Month: September 2012
SREITs – Lim and Tan
S-REITS
- Bloomberg has a piece on the S-Reits sector this morning, saying it has been the best performing so far this year: averaging 37% (yield + capital gains), twice the gains in the US, UK and Japan, the other major reit markets. (S-Reits offer an average 6.,46% yield presently.)
- One of the reasons cited for this is the pace of acquisitions, accounting for a third of total acquisitions by reits in the region since 2009, second to Japan.
- The report also highlights the wide gap between yields of reits and 10-year government bonds: 413 basis points here vs 192 bp in Australia.
- While we remain bullish on S-Reits, we believe there are warning signs to look out for, especially when reits gain on every acquisition they make (eg the Mapletree Group of reits). Price to book will be the ratio to watch closely rather than the yield.
- For instance, retail reits like CapitaMalls trust, Fraser Centrepoint are trading at >20% premium.
REITs – Phillip
Results Season Takeaways
Sector Overview
The Real Estate Investment Trust (REIT) Sector in our Singapore coverage consists of 23 REITs listed on Singapore exchange with a market capitalization of USD35 billion.
- Majority of S-REITs turned in positive DPU
- S-REIT’s dividend yield of 5.5% is less appealing than a quarter ago and there is limited upside given rich valuation based on +1 STD of P/B ratio
Earnings Surprise?
Across the S-REITs universe, majority of them turned in positive DPU. Negative rental reversion was not the main reason for the dip in DPU. The drag in DPU was caused by some other factors such as divestment of property assets, issuance of new units, on-going major asset enhancement works and amongst others.
Under our coverage, the DPU estimates for CDL HT, PLife REIT and Sabana REIT were largely in-line, forming 49%, 51% and 50% of our FY12 projections.
Capital management outlook
- The variable-rate loans that are pegged to swap offer rates maintained flat
- Liquidity is expected to remain healthy at current loan-to-deposit ratio (LDR) level of 91.9%
- Financial position of REITs looks healthy, with comfortable gearing and longer weighted average debt to maturity
Recommendation
P/B ratio has progressively moved towards +1 SD and it had served as a strong resistance level for the past four years. From our viewpoint, it is going to be an uphill struggle to break above +1 STD. Given there is no major negative shocks from the western countries, P/B ratio should hover around this level as the current situation is not much better compared to two years before, undermined by lingering Euro debt problems and anaemic US growth.
For investors with mid- to long- term horizon, they may want to place their bet on Suntec REIT which is undergoing major makeover (phase 1-4) at Suntec City, stretching from Jun-12 to 2014. In this regard, return on investment from the refurbishments is likely to stream in in staggered phases. The tax savings from MBFC Phase I and potential ORQ could make up the loss for the drop in vacancy. Valuation is also undemanding and trading at a steep discount of 26.5% relative to Mapletree Commercial Trust (MCT) and Starhill Global REIT.
ART – OCBC
HOLDING ITS OWN
- 5.1% SG supply CAGR for 2012-2014
- Change in corporate contract pattern
- Preferred locations
Upcoming serviced residence supply
According to CBRE, an estimated seven serviced residences with approximately 783 serviced residence units are expected to enter the Singapore market by the end of 2014. This would bring the potential supply to over 5,765 units by 2014, representing a 5.1% CAGR on 2011 figures. While this is higher than the rate at which hotel room supply is expected to grow over the same period (4.6% p.a., see our CDLHT report dated 27 Aug), we note that occupancy rates for serviced residences is Singapore are stronger than for hotels in general. Serviced residences clocked average occupancy of 91.8% for 2011 (CBRE), versus an average of 86% for hotels (STB), and thus should be able to deal better with increased supply.
Different contract signing pattern
ART’s Singapore properties were responsible for 18.7% of 1H12 gross profit. Having spoken to management previously, we understand that given the current uncertain economic environment, some corporate are effectively staying for the same duration as they did previously in the Singapore properties although they are renewing shorter contracts as opposed to signing longer contracts. While this may partially reduce visibility for ART, we note that higher average rates can be charged because of the shorter contracts.
