Month: March 2013
FCOT – OCBC
DPU GETS ANOTHER THRUST
- Expecting further DPU uplift
- Gearing to notch higher
- Current valuations still undemanding
Second round of CPPU redemption
Frasers Commercial Trust (FCOT) announced that it has successfully exercised the right of redemption for 157.1m Series A Convertible Perpetual Preferred Units (CPPUs). This constitutes 91.6% of the number of CPPUs outstanding. No CPPU has been successfully converted into new units, thus leaving a remaining 14.3m CPPUs in issue. The redemption will take place on 1 Apr, and will be funded via bank borrowings and cash. In addition, the distribution to entitled CPPU holders amounts to S$2.3m, or 1.3562 S cents per CPPU.
Positive impact on DPU
The decision by FCOT to redeem the remaining CPPUs was not expected as we feel that FCOT could have done so in the previous exercise. Nevertheless, we welcome the move as it would lead to an improvement in FCOT’s DPU, given that the CPPU distribution rate is relatively high at 5.5% vs. its average borrowing cost of 3.3%. Furthermore, this would remove any uncertainty pertaining to a possible dilution in unit base from a conversion of the CPPUs (currently in the money). The only trade-off, in our view, would be a higher aggregate leverage, which we believe would rise from 29.2% as at 31 Dec 2012 to ~40% assuming the CPPU redemption is fully funded by debt. This may imply limited debt headroom/higher risk of equity fund raising. However, our sense after talking to FCOT is that there is possibly no immediate acquisition target in sight, while its cash balances are more than sufficient to finance its asset enhancement initiatives for the Precinct Master Plan and China Square Central (both on track for completion).
Maintain BUY with higher fair value
We now project a full CPPU redemption in our model, as it may no longer be economical for FCOT to retain the remaining CPPUs. This raises our fair value from S$1.48 to S$1.52. We continue to like FCOT for its active management, growth potential and undemanding valuations (0.87x P/B vs. average 0.96x P/B for its office peers). Maintain BUY.
A-REIT – CIMB
Good pricing
AREIT is placing out 140m new units to raise ~S$350m for acquisitions. We like the pricing of its proposed acquisitions and project long-term accretion of 3% on a stabilised basis. Acquisitions continue to reflect management’s disciplined approach.
We lower our FY14 DPU by 3% for dilution and raise FY15 DPU by 3%forcontributions from its acquisitions. Rolling forward our forecasts and with the above accretion, we raise our DDM-based target price (discount rate: 6.7%). Maintain Outperform with catalysts expected from stronger-than-expected rental reversions.
What Happened
AREIT is placing out140m new units to raise gross proceeds of no less than S$350m. The issue price is S$2.50-2.55, implyingFY13 yields of 5.5-5.6% and representing2.1-4.1% discounts to its adjusted VWAP. Proceeds will be used to fund potential acquisitions: i) S$126m for Singapore Science Park II; and ii) S$210m for the partial funding of business space and a white commercial property at Kallang Avenue from PLC8 (a Soilbuild-related entity). The latter is a property under construction which should be completed around mid-2014 with a value of around S$490m.Factoring in the acquisitions and placement, asset leverage should be about 34.6% (39% if the assets are fully debt-funded).
What We Think
We like the acquisitions for their attractive pricing. The placement also appears necessary and AREIT’s good share price YTD has just offered it an opportunity. Acquisition yields from Science Park II are attractive at high 6% while the Kallang Avenue property should have yields of 6%or so upon completion, translating to blended yields of 6.3-6.4%. With these, we project full-year stabilised accretion of 3%, assuming its remaining commitments for Kallang Avenue are funded at 2.0% costs. There will, however, be near-term dilution of 3% in FY13 before the Kallang Avenue property is ready. With this, our FY14 DPU will be flat before growing by+9.5% in FY15.
What You Should Do
We continue to like AREIT for its disciplined approach toa cquisitions. Any share-price weakness on the placement should offer good entry points. Maintain Outperform.
