Month: April 2013
Suntec – OSK DMG
A New Dawn
As previously indicated by its management, the pre-commitment rate for Suntec City Mall’s Phase 1 AEI reached 83% in 4Q12. We speculate that the rate is now over 90%, as Phase 1 of the AEI is near to completion and prepares to commence operations in about 1.5 months. On the back of a well-executed AEI, we have upgraded our rating on SUN to BUY, with a revised TP of SGD2.10.
Value enhancements through AEI at Suntec City. At its last results briefing, SUN’s management indicated that 83% and 37% of Suntec City’s Phase 1 and Phase 2 AEI space respectively have been pre-committed. With a forecasted average rental rate of SGD12.59 per sq ft per month (+25%) and a higher NPI of SGD7.8m per month (+33%) post-Phase 1 AEI, we expect SUN to benefit from this project when the majority of works are completed in 4Q13.
Bright prospects despite weak performances in 1Q13 and 2Q13. While we speculate Phase 1 pre-commitment rate to have exceeded 90%, we expect the earnings for SUN to be the weakest between 1Q13 and 2Q13, a period when the Phase 1 has not commenced operations while Phase 2 is closed in preparation for the upcoming AEI. However, as we approach the end of Phase 1 AEI, we expect SUN to re-rate as its outlook brightens on the back of a well executed AEI.
Trading at steeper discount than appeared. SUN, which is currently trading at 0.9x P/B is one of the few S-REITs that are still trading at a discount to book value. In addition, given that Suntec retail mall (which accounts for c.33% of the total portfolio value) is valued at c.SGD2,100-SGD2,200 per sq ft, we believe SUN is trading at a steeper discount than it appears on book; if the ‘true value’ of the mall is taken into consideration.
SUN trading at higher yield versus peers. Currently, SUN is trading at a dividend yield of 5.2% and 5.7% of FY13’s and FY14’s forecasted yields respectively. Concurrently, given a lower average dividend yield of 5.0% (4.8% if Keppel REIT is stripped out) among the Grade A office and retail REITs space, we believe SUN is due to re-rate once positive income starts flowing in when Phase 1 AEI is completed in about 1.5months. On this basis, we have upgraded our rating on SUN to a BUY with a TP of SGD2.10 on the back of a clearer outlook, positive rental reversion and high pre-commitment rates for the new space.
A-HTrust – DBSV
Park Hotel Clarke Quay "poised for imminent sale"
- Park Hotel Clarke Quay is reported to be available for sale at a price tag of close to S$300m
- Price implies up to a price per key of S$900k seems high but reflects optimisim in Singapore as a leading tourist location
The media reported that the 336-room Park Hotel Clarke Quay is "poised for imminent sale" at about S$300m. The buyer is reportedly a REIT, and Ascendas Hospitality Trust is a prime candidate. Park Hotel Clarke Quay is new upscale hotel that was completed in 2009. The hotel is strategically located near the Central Business District and is close to several tourist attractions like Chinatown, Arab Street, and the National Museum, and is within walking distance to Clarke Quay MRT Station and lively drinking hole, Clarke Quay. The hotel has received good reviews by travelers at online travel website Tripadvisor.com. There are other hotels in the vicinity which means there will be competition for guests.There are no further details or related announcements by any REITs.
The price tag and our thoughts
The reported S$300m price tag implies S$900k/key, which seems high but is within expectations given the tight holdings of hotel assets in Singapore and the lack of available hotel assets in good locations in Singapore. Previous transactions in the vicinity included Hotel Grand Pacific, an older hotel that was sold at S$850k-S$900k/key)
Given the positive outlook for Singapore's tourism sector in the medium term – Singapore Tourism Board is targeting to increase visitor arrivals to 17m in 2015 -, Singapore remains one of the most desired hotel investment markets in the region.
Assuming S$260/night RevPAR reported by Upscale hotels (Singapore Tourism Board) and 50% EBITDA margin, the price tag implies EBITDA yields of 5.25%- 5.5%.
It is interesting that Ascendas Hospitality Trust was also mentioned because if successful, this deal would represent its maiden foray into Singapore. But given its exposure in Australia, Japan and China, its portfolio yield (est. 6.6% on book, 6.1% on implied basis) is naturally higher than Singapore’s, and would likely mean dilution for shareholders or the trust would have to take on a larger debt-funded structure in order to make the deal accretive.
A-REIT – MayBank Kim Eng
Nearing End of Sweet Run; Cut to HOLD
Downgrade to HOLD. The industrial REIT run looks over and we downgrade A-REIT to HOLD on valuations. It was our last BUY among Industrial-REITS. A-REIT has been our conviction BUY since we initiated in June 2012 and the stock has risen 30%. We expect the current QE-inflated growth to run out of steam once the artificially compressed interest rates in the US, and hence Singapore, start normalising sometime next year or in early 2015. Industrial property prices in the physical market have almost doubled since 2009 whereas rentals are up only 44%. Further government cooling measures will put a lid on asset prices, while we are sceptical that rentals can scale up in the near term. We remain cautious on the mismatch between industrial rentals and physical prices and see no further catalysts for the sector at the current levels (refer to our S-REITs report, titled Rational Temperance, dated 22 Mar 2013).
