Month: January 2013
Saizen – Phillip
The forgotten child!
Company Overview
Saizen REIT is a Singapore-based REIT. Its mandate is to invest in a diversified portfolio of income-producing real estate which is primarily used for residential and/or residential-related purposes in Japan
- On a property tour to visit six residences in Fukuoka, Kumamoto and Hiroshima, Japan
- Residential property is good property asset class in Japan with stable and resilient cash flow
- Japan residential property prices are firming up No rating on the stock
What is the news?
We visited six residences under the portfolio of Saizen REIT in Fukuoka, Kumamoto and Hiroshima, Japan in December. These properties are conveniently situated in major commercial and entertainment areas, or towns near transportation networks connecting to major business and commercial centres or close to educational institutions. The building age of these residences range from 6-month to 23-year old and thus provided us a good sense of the condition of the newer and older buildings.
How do we view this?
The condition of the properties from the interior to exterior of the building was well-maintained and some of the rental unit is fully-furnished and equipped with electrical appliances and other fittings which can command a premium. Having said that, we believe the rental units will be highly sought after among tenants given the tip-top condition and easily accessible to places for work, play and learn.
Investment Actions?
Japan residential property seemed to hit the rock-bottom with limited downside. Cap rate is tightening marginally for some cities. This is evidenced by the modest increase of 0.8% for the valuation of 130 portfolio properties in FY12. We opine the worse could be over for Japan residential market. Saizen REIT’s borrowing cost and loan tenure are improving over time since global financial crisis. The management will continue to deepen the relationship with existing lenders and forging new ones to achieve lower interest cost and establish new loans for future acquisitions. Furthermore, the warrant proceeds can be used to perform share buyback which is DPU accretive. For investors who want to have exposure in Japan residential market, they can consider Saizen REIT over Japan Rental Housing Investments Incorporation (listed on TSE) on the thesis of yield compression. Weakening Japanese yen may not be favorable to Saizen REIT but Forex lines could be employed to hedge the depreciation.
S-REITs – Kim Eng
Go Selective On REITs
Year in Review. The S-REITs has been one of the best performers in 2012 (39% price return in FY12). Last year, we have seen many pension, insurance and income funds switching into REITs to pursue higher returns for the sheer fact that the yield-curve is almost flat. This is further aggravated by the almost “zero-bound yields” which meant that yields have no more room to fall, erasing any prospects of fixed income capital gains for investors. In the quest for returns, many such funds had to turn to slightly riskier asset classes such as REITs, Infrastructure Trusts and Master Limited Partnerships (MLPs) etc for stable recurring distributions.
S-REITs 2013 forecast. In the absence of real sustainable global economic growth, we believe that continuing rounds of QE Infinity, ECB’s unlimited bond-purchase program and BoJ’s yen-asset-purchase program will persist to keep interest rates low and liquidity high. This, in turn, will sustain property prices moving forward. Nonetheless, we DO NOT think that S-REITs will be able to repeat its stellar performance in 2012. In our view, S-REITs will find it challenging to complete yield-accretive acquisitions in 2013, given that property prices in most segments are already past their 2008 peak levels. We also see limited opportunities for further positive rental reversions (3-8% DPU upside per annum) as rentals face more downward pressure in 2013, following looming supply and softening of business sentiments.
Year of consolidation. 2013 is probably a year of consolidation for S-REITs, that will warrant further yield compression of at most 30-40bps, translating to a maximum of 6-8% upside. Given the high price-to-book of S-REITs (1.15x sector-wise), we downgrade S-REITs to NEUTRAL from OVERWEIGHT. For greater upside, we see more prevailing opportunities in developers (especially local high-end and diversified big caps) than landlords. We also see heightened risk of equity fund raising for S-REITs in asset enhancements, redevelopment projects or/and sponsor injections.
Stock picks. Selectively, our TOP picks remain with the more defensible Retail and Industrial REITs, namely Starhill Global (SGREIT SP, BUY, TP SDG0.85), Capitamall Trust (CT SP, BUY, TP SGD2.29) and Ascendas REIT (AREIT SP, BUY, TP SDG2.60), that can expect to benefit from near-term DPU upside with asset enhancements and ongoing redevelopment projects. We will advise investors to shun the more cyclical Office and Hospitality REITs.
FCOT – CIMB
What next after CPPU redemption?
After a series of yield-enhancing activities and portfolio restructuring in FY12, FCOT is in an enviable position asDPUgrowth is built-in through FY15 andasset leverageof 31% providesit withthe financial flexibility to do more.
We adjust FY13-15 DPUs by between -5% and +2% for the changes to NPI margins, timing of CPPU redemption in FY13, and upside from Alexandra Technopark in FY15. We maintain Outperform with a higher DDM-based target price (discount rate: 7.7%). We see catalysts from more yield-enhancing actions.
FY13 growth locked in; in-built growth till FY15
2012 marked a turning point for FCOT when management successfully restructured its asset portfolio and engaged in yield-enhancing activities. With the recent completion of a 48% CPPU redemption, management has locked in a nice 12% DPU uplift for FY13. Ongoing back-filling and positive rental reversions on its under-rented local office assets should extend DPU growth into FY14. Meanwhile, underlying NPI on Alexandra Technopark has already surpassed that provided by its master lease, which could provide another layer of uplift come FY15 when the master lease lapses.
