Author: kktan
CCT – OCBC
Looks fairly valued here
- 1Q14 figures within expectations
- CapitaGreen 12% pre-committed
- Downgrade to HOLD
Good start to the year
1Q14 distributable income increased 7.6% to S$59.9m mostly due to stronger contributions from portfolio assets and lower interest expenses. 1Q figures were mostly within expectations and YTD distributable income now constitutes 25.6% of our full year forecast. Topline for the quarter came in 8.5% higher YoY at S$57.1m versus S$52.6m in 1Q13 (restated due to the adoption of FRS 111 which reclassified income from RCS Trust and MSO Trust under “share of results of JV”). We note that the Trust enjoyed higher revenues from all properties due to a mix of stronger occupancies and positive rental reversions, except for One George St which was impacted by the cessation of yield protection income. 1Q14 DPU of 1.94 S-cents translates to a 5.2% yield as at the last closing price of S$1.635.
CapitaGreen now 12% pre-committed
Portfolio occupancy came up to 99.4%, up 70 bps from 98.7% as of end 4Q13. We continue to see positive rental reversions across CCT’s portfolio assets, with average committed office portfolio rentals increasing to S$8.22 psf as at end 1Q14 from S$8.13 as at end 4Q13. Management highlights that more than two thirds of leases expiring in FY14 has been renewed. Greenfield asset CapitaGreen remains on track to complete by end FY14 and the Trust has already pre-leased 12% of the 0.7m sq ft net lettable area to Cargill, Bordier & Cie and an international gym operator. Management expects to achieve commitment levels of ~50% by completion.
Downgrade to HOLD on valuation grounds
As our top pick in the REITs sector, CCT has outperformed significantly YTD, appreciating 12.8% versus the STI’s 2.7% movement over this period. We update our model for latest rental assumptions, and our fair value increases marginally to S$1.67 from S$1.61 previously. At this juncture, however, we believe CCT is almost fully valued; downgrade to HOLD on valuation grounds.
CCT – Maybank Kim Eng
In-line results; eyes on CapitaGreen
- 1Q14 results in line with our expectations. DPU rose 7.2% YoY to 2.08 cts.
- 12% pre-commitment signed to-date for CapitaGreen. Cargill leases 51,000 sq ft and likely paying SGD9-10 psf per month.
- Reiterate HOLD with DDM-based TP raised to SGD1.66.
Results in line with expectations
CCT saw a 3.2% YoY rise in 1Q14 revenue to SGD64m, bolstered by higher income from most properties except One George Street, whose Deed of Yield Protection expired on 10 Jul 2013. 1Q14 DPU grew 7.2% YoY to 2.08 cts, driven by lower interest expense and higher NPI. Balance sheet remained strong, with a low gearing of 30% and 81% of borrowings on fixed rates. CCT has debt headroom of SGD1.2b, assuming a gearing of 40%. Portfolio occupancy rate edged up to 99.4% from 98.7% thanks to a mix of new and renewed leases, while monthly average office portfolio gross rent continued its uptrend, increasing to SGD8.22 psf from SGD8.13 psf in 4Q13.
CapitaGreen achieves 12% pre-commitment
CapitaGreen has secured a pre-commitment for 12% of its NLA of 700,000 sq ft from Cargill (51,000 sq ft), Bordier & Cie (12,000 sq ft) and an international gym operator (18,000 sq ft). These first-mover tenants are likely to be loss leaders, possibly paying a monthly rental of SGD9-11 psf, lower than CCT’s target of SGD12-14 psf for subsequent smaller floor-plate tenants. We see challenges ahead as CCT’s pre-leasing activities will coincide with those of the 782,000-sq-ft Asia Square Tower 2 (TOP 3Q13; 60% pre-committed) and 527,000-sq-ft South Beach Development. We expect the next significant increase in DPU to occur only in FY15 after the completion of CapitaGreen. We raise our FY14E-16E DPU estimates by 1.4-2.3% on interest savings and better growth prospects. Reiterate HOLD with a higher DDM-derived TP of SGD1.66 (previously SGD1.50).
KeppelREIT – DBSV
Sound operations
- DPU stable y-o-y at 1.97 Scts, in line
- Portfolio fully occupied; REIT to benefit from rising demand for space at Marina Bay area
- Maintain HOLD, TP S$1.29
Highlights
1Q14 results. KREIT booked S$47m revenue (+13% y-o-y), S$39m NPI (+15%), and S$55m distribution income (+5.5%) for the quarter. Topline growth was driven by (a) better performance at Ocean Financial Centre (OFC) and Prudential Tower, and (b) new contribution from 8 Exhibition Street (acquired In Aug-13). There was also higher contribution from MBFC Phase 1, leading to 13% growth in associate income. Financing costs rose 13% to S$14.5m due to an expanded portfolio. DPU was flat at 1.97 Scts on a larger share base after several equity fund-raising (EFR) exercises in FY13.
Marina Bay: positive leasing momentum to ease negative impact of loss of income support. KREIT will see 3.1% and 6.3% of NLA due for renewal and rent review, respectively. We understand the majority of these leases are for OFC and MBFC Phase 1 where passing rents are lower than market currently. Given healthy office leasing momentum in the Marina Bay area, we expect 10-15% uplift in those rents. This should mitigate the slight drop in rental income as income support from MBFC Phase 1 had expired last quarter. Income support from OFC also fell to S$10.5m due to larger share of retail leases and other ancillary income (advertising and signage).
