Month: December 2012
Healthcare REITs – OCBC
STABLE OUTLOOK FOR 2013
- Strong share price performance YTD
- Defensive income streams and lease structure
- Quality likely priced in
Year in review
The S-REITs sector has been a standout performer in 2012 (+34.5% YTD), buoyed by the ‘yield compression’ theory in light of the current low interest rate environment. Unsurprisingly, healthcare REITs have also delivered strong YTD price appreciation, with First REIT (FREIT) rising 36.2% and Parkway Life REIT (PLREIT) a more modest 19.0%. Both healthcare REITs also continued to showcase steady growth in their financial performance, supported by organic and inorganic growth. For 9M12, FREIT’s revenue and DPU increased 5.4% and 9.1%, while that of PLREIT climbed 8.0% and 6.8%, respectively.
Defensive play amid uncertain macro environment
In our opinion, healthcare REITs offer the most defensive attributes within the S-REITs space. This stems from the following reasons: 1) long-term master lease tenures which have significant downside revenue protection and 100% committed occupancy; 2) Singapore CPIpegged rental structure which allows for positive rental reversion (3.5-4.5% headline inflation expected in 2013, according to the Monetary Authority of Singapore); 3) triple net lease structure inherent in a substantial proportion of leases; and 4) resilient underlying cashflows from operators which enhances their ability to fulfil rental obligations. We believe that these defensive qualities would provide stability for investors amid the still-uncertain macroeconomic environment.
Maintain NEUTRAL
Moving into 2013, we believe that healthcare REITs will remain on the lookout for further acquisitions to boost their portfolios. Indonesia will likely continue to be the main focus for FREIT, while PLREIT could deepen its foothold in Malaysia (through sponsor-related or third party acquisitions), in our view. In terms of valuation, we believe that the subsector positives have already been priced in, with healthcare REITs trading at an average historical P/B ratio of 1.37x, while offering current and forward yields of 5.8% and 6.0%, respectively, based on Bloomberg consensus estimates. This is a rich premium to the S-REITs universe (ex. healthcare REITs), which are trading, on average, at 1.06x historical P/B and current and forward yields of 6.1% and 6.4%, respectively. Hence, we maintain our NEUTRAL rating on the healthcare REIT subsector. Within this space, we have a HOLD rating and RNAV-derived S$0.98 fair value estimate on FREIT.
FE-HTrust – OCBC
PROPOSED ACQUISITION OF RENDEZVOUS GRAND HOTEL SINGAPORE
- Pure Singapore hospitality play
- Rendezvous Grand Hotel Singapore
- Reduce FV to S$1.02
Largest diversified hospitality portfolio by asset value
The portfolio of Far East Hospitality Trust (FEHT) consists of 11 properties in Singapore, including seven hotels and four serviced residences, giving a total of 2,531 rooms/units. The trust has the largest diversified hospitality portfolio in Singapore by asset value, equaling S$2.14b.
Proposed acquisition of Rendezvous Grand Hotel
In Nov, FEHT and Astor Properties Pte. Ltd., a member of the Far East Organization group (the sponsor) entered into a non-binding memorandum of understanding (MOU) with The Straits Trading Company Limited to acquire Rendezvous Grand Hotel Singapore and its retail component Rendezvous Gallery Singapore. FEHT is exploring the proposed acquisition of a leasehold interest in the property, while the sponsor is exploring the proposed acquisition of the reversionary interest for the remaining leasehold period in the property. FEHT also entered into a separate non-binding MOU with the sponsor to grant a master lease of the hotel component to the sponsor as master lessee under a master lease agreement Rendezvous Grand Hotel Singapore is a modern 4.5 star hotel with 298 rooms located at Bras Basah. The REIT manager and the sponsor are evaluating the proposed transactions and the REIT manager is exploring options to finance the proposed acquisition. We have not incorporated the proposed transactions into our model since no definitive agreements have been executed.
Visible and substantial pipeline
The proposed acquisition of Rendezvous Grand Hotel Singapore is in addition to the three hotels and four serviced residences which have been identified by the sponsor as Right of First Refusal (ROFR) properties which could be offered to Far East H-Trust.