Ammunition to do more
Asset leverage at 31% after its recent CPPU redemption leaves FCOT with the financial flexibility to do more. We expect FCOT to relook at hotel redevelopment plans over the next year, where it could sell the site and redeploy proceeds into accretive CPPU redemption. Management is also on the lookout for acquisitions, failing which it still retains the financial flexibility to redeem all its remaining CPPUs for ~10% DPU accretion while keeping asset leverage at levels of 40%.
Maintain Outperform
With DPU growth of 6-12% over FY13-15, FCOT‟s growth visibility is one of the strongest among S-REITs. This is further backed by undemanding valuations (0.9x P/BV and forward yields of 6-7%). We maintain Outperform and see upside from a gearing-up for acquisitions, CPPU redemption, and asset enhancements.
MLT – OCBC
BUILDING SCALE THROUGH INVESTMENTS
- Performance to stay firm
- Weaker JPY to have limited impact
- Strong growth potential
Strength from diversification
Mapletree Logistics Trust (MLT) has one of the most diversified portfolios in the industrial REIT space, with 110 logistics assets located across seven countries in Asia. This allows MLT to capitalise on the robust demand for warehouse space from retailers and third-party logistics companies as a result of the region’s strong underlying fundamentals and robust domestic consumption, as well as to maintain a sturdy financial performance. Operational metrics have also proven its resilience thus far, as evidenced by the positive rental reversions of 8% and continued improvement in the portfolio occupancy in 2Q.
Likely limited impact from depreciating yen
For 3QFY13, we expect the positive trend to continue, driven by healthy rental and take-up rates and contributions from MLT’s past acquisitions. While the recent weakness in JPY against SGD (depreciated ~11.6% since start of Oct 2012 and 6.3% a month ago) may have an impact on its distributable income given that ~27% of its revenue was contributed by Japan historically, we note that ~90% of amount distributable in FY13 is hedged/ derived in SGD. Hence, we believe any impact from a depreciating yen is likely to be limited.
Multiple avenues for growth
We also like MLT’s growth potential. MLT has been able to pursue inorganic growth at a time when the cap rates in Singapore have become relatively competitive, thanks to its strong pipeline of overseas assets from its sponsor. We highlight that MLT has the right of first refusal to over S$400m worth of pipeline assets which are nearing completion/ completed. Such assets usually have comparatively higher yields than those in its existing portfolio, which would enhance its DPU. On top of this, MLT will also focus on capital recycling and asset enhancement/redevelopment. These initiatives are likely to boost MLT’s income and yield going forward. We maintain our BUY rating and S$1.25 fair value on MLT. At current price level, its current DPU yield of 6.1% is also higher than the S-REIT average yield of 5.9%.
CDL H-Trust – Kim Eng
Maiden Foray into Maldives
Sale-and-leaseback of Angsana Velavaru. CDLHT announced that it has entered into a conditional sale and purchase agreement with Banyan Tree Holdings (BTH) on 4 Jan for the acquisition of Angsana Velavaru (79 beach villas, 34 water villas) at a purchase price of USD71m (USD628k per key), at a pro forma annualised NPI yield of 9.6% for the nine months ended 30 September. Including the USD0.71m acquisition fee and USD0.68m professional fees, total cost of acquisition is USD72.4m. This will be fully funded through debt financing, which will increase CDLHT’s gearing from 25.5% to 28.6%. Upon completion, CDLHT will leaseback the property to BTH for 10 years.
Lease agreement. Under the lease, CDLHT will receive rent payments equivalent to GOP less management fees. BTH is entitled to a tiered management fee, representing a share of the GOP, only if the GOP for the year exceeds USD4.5m. BTH will also pay a top-up amount to make up for any shortfall in rent below USD6m (the “Minimum Rent”). On the other hand, CDLHT has to set aside an amount equivalent to 3% of gross revenue as FF&E reserve every year and has to fund any capital expenditure required.
Rationale for acquisition. CDLHT’s first resort acquisition positions it as a beneficiary of the growing visitor arrival trends in Maldives, particularly from China. This also marks the beginning of a new lessee relationship with BTH (apart from existing ones with M&C, Accor and Rendezvous Group). CDLHT also believes that the asset presents asset enhancement opportunities. The Ministry of Tourism, Arts and Culture of the Republic of Maldives previously increased the allowable built-up area for tourist facilities as a percentage of the total land area from 20% to 30% in Apr 2012. Moreover, this acquisition also has the additional benefit of reducing CDLHT’s reliance on any single property such that the maximum contribution in gross rental revenue from Orchard Hotel will fall from 18.7% to 17.5%.
Our estimates. We expect the acquisition to complete by Feb 2013, with NPI yield-on-cost of ~8% (Incremental NPI of USD5.7m per annum) and GOP margin of 50%. According to CDLHT, RevPar (YTD Sep 2012) is around USD279 and occupancy ~70%. Room revenue makes up ~73% of total revenue while F&B constitutes the rest. At a cost of debt (USD) of slightly north of 2% (100% debt-funded), we think this acquisition should be yield-accretive for CDLHT.
Reiterate HOLD. We are mildly positive on this acquisition. Nonetheless, with more hospitality trusts onboard (At FY13P/B of 1.2x, scarcity premium likely to compress) and more hotel rooms coming onstream, we would advise investors to stay cautious. The stock has run up 22% in FY12 has limited upside ahead in our view. Reiterate HOLD