Hospitality REITs – OCBC
POTENTIAL OVERSUPPLY SITUATION
- RevPAR growth strongest for IRs
- Uninspiring results expected for 1Q13
- GPH as asset value play
Total gross lettings stagnant
While visitor arrival figures for 1Q12 to 3Q12 demonstrated declining rates of YoY growth (+14.7%, +8.3%, +3.1% respectively), 4Q12 staged a rebound with visitor arrivals up 11.0% at 3.7m (preliminary figures). 2012 visitor arrivals totaled 14.4m, up 9.1% and near the high end of STB’s 13.5m-14.5m target. However, the total gross lettings for hotels was stagnant at 10.7m room nights. It is likely that the average length of stay has declined further from the 3.73 days in 2011, e.g. down to 3.45 days, and larger proportions of tourists may be staying in non-hotel accommodations.
IR hotels benefitting the most
2012 average occupancy was flat at 86%, and average room rates rose 5.7% to S$261.2, hence RevPAR for 2012 grew 5.7% to S$225.6. We believe that the industry RevPAR numbers might be skewed by the performance of IR hotels. For 4Q12, Marina Bay Sands registered 10.0% YoY growth in RevPAR to US$362, and Genting Singapore’s RevPAR jumped 42% YoY to S$407 (Genting opened the high-end Equarius Hotel and Spa Villas in 2012). 4Q12 RevPAR for CDLHT’s Singapore hotels was flat YoY at S$205. For FEHT’s Singapore hotels, RevPAR for 27 Aug – 31 Dec 2012 was S$171, only 1.2% higher than 2011 RevPAR of S$169.
Not a pretty picture
We understand from talking to industry players that 1Q13 operational figures for Singapore hotels are likely to be lackluster. For 2013-2015, we forecast hotel room demand growth of 5.4% p.a., lower than the projected 5.8% p.a. increase in room supply.
Maintain NEUTRAL
We remain NEUTRAL on the hospitality sector. Our top pick is Global Premium Hotels [BUY, FV: S$0.33], which we believe is a longerterm asset value play. GPH is currently trading 32% below its NAV of S$0.39. We have HOLD ratings on Ascott Residence Trust [FV: S$1.36], CDL Hospitality Trusts [FV: S$1.93], Far East Hospitality Trust [FV: S$1.05] and Genting Singapore [FV: S$1.52].
Starhill Global – OCBC
POISED FOR GROWTH
- Plaza Arcade to contribute from 1Q13
- Favourable outcome from rent review
- Further room for upside
Completion of Plaza Arcade acquisition
Starhill Global REIT (SGREIT) announced that the acquisition of Plaza Arcade in Perth, Australia has been completed last Friday. The purchase consideration of A$48.0m (~S$61.0m) was 40% funded by proceeds from SGREIT’s 2009 rights issue with the balance funded by its revolving credit facilities. This is expected to increase its gearing level marginally from 30.3% to 31.0%, according to our estimates. As a recap, Plaza Arcade is a freehold retail property with an NLA of 25k sqft and enjoys a high occupancy of 97.6%. It is located next to SGREIT’s David Jones Building, which gives the REIT opportunity to gain from synergies through asset enhancement. At an NPI yield of 7.8%, we expect the transaction to be DPU accretive, adding 0.08 S cent to SGREIT’s FY13 DPU.
Enlarged DPU expected in 1Q13
Apart from the maiden contribution by Plaza Arcade, SGREIT is also likely to get a boost in its 1Q13 DPU, due to the distribution of ~S$3.8m accumulated net rental arrears expected to be received from Toshin during the quarter. The arrears arose as a result of the retrospective application of the new rental rate (10% increase in base rent) for the term commencing 8 Jun 2011, of which SGREIT has been awarded following the conclusion of the Toshin rent review process. SGREIT intends to distribute substantially the net arrears in 1Q13, on top of the regular distributable income generated for the quarter. Hence, we expect its 1Q13 DPU to be up-sized.
Maintain BUY
We also understand that the new rate will serve as the base rent for the next lease renewal exercise in Jun. We believe further upside in rent is still possible, given that Orchard Road rental and occupancy rates have been holding up well. In addition, SGREIT may possibly benefit from interest savings following the refinancing of its term loan maturing in Sep. As such, we are positive on SGREIT’s performance going forward. Maintain BUY with an unchanged fair value of S$0.98.