Downgrade to a HOLD
Rolling forward our RNAV model to FY13F, and using more conservative capitalization rates given a more cautious outlook for tourism in 1H13, we reduce our fair value from S$1.08 to S$1.02, and downgrade FEHT from Buy to a HOLD.
Retail REITs – DBSV
Still a safe house
• AEI to take centrestage in driving earnings growth amidst slowing retail sales growth in 2013
• Suburban retail to continue attract good interests despite incoming supply
• Extra earnings kicker could come from acquisitions, particularly from sponsors’ pipeline
• MCT top pick given its superior earnings profile; SGREIT offers an attractive relatively yield to retail peers
AEI malls showed superior rental growth. Underlying fundamentals in the retail real estate sector remain strong. Rents have stayed resilient in the past year, largely supported by annual built-in step up rents. While increasing market shares, as evidenced by decade-high leasing transaction volumes, continue to be the retailers’ main focus despite rising cost pressures, the latter is likely to have a bearing on rental pricing ability with occupancy costs now at 16-17%. With retail sale expected to grow at 2-3% next year, we expect reversion to track inflation rates. Our preferences are for market beaters/outperformers that can exceed this benchmark for rent rolls via successful Asset Enhancement Initiatives (AEI) activities, to deliver superior earnings growth.
Still prefer suburban for its strong leasing interests. From a supply angle, the suburban market segment continued to be at almost “full house” at 98% occupancy. Going forward, c.50% of the new supply will come from suburban locations over the next four to five years but we believe robust consumer sentiment, amid a low unemployment environment, would translate to a keen appetite for new retail space.
Rerating catalyst could come from acquisitions, prefer reits with strong sponsors. Trading at an average P/BV of an average 1.1x and an average implied yield of 5.0%, we believe that certain retail reits could look at acquisitions to spearhead their inorganic growth ambitions. Prime yields are now hovering at between 5.25% and 5.65%, hence with a mix of equity and debt, reits would still be able to acquire accretively. With limited access to good retail assets in Singapore, given the tightly-held market and its stable nature, we believe sponsored reits would have an upper hand with the ability to tap sponsors’ pipeline for new assets to fuel their inorganic growth ambitions.
Stock picks. Within this space, we like MCT for its ability to continue to drive rental reversions as well as inorganic growth capacity from tapping its deep sponsor pipeline such as the recent maiden proposed acquisition of Mapletree Anson. In the small-mid cap space, we believe the completion of AEI works will continue to drive SGreit earnings while valuations at 0.8x P/BV and forward yield of 6%, which is higher than peers is attractive.
StarHill – Kim Eng
Orchard Road Retail Remains in Vogue
Orchard Road supply squeeze. Between 2013 and 2016, only three malls along Orchard Road (representing ~12% of available stock) are expected to be completed – and all in 2013. They include the asset enhancement works to The Heeren (156k sq ft), Orchard Gateway (180k sq ft) and the redevelopment of 268 Orchard Road (147.5k sq ft). The Heeren will be almost fully occupied by Robinsons (which will move out of Centrepoint) and Orchard Gateway is already more than half pre-committed with tenants such as Crate & Barrel, Religion, Swatch Megastore, Nike’s new concept stall called Amplify Women’s and library@Orchard. According to property agent CBRE, Prime Orchard Road rents were unchanged QoQ and YoY at SGD31.60 psf pm in 3Q12, while the capital value for strata-titled retail space rose 3.8% YoY to SGD6,500 psf, albeit unchanged QoQ. Occupancy rate remained robust at 93.7%.
Retail demand to remain steady. Indicators are still showing a general positive tone in the retail market despite the gloom over the world economy. As of Sep 2012, the RSI, excluding motor vehicles, and the F&B sales index are up 0.7% and 2.2% YoY, respectively. Prominent store openings in 3Q12 included Mulberry (first Asian flagship store at Mandarin Gallery), Carven and Crate & Barrel (Ion Orchard), Vivienne Tam (flagship store at Scotts Square), Paris Baguette in Wisma Atria, Malaysian celebrity Chef Wan’s 1-Market and Japanese restaurant Tsukada Nojo in Plaza Singapura. We expect retail demand to remain steady on healthy tourist arrivals and domestic spending, as well as new retailers and international concepts.
