure in the logistics and multi-factory space (price index rose by 31.6% and 25.4% YoY in 1Q12, respectively).
• Risk. Downside risks, in our view, include a relatively short lease expiry of 2.62 years. Two large assets, 27 Penjuru Lane and 8&10 Pandan Crescent, are expiring in FY13. However, overall lease expiry has been reduced from 29.9% in end-Mar to 18% in end-Jun (incl. subleases), following lease extensions. There are also varying degrees of: (a) concentration risks as the top ten tenants constitute 70.5% of 4QFY12 rental income; (b) competition risks over tenants and assets; and (c) macro-economic headwinds. Upside risks include more yield-accretive acquisitions, redevelopment projects, and better-than-expected positive rental reversions moving forward.
CMT – DBSV
Change in CEO but no change in strategy
Changes at the top. CapitaMall Trust (CMT) announced that Mr Ho Chee Hwee Simon has resigned as Chief Executive Officer (CEO) of the company and will be succeeded by Mr Tan Wee Yan, Wilson, who is currently the Deputy CEO of CMT with effect from 1 July 2012. Wilson Tan joined CMT from CMA where he was SVP in the CEO’s office for the Singapore market in Feb this year and prior to this he was the Group CEO of Singapore Post Limited.
Not unexpected, strategy intact. We believe that these changes are somewhat expected and we do not expect any major change in strategy, business model and operations at CMT. Meanwhile, Mr Simon Ho has assumed a new role as the Deputy CEO of CapitaMall Asia (CMA) and will remain a director and a member of the Investment Committee of CMT. Hence, we think the long-term strategies remain intact with stronger synergies in place.
Maintain BUY. We believe the changes should not have any impact on stock prices and we continue to like CMT for its strong execution ability. While the reit has delivered relatively modest growth in its results in the last few quarters, we believe that should change. We see a stronger performance in 2H, supported by the full contribution of JCube as well as the gradual completion of the AEI works at Clarke Quay, Bugis+ and The Atrium by 2012-2013. In the longer term, the completion of the retail portion of Westgate in 2013 should underpin medium term earnings growth. Maintain BUY at an unchanged TP of S$2.05.