Author: kktan
SB REIT – OCBC
Bite-size addition, but positive attributes
- Long leaseback term of 10 years
- Attractive NPI yield and rental step-ups
- Possible DPU accretion of 0.13 S cents
Maiden third-party acquisition
Soilbuild Business Space REIT (Soilbuild REIT) announced last Friday the proposed acquisition of an industrial property known as 39 Senoko Way in Woodlands, Singapore from third-party vendor Tellus Marine Engineering Pte Ltd (Tellus Marine). The total cost of the transaction is expected to be S$18.3m, comprising the purchase price of S$18.0m (S$189 psf GFA) and other acquisition-related expenses. Upon completion of the deal (around Apr 2014), Soilbuild REIT will lease the property back to Tellus Marine for a term of 10 years via triple-net lease arrangement.
More details on transaction
39 Senoko Way consists of an existing four-storey industrial building and a proposed single storey workshop which is expected to complete construction no later than nine months from the completion of the acquisition. The property is held under a JTC lease with a remaining land lease tenure of 10 years and an option to extend by another 30 years, subject to terms and conditions of the JTC lease. Management believes that the proposed acquisition will provide an additional growth driver, stable income as well as diversification to its portfolio assets. We understand that the property is expected to generate an initial NPI yield ranging 7.8%- 8.0% and offer an annual rental escalation of 2.5%. This is higher than that seen in most of its existing assets.
Maintain BUY
We anticipate Soilbuild REIT to fund the acquisition wholly by debt and internal resources, as its gearing ratio has remained very robust at 29.3%. Based on our projections, the new addition is likely to add an annualized 0.13 S cent to Soilbuild REIT’s DPU. We now incorporate the acquisition in our forecasts. Accordingly, our fair value is lifted slightly from S$0.85 to S$0.87. Maintain BUY on Soilbuild REIT as the total expected return remains compelling.
PCRT – CIMB
Is it worth the wait?
If St James’ reverse takeover of Perennial goes through, PCRT’s shareholders will be offered an option to swap their shares for those of a bigger real estate company with presence in Singapore and China. We do not like the deal as: 1) investors will probably have to compromise on yield; 2) investors will gain access to a portfolio with higher gearing and proportion of assets under development, thus higher risk, in our view; and 3) while we believe the S$0.70 offer price is fair, the issue price of PREHL at 0.9x NTA is expensive compared to Singapore developers at an average 0.74x P/BV. We downgrade our rating to Reduce from Hold and cut our RNAV-based target price by 13% as we increase our discount rate from 20% to 30%.
What Happened
Trading in both Catalist-listed St James Holdings (SJH) and PCRT was halted on 14 Mar for the announcement of: 1) the reverse takeover of Perennial Real Estate Holdings Pte Ltd (PREH) (incl. 27% stake in PCRT), after which SJH will be renamed Perennial Real Estate Holdings Ltd (PREHL) and transformed into a real estate owner, developer and manager in Singapore and China, and 2) voluntary conditional offer of S$0.70/unit for PCRT in exchange for PREHL shares issued at S$1.1756/share, conditional upon the completion of (1) above.
What We Think
Rationale. We believe the rationale of the proposed acquisition and offer is to gain better access to funding. Also, the consolidation of PREH and PCRT’s assets positions the company as a mixed development developer and clears the confusion on whether PCRT should be regarded as a yield play.
We view the deal negatively. While we believe the offer of S$0.70 at 1x RNAV and 0.9x P/BV is fair, payment in PREHL shares complicates the issue. The issue price of PREHL translates to 0.9x P/NTA and 24x P/E, pricey in our view. Existing shareholders converting into PREHL would compromise on yield, accept higher development risks, higher gearing and wait a much longer time for the portfolio to complete development. While investors can buy PCRT at 0.7x P/BV to be exchanged for PREHL shares at 0.9x P/NTA, we believe PREHL’s shares may de-rate to an average 0.74x P/BV as well. CMA is trading at 0.87x P/BV, but 75% of its assets are operational, while 77% of PREHL’s assets are under development.
What You Should Do
Reduce exposure on potential overhang post the announcement.
OUE H-Trust – OCBC
Downgrade on valuation grounds
- RevPAR of S$254
- Orchard hotels opening in 2Q and 3Q
- Downgrade to HOLD
Mandarin Orchard drives results
FY13 results, released on 25 Feb, for OUE Hospitality Trust (OUEHT) were in line with ours and the street’s expectations. For FY13 (from listing date of 25 Jul to 31 Dec 2013), gross revenue at S$50.6m was 1.3% higher than management’s IPO forecast mainly due to better-than-expected performance recorded by Mandarin Orchard Singapore (MOS) hotel. The achieved RevPAR was S$254, versus the forecast RevPAR of S$252. Net property income at S$44.8m was 1.4% higher than forecast. Distributable income was 2.4% higher than forecast at S$38.2m. DPU was 2.1% higher than forecast at 2.90 S cents.
Refurbished rooms see 15% premium
In FY13, MOS had 26 guest rooms added, bringing the number of rooms from 1,051 at listing to 1,077. 32 refurbished guest rooms achieved room rates ~15% higher than non-renovated rooms. 430 guest rooms are scheduled to be refurbished in phases in 2014 and 2015. Mandarin Gallery is 100% committed, with more than 90% of leases (by NLA) having step-up structures with a weighted annual step-up of ~4.7%. Five leases, with account for ~2.2% of NLA, were renewed in 4Q13 with average weighted rental reversion of 28%.
New competition in 2Q and 3Q
MOS will be seeing increased competition in the Orchard Road region from 2Q14. Traders Orchard Gateway Hotel (upscale/luxury, 502 rooms), is expected to open in 2Q14, and Hotel Grand Chancellor Orchard (mid-tier, 488 rooms) and Hotel Grand Central (mid-tier, 264 rooms) are expected to open in 3Q14. Traders Orchard Gateway will be located very close to Mandarin Orchard and will compete in the same tier. The first few months of the new hotel’s operation will likely present even keener competition with discounts.
Downgrade to HOLD
Raising our cost of equity from 7.8% to 8.7% due to higher risk-free rate and expected market return assumptions, we lower our fair value from S$0.94 to S$0.82 for OUEHT and downgrade it from Buy to HOLD.
SB REIT – AmFraser
First third‐party acquisition since August 2013 IPO. On 11 March 2013, Soilbuild REIT signed a conditional sale and purchase agreement with Tellus Marine Engineering Pte Ltd (“