Good locations
We believe that ART’s Singapore properties will hold their own against upcoming serviced residence supply given their high quality, branding and good locations. Somerset Liang Court and Citadines Mount Sophia are in districts which are not forecasted to see any additional supply between 2012 and 2014. While Dorsett Residence, to be located next to the Outram Park MRT, will provide some competition to Ascott Raffles Place, the latter has the superior location in the heart of the CBD. Given the Additional Buyer’s Stamp Duty, which was announced in Dec 2011, we expect that more non-residents may end up staying in serviced residences over time as opposed to buying their own residential units.
Maintain BUY
We reduce our fair value from S$1.34 to S$1.30 to reflect a weaker Euro but maintain our BUY rating.
StarHill Global – OCBC
Valuations still attractive
- Extended debt duration
- Neutral outcome for appeal
- Growth profile intact
Refinancing of loan facility
Starhill Global REIT (SGREIT) recently entered into an agreement with its lender ANZ Bank for a A$63m term loan maturing in June 2017. We understand that the new facility will be used to refinance its existing A$63m loan (due to mature in Jan 2013) taken up by SGREIT in Jan 2010 to partially fund the acquisition of David Jones Building. The new facility will be secured under similar arrangements as its existing facility. Based on our estimates, SGREIT’s weighted average debt maturity will likely be extended from 1.8 years to ~2.0 years as at end Sep.
Toshin dispute to be resolved through mediation
In a separate announcement, SGREIT also updated the outcome of its appeal relating to the master lease with Toshin Development Singapore. According to management, the Court of Appeal did not find that the rent review mechanism had been rendered inoperable, as SGREIT had previously declared. However, the Court acknowledged that Toshin did not act in good faith in agreeing on the prevailing market rental values during the early stages of the review exercise. Hence, the Court ordered both parties to jointly request the President of Singapore Institute of Surveyors and Valuers to appoint three valuation firms to determine the prevailing market rental rates. Our take on this development is neutral, as we have not factor in any rental upside resulting from a favourable outcome. But we note that SGREIT has achieved its motive of sending a strong signal to the valuers to exercise independence on the review process.
Retain BUY with unchanged fair value of $0.79
We continue to like SGREIT for its healthy financial position (aggregate leverage of 30.5%), compelling P/B of 0.85x, and growth potential. In our view, SGREIT has yet to reap the full impact of its asset enhancement initiative on Wisma Atria, which is expected to be realized in the upcoming quarters. We now adjust our forecasts to reflect the refinancing activity. Our fair value stays unchanged at S$0.79. Maintain BUY.
Fortune – OCBC
DISAPPOINTING HK RETAIL SALES IN JUL
- Poor HK retail sales in Jul
- Easier visa policy for Mainlanders
- Maintain HOLD
HK Jul retail sales below expectations
In Jul, HK retail sales climbed 3.8% YoY by value, significantly lower than the median 9.0% forecast of five economists surveyed by Dow Jones Newswires and the YoY increases from Jan-Jun, which varied between 8.7% and 17.1%. Jun retail sales had grown 11.0% YoY. A government spokesman attributed Jul’s slow growth to the external economic environment and more cautious local consumer sentiment. Retail sales growth could be more moderate in 2H12 than 1H12 and this will reduce the extent of possible rental increases.
New visa policy could increase PRC visitor numbers…
The Chinese government has announced a change in the Individual Visit Scheme, whereby non-residents living in Beijing, Shanghai, Guangzhou, Shenzhen, Tianjin and Chongqing are able to apply for passports and visas to HK, Macau and Taiwan starting from 1 Sep 2012. Currently, people need to return to the area that issued their residency permit (hukou) to apply. The six cities have substantial nonresident populations. Shenzhen reportedly has a non-resident population of 4.1m, of which many are thought to be migrant workers with mass-market consumption patterns – which suits FRT’s positioning.
…but PRC arrivals account for only 19% of retail sales
For the first seven months of the year, overall visitor arrivals to HK climbed 15.2% YoY to 26.7m. In particular, arrivals by visitors residing in the mainland increased 22.6% YoY to 18.8m. Residents of mainland China spent HK$78,792m on shopping in 2011. Based on this, we estimate that mainlanders accounted for only 19.4% of the HK’s total retail sales in 2011, so additional arrivals due to the visa policy will not necessarily be a panacea. For suburban mall operators like FRT, local consumer sentiment will still be a more important driver for positive rental reversions. We calculate that visitor arrivals as a whole accounted for 24.4% of 2011 retail sales.
Maintain HOLD
We maintain our fair value of HK$5.33 and HOLD rating.