Author: kktan
Hotel REITs – CIMB
Quantity lower, quality higher
Visitor arrival to Singapore was flat yoy in 1Q14. This was largely due to lower Chinese visitor arrivals in Feb and Mar, which we attribute to: 1) a new tourism law in China, and 2) the MH370 incident. Although the number of visitors from China has dwindled, we believe the average Chinese spending in Singapore has strengthened, benefitting the luxury and upscale hotels. We maintain our Add rating on OUE-HT (TP: S$0.96) and CDL-HT (TP: S$1.97), and our Reduce rating on FEHT (TP: S$0.80).
What Happened
Recent data from the Singapore Tourism Board (STB) revealed that visitor arrivals to Singapore remained flat yoy in 1Q14. During this period, higher visitor arrival from South East Asia (+4.1% yoy), on the back of stronger arrivals from Indonesia (+5.5% yoy), was offset by weaker visitor arrivals from China (-14.0% yoy). On the other hand, it was noted that RevPAR for Singapore hotels during the first four months rose by 2.1% yoy, despite a 0.7% yoy drop in occupancy. The growth was attributed to the upscale and luxury hotel segments, where RevPAR expanded by 10.1% and 3.1% yoy, respectively, vs. -4.4% in the mid-tier and +0.2% in economy segments.
What We Think
The slowdown in visitor arrivals from China could mainly be attributed to 1) the new tourism law in China which took effect in Oct 2013, and to a lesser extent 2) the MH370 incident. During Feb 14 and Mar 14, Chinese visitor arrivals dropped by an average of 19.5% yoy. During this period, although fewer Chinese came on multi-country package tours, more are travelling here on their own – and this group of visitors tend to spend more. As highlighted by data released by STB earlier this year, total Chinese tourism receipt in 4Q13 grew by 1% despite visitor arrival from China dipping by 31% over the same period. During 2013, Chinese spending was also noted to reach c.S$3.0bn, exceeding the Indonesians (at S$2.3bn) for the first time since 2007. Furthermore, tourism shopping tax refund company Global Blue recently pointed out that Singapore remains the second most favoured shopping destination for the Chinese after Paris. This trend is expected to strengthen further as the government aims to position Singapore as a top luxury lifestyle destination through various partnerships with Chinese tourism providers. Besides the patronage from big Chinese spenders, the upscale and luxury hotel segments are expected to benefit from 1) stronger Indonesian visitor arrivals, 2) packed calendar of events in 2014, and 3) a potentially stronger corporate spending trend as the global economy continues to recover in 2014.
What You Should Do
With the luxury and upscale hotel segments’ RevPARs expected to be strong in 2H14, we maintain our Add rating on OUE-HT (TP: S$0.96) as the company has the ability to boost RevPAR through the sponsor-funded AEI of its Mandarin Orchard hotel. Similarly, we remain positive on CDL-HT (Add; TP: S$1.97) and expect continual good performance from its Singapore and Maldives portfolios. On the other hand, we are negative on FEHT (Reduce; TP: S$0.80) as we expect its portfolio of mid-tier hotels, particularly those located along Orchard Road, to come under pressure amid intensifying competition in the coming months.
FCT – OCBC
New mall to propel growth
- Initial NPI yield at 5.43%
- Funded partially by placement
- Gearing to increase slightly to 30.3%
New addition to portfolio
Frasers Centrepoint Trust (FCT) announced that it has completed the acquisition of Changi City Point (CCP) from its sponsor’s joint venture Ascendas Frasers Pte Ltd on Mon. Recall that FCT first proposed to acquire the retail mall for a purchase consideration of S$305.0m (or S$1,472 psf NLA) on 8 Apr. According to the circular for unitholders, CCP is expected to generate an NPI yield of 5.43% and to contribute positively to DPU, assuming that the transaction is funded via a combination of debt and equity.
Strong interest for private placement
FCT has since launched a private placement of 88m new units at an issue price of between S$1.79 and S$1.835 per unit, upon getting unitholders’ approval for the related-party transaction. We note that the issue price was later fixed at the top range of S$1.835, backed by strong demand from new and existing Asian and European institutional investors. This represents a slight 3.6% discount to the VWAP for the full market day prior to the placement announcement. The total net proceeds of S$158.7m raised from the placement exercise was used to part finance the acquisition, while the remaining balance of the purchase price was funded by borrowings and internal resources. Based on our projections, the CCP deal is expected to add an annualised 0.12 S cents to FCT’s DPU. FCT’s gearing ratio, on the other hand, is likely to increase from 27.7% as at 31 Mar to 30.3%.
Maintain BUY
In connection with the placement, FCT has also declared an advance distribution of 2.288 S cents per unit for the period of 1 Apr to 9 Jun 2014, payable on/around 17 Jul. This translates to a respectable yield of 6.4%. We now incorporate the private placement and acquisition into our forecasts. Consequently, our fair value is raised from S$2.02 to S$2.08. Given that upside potential remains attractive, we maintain our BUY rating on FCT.
PLife – CIMB
More reasonable valuations
PREIT has de-rated 5% to more reasonable valuations since our downgrade. Fundamentally, it remains one of the most stable REITs with long leases, downside protection and CPI-linked rental reviews. There is further room for acquisitions given a healthy balance sheet at 35% gearing and debt headroom of S$131m-287m at 40%-45% gearing. We maintain our DDM-based target price (discount rate: 7%) and upgrade PREIT on valuation grounds. We have yet to factor in any acquisitions but estimate that a S$100m acquisition at NPI yield of 7% could lift our target price by 5% to S$2.53. Re-rating catalyst will be yield-accretive acquisitions.