Our estimates. We forecast tourist arrivals to grow at a CAGR of 5.2% over 2011-2015, reaching 16.2m arrivals by 2015 (14.2m in FY12). In our view, higher tourist arrivals will provide some form of price support for Orchard rentals, especially since there is no more known supply after 2013. We believe that Orchard retail demand will grow at a CAGR of 2.7%, outstripping overall supply increases (CAGR: 2.3%) for 2011-2015. This will cause vacancy rates to dip from 5.4% in 2011 to 4.2% in 2015. We also expect Orchard rentals to register growth of 0-2.5% pa in 2012-2015, as previous concerns over a supply overhang are removed. Thus, NPI yields are likely to remain steady at 5.0-5.2%.
Investment thesis intact. SGREIT’s key assets are in the coveted Orchard Road area, where tight supply and the entry of new international retailers should give it greater bargaining power in terms of leasing its space. We continue to like SGREIT for the rental upside at Wisma Atria (3Q12 passing rent at SGD35.04 psf pm) and income stability in Malaysia and Australia. At 6.1% FY13F yield and 464bps yield spread, we reiterate BUY with a DDM-derived TP of SGD0.85.
Suntec – Kim Eng
Equity Fund Raising Overhang Removed
MBFC Twr 3 acquisition. DBS announced on 10 Dec that it has entered into an agreement with Choicewide Group Limited, a JV of Cheung Kong (Holdings) Ltd and Hutchison Whampoa Limited, to purchase 30% equity stake (and its associated loan) in Marina Bay Financial Centre (MBFC) Twr 3 for an aggregate consideration of SGD1.035b (SGD2,555 psf). DBS is the anchor tenant at MBFC Twr 3, occupying over 600,000 sq ft or 18 floors. Both parties also entered into a conditional put option agreement for DBS to take up Choicewide’s remaining 3.33% equity stake and its associated loan for an estimated aggregate price of SGD115m. The remaining stake on MBFC Twr 3 (66.66%) is held by Hong Kong Land and Keppel Land.
A little bit of history. DBS sold its Shenton Way office buildings (Twrs 1 & 2, about 875k sq ft net lettable area at Shenton Way) to funds managed by Goldman Sachs fo SGD690m (SGD800 psf) end-2005, with a leaseback agreement for an initial period of 8 years. The logic back then was that the sale to enhance the efficiency of its balance sheet. Goldman Sachs later sold the buildings to Overseas Union Enterprise for
SGD871m (SGD970 psf) in 2010, whose upgrade plans prompted DBS’ shift to Marina Bay Financial Centre (MBFC). In Oct 2012, DBS moved into its new headquarters at MBFC Twr 3, occupying over 600,000 sq ft or 18 floors of the 46-storey building. Some of the support functions were relocated to Changi Business Park. Recall also that Suntec REIT purchased MBFC Phase 1 (33.33% stake) from the same vendor on 9 Dec 2010 for SGD1.495.8b, including rental support of SGD113.9m over a 60-month period. This works out to SGD2,568 psf with income support and SGD2400 psf excluding income support. The latest FY11 valuation for MBFC Twr 3 (as of 31 Dec 2011) was SGD1.523b (SGD2,615 psf).
Positive for Suntec. We view this acquisition positively for Suntec REIT as it removes the EFR overhang of MBFC Twr 3 being injected into the REIT. It can henceforth focus more on its organic AEI on Suntec City. In addition, Suntec REIT has, over the weekend, also appointed the CEO of APM Property Management Pte Ltd as its Deputy CEO with effect from 1 Jan 2013. We think this shows Suntec REIT’s commitment to making the
Suntec City revamp a success. We reiterate a BUY rating for Suntec REIT. Our TP of SGD1.70 is unchanged for now, but we believe there is upside potential after FY12 results as pre-commitments for phase 1 Suntec City Mall (complete by 2Q12) are likely to be secured above Suntec’s post-AEI target of SGD12.59 psf/mth.