Private placement. A-REIT conducted a private placement of 160m units (6.7% dilution post-placement) at SGD2.54/unit on 19 Mar 2013. An advance distribution of 2.70 cents is expected to be paid on 25 April. Of the gross proceeds of SGD406m, SGD126m has been used to acquire The Galen at Science Park II and SGD210m will be used to partly fund an integrated industrial mixed-use property, currently under construction, at Kallang Avenue (total value ~SGD490m). The rest of the money will be reserved for issue expenses, corporate/working capital purposes and debt repayments.
The Galen acquisition. We have factored into our model A-REIT’s private placement and purchase of The Galen (SGD538 psf on NLA basis), with initial NPI yields of 6.8% and passing rents of SGD4.10 psf/mth. This works out to ~SGD11m in revenue and ~SGD8.6m in NPI contributions. A six-storey multi-tenanted science park building, The Galen has a NLA of 234,384 sq ft and occupancy rate of 97.5%. Ascendas Land and the REIT manager occupy 52.7k sq ft, or 22.5%, of the lease space.
Moving up the value chain. Based on our estimates, A-REIT has 38% of its FY3/14F GAV in business/science parks and 23% in high-tech industrial/data centres. We expect these two segments to progressively increase in proportion as Singapore outsources its lower value-add activities to neighbouring countries (warehouse rents and asset values in Singapore are, respectively, 2.5x and 8.5x higher than in Iskandar Malaysia). We downgrade A-REIT to HOLD with a TP of SGD2.70.
FirstREIT – OCBC
ENHANCING ITS PORTFOLIO VALUE
- Total purchase consideration of S$190.4m
- Lease terms similar to Nov 2012 Acquisitions
- Bump up FV to S$1.31 but maintain HOLD
Recently proposed two sponsor-related acquisitions
First REIT (FREIT) recently announced that it has entered into two conditional sale and purchase agreements for the acquisition of two new hospitals from its sponsor Lippo Karawaci (Lippo)1. The hospitals are Siloam Hospitals Bali (SHBL) and Siloam Hospitals TB Simatupang (SHTS), with purchase considerations amounting to S$97.3m and S$93.1m, respectively. This represents a 13.3% and 12.5% discount to the average of two independent valuations for each property, respectively. The purchase of SHBL would be funded wholly by a drawdown from FREIT’s committed debt facility, while SHTS would be purchased using a combination of both debt and issuance of new units to Lippo (funding mix not finalised).
Acquisitions to provide stability and visibility to unitholders
We are positive on the acquisitions as it is expected to be accretive in nature and would enlarge FREIT’s asset base, lower its weighted average age of properties from 10.4 years to 8.6 years and increase its weighted average lease to expiry from 11.3 years to 12.0 years. The lease terms are largely similar to its two previous acquisitions made in Nov last year, and offers strong stability and visibility to unitholders (15+15 years lease tenure with downside base rental protection), in our view.
Estimated DPU accretion of 6-13%; but maintain HOLD
We raise our FY13 and FY14 DPU estimates by 5.9% and 13.2%, respectively, as we incorporate contribution from the assets in our forecasts. We assume that SHTS would be financed by S$45m of debt and S$50m of equity. This would raise FY13F gearing ratio to 34.0%, based on our estimates. Yields for FY13F and FY14F remain healthy at 6.2% and 6.8%, respectively. We also adopt a DDM model (cost of equity: 7.7%; terminal growth rate: 1.0%) as our new valuation matrix (previously RNAV). Our fair value estimate is raised from S$1.00 to S$1.31. But we maintain our HOLD rating as we believe that the market has largely priced in the positives from these acquisitions (price appreciated 6.3% since the announcement) and FREIT’s continued transition to a sizeable healthcare REIT in the region.
MIT – DBSV
Winning a sweet deal
- ‘Built-to-suit’ project with quality earnings
- Good returns with accretion to distributions
- HOLD, TPS$ 1.46
Built-to-suit project for Equinix Singapore.Mapletree Industrial Trust (MINT) announced an agreement to develop a ‘built-to-suit’ facility for Equinix Singapore, a 7 storey, high specification property located in One-North (land allocated by JTC) which will primarily be used as a data centre. On completion, Equinix will sign a long term lease of 20 years with step-ups and further renewal options. Equinix have an option to enhance and add
additional infrastructure at two floors of this proposed faclity where additional rent will be payable.
Good returns and accretion to distributions.We like this deal as (i) the long lease provides good income visibility for this proposed investment, with annual step-ups providing longer term organic growth (ii) high returns on cost of 7.75% (on estimated rent of S$2.0 psf pm ) for this property, which will be accretive to distributions and (iii) quality earnings backed by a blue chip tenant – Equinix Sinapore is a subsidiary of
NASDAQ-listed Equinix Inc. a global interconnection and data centre company.
Maintain HOLD, TP S$1.46.TP is adjusted to S$1.46 after this latest deal has been factored in. DPU estimates adjusted down by c1% in FY14F to reflect income vacuum during development, but expect a hike of c3% after. HOLD call is maintained, premised on a lack of upside.