Our View
Early debt refinancing to stabilise interest cost. KREIT continued to be proactive in capital management by refinancing S$350m of debt due in FY15 (38% of total debt) and FY16 (16%), terming out debt to 3.9 years from 3.5, while maintaining
fairly low all-in interest cost of 2.18% (vs 2.15%). In addition, the REIT has hedged 68% of total borrowings with fixed rate debt to minimise risk to rising rates in the near term.
High acquisition hurdle. Given high gearing of 42%, future acquisitions would have to be financed via EFR, which will be difficult to execute given high implied yields compared to market. Despite the availability to acquire MBFC Phase 2 from its Sponsor Keppel Land, K-REIT would be hard pressed to make any DPU accretive acquisitions at this point given that cap rates for office assets in Singapore are c.4% currently.
Recommendation
Maintain HOLD, TP S$1.29. We like K-REIT for their quality prime Grade A portfolio. Further clarity on the planned acquisition of MBFC Phase 2 and funding could be re-rating catalysts.
CLT – OCBC
Clinches first BTS development
- BTS warehouse completion expected in 2H15
- Long-term lease with quality tenant
- Funded by debt and internal sources
Development of ramp-up warehouse
Cache Logistics Trust (CACHE) announced yesterday that it has entered into an agreement with DHL Supply Chain Singapore Pte Ltd to develop and lease a build-to-suit (BTS) ramp-up warehouse located at Greenwich Drive, Tampines LogisPark. The development comprises two blocks with a total GFA of ~989,200 sqft and NLA of ~928,100 sqft. The total cost of the project is estimated to be ~S$123.5m, including S$105.1m development costs and S$18.4m non-development expenses.
Arrangements relating to development
Development risk is minimised through a fixed price building works contract with Precise Development Pte Ltd, a qualified and well-established contractor founded in 1983. Recall that CACHE acquired a ramp-up warehouse from the contractor via a sale-and-leaseback arrangement in Apr 2013. In addition, CACHE’s sponsor, CWT Limited, will assist by providing strategic project management expertise. Temporary occupation permit is expected to be issued by 2H15. Upon completion, DHL Supply Chain will occupy 100% of Block 1 NLA, 50% of Block 2 NLA from year 3 onwards, and 100% of Block 2 NLA from year 5 onwards. All three lease terms will co-terminate at the end of the initial 10-year period, with an option for renewal. In our view, the lease with DHL Supply Chain (part of world’s leading logistics solution provider Deutsche Post DHL) will provide CACHE with quality long-term recurring income, while improving its portfolio’s average lease term from 3.1 years
to 4.1 years.
Maintain BUY; fair value raised
According to management, the stabilized NPI yield is expected to be comparable to CACHE’s existing properties in the vicinity, and annual rental escalations will apply throughout the first lease term. We also understand that CACHE has secured a loan facility of S$97.0m to finance the development (remaining costs to be funded by internal sources). We estimate a NPI yield-on-cost of 8.5% and rental escalation of 1.5%, with contribution to start in 2016. Our value fair is now raised from S$1.20 to S$1.25. Maintain BUY.
CLT – Maybank Kim Eng
New BTS asset to lift DPU; up to HOLD
- Foray into build-to-suit development with DHL Supply Chain at a total cost of SGD123.5m. New asset to account for 12% of our total GAV.
- Yield-on-cost estimated at ~11% on a stabilised basis, with 1.1-8.6% boost to FY15E-16E DPU.
- Upgrade to HOLD with a higher DDM-derived TP of SGD1.15.
What’s New
CACHE has entered into an agreement with DHL Supply Chain Singapore to develop and lease a build-to-suit (BTS) warehouse (NLA: 928,100 sq ft) at Greenwich Drive in Tampines LogisPark. The development will comprise two blocks of ramp-up warehouses. JTC Corporation will grant CACHE a 30-year land lease starting from 16 Jun 2014 and CACHE has to complete the development within the next 15 months. The cost of development amounts to ~SGD105.1m, while non-development expenses will add another SGD18.4m.
What’s Our View
CACHE’s foray into BTS development is overall positive in our view as the new asset will generate better yields, increase its total deposited property (by 8.6% to SGD1.17b), lengthen its portfolio’s weighted average lease to expiry (to 4.1 years from 3.12) and reduce the average portfolio building age (to 4.9 years from 5.82). We factor in a yield-on-cost of ~11% on a stabilised basis (ie, full occupancy). Our FY15E-16E DPU would thus rise by 1.1-8.6% which is already incorporated into our forecasts. Post development, CACHE’s gearing will rise to a still comfortable 34.8% from 29.1% at end-2013. We note also that its sponsor, CWT, has seconded
strategic project management personnel to Cache Property Management to assist in quality control and on-time delivery. The new BTS development is estimated to account for 12% of our total GAV. As we are positive on this acquisition, we upgrade CACHE to HOLD from SELL with a higher DDM-derived TP of SGD1.15 (previously SGD1.05).