A-REIT – DMG
Laggard to A-REIT
Attractive yields and valuations despite strong rally. We raise our TP to S$0.64 from S$0.61 on the back of lower cost-of-equity assumption. CREIT will be reporting 3Q09 results on 27 Oct and we expect annualised DPU of 5.09¢, a 15.5% decline over FY08. The fall in DPU is due to the higher refinancing cost that was concluded at end-2008. Whilst stock price has doubled since March underpinned by its successful refinancing, CREIT still trades at attractive FY10 yields of 11.4%. Maintain BUY.
Defensive business structure is a relative strength. CREIT remains our top pick within the small cap S-REIT space. We favour it for its bondlike characteristics anchored by: 1) long tenant leases of 5.1 years; 2) high levels of bank-guaranteed security deposits of 16 months; 3) built-in portfolio rental escalation of 2% pa; 4) high occupancy and diversified tenant mix; and 5) 51% of portfolio sublet providing second layer of income support. Besides, its existing interest costs are hedged for the next three years, minimising interest rate fluctuation risks. CREIT does not have any debt expiring until Feb 2012.
Further devaluation – an unlikely event! CREIT’s portfolio was written down by 9% to S$880m following a 50bps increase in cap rate used by property valuers. This resulted in its gearing rising to 44% in 2Q09 from 40% in 1Q09, and a lower book value of S$0.62/share (S$0.74/share previously). CREIT’s portfolio was valued based on a cap rate of 6.75-7.75%. We believe the vulnerability of further rises in cap rate is low, backed by its built-in step-up rental leasing arrangements and low risk free instrument yields.
A laggard to A-REIT – room for further yield compression. CREIT’s dividends are well supported by rental guarantees and step-up rental agreements. Prior to the credit crisis, CREIT traded at 140bp yield premium over A-REIT. That gap now stands at 440bp, suggesting that it is very much a laggard play. At our TP of S$0.64, CREIT offers an attractive FY10 yield of 8%, a reasonable peg in our view. Recall: A-REIT offers a recursive yield of 6.5% at our TP estimate of S$2.05.