What Happened
PREIT has de-rated 5% since our downgrade on 2 May 14, which was largely premised on expensive valuations.
What We Think
Fundamentally attractive. Aside from being in a resilient industry, PREIT benefits from favourable lease structures such as a long-lease term to expiry (>10 years), downside protection for 91% of its revenue and CPI-linked rental review for 67% of its portfolio. The Singapore hospitals alone should drive organic growth of 2.7% over the next two years assuming a CPI of 3%.
Further room for acquisitions. PREIT’s exposure in Japan (>30%) positions it as a proxy for Japanese reflation. More importantly, its early entry and good working relationship with Japanese nursing home operators allow PREIT to consistently make yield-accretive acquisitions despite rising competition. We expect more acquisitions given its healthy gearing of 35% and debt headroom of S$131m-287m. Aside from Japan, Australia and Malaysia are potential markets.
More reasonable valuations. The yield spread for PREIT against 10-year government bond yields has widened from 175bps (during our downgrade) to 275bps. While this remains below the S-REITs simple average of 3.8%, we believe this is a more reasonable level given PREIT’s stability.
What You Should Do
Hold for a stable REIT with c.5% dividend yield. We have only factored in organic growth, but estimate that a S$100m acquisition at NPI yield of 7% could raise our target price by 5% to S$2.53.
MLT – Maybank Kim Eng
MLT expands in South Korea
- MLT acquires Daehwa Logistics Centre, its ninth property in South Korea, for SGD31.2m which is to be fully debt funded.
- At an initial NPI yield of 8.3%, it is a DPU-accretive acquisition.
- A positive move but too small to ‘move the needle’ for MLT. Reiterate SELL with a higher TP of SGD1.01.
What’s New
MLT announced last evening that it has entered into a sale and purchase agreement for the acquisition of Daehwa Logistics Centre in South Korea for KRW25.5b (SGD31.2m). We believe this asset was highlighted by management during the FY3/14 briefing on which MLT had previously signed an MOU. The new property is fully occupied by three quality tenants: eBay, Acushnet and Daehwa. The leases have a weighted average lease term to expiry of 3.5 years with built-in annual rental escalations for 70% of the leased area. The acquisition will be fully debt funded with completion expected by July. MLT’s aggregate leverage ratio is expected to increase marginally to 33.8% from 33.3% as of 31 Mar 2014.
What’s Our View
The property’s initial NPI yield of 8.3% compares favourably to MLT’s cost of borrowing of 1.9% and overall portfolio NPI yield of 6.5%. While it is a DPU-accretive acquisition, it would only raise FY3/15E-FY3/17E EPS by up to 0.8%. Post transaction, revenue contribution from South Korea will increase from 8.7% to 9.4%.
Nonetheless, the size of the acquisition is too small to ‘move the needle’ for MLT and we look forward to more sponsor injections and third-party acquisitions in FY3/15E. We remain downbeat on industrial warehouse properties, as this segment is the most at risk of a sharp physical price correction. Maintain SELL on MLT with a slightly higher TP of SGD1.01 (previously SGD1.00) after factoring in this acquisition.
AscottREIT – OCBC
Expecting better 2H14
- Seasonally softer 1Q14
- Portfolio RevPAU flat at S$124
- AEIs and acquisitions to propel growth
1Q14 results within view
Ascott Residence Trust’s (ART) recent 1Q14 results were within our expectations. Both revenue and gross profit grew by 16% YoY to S$80.4m and S$39.2m, respectively. The growth was bolstered by contributions from the properties acquired in 2013 and improved performance at its existing properties, particularly from United Kingdom, France, Germany and Vietnam. Distributable income was down 3% to S$26.7m due to a one-off realized forex gain of S$8.1m in 1Q13. Together with the rights issue in Dec 2013, DPU eased 22% to 1.75 S cents. While this only meets 22% of our FY14F DPU, we view the results to be in line considering that this is a seasonally softer quarter and performance is expected to improve with new income streams from its announced acquisitions YTD.
Operating metrics mostly positive
For the quarter, RevPAU has remained stable both YoY and QoQ at S$124. However, we note that RevPAU for Japan, United Kingdom and Belgium saw a 18%, 13% and 11% increase respectively, driven by strong demand from corporate and leisure travelers. In Singapore and Vietnam, higher demand from executives on project assignments were also seen, and this has helped to push RevPAU up 6% in both countries. Only Australia and The Philippines were impacted by weaker marker demand and unfavourable forex movements. Nonetheless, as forward contracts to hedge 60%-70% of its estimated income derived in EUR, GBP and JPY were entered, we expect limited volatility in ART’s distribution.
Maintain BUY; fair value unchanged
We also understand that 17%-25% uplift in average daily rates was registered upon completion of the asset enhancement initiatives (AEIs) in 1Q. Looking ahead, management disclosed that it will continue to undertake AEIs to enhance customer experience and maximize returns (S$29.3m costs from 2Q14-2Q15). Coupled with the revenue from its Dalian property (acquired in Mar), Fukuoka property (to complete by Jul)
and possibly new acquisitions in the key gateway cities, we believe 2H14 to be stronger. Maintain BUY with unchanged fair value of S$1.33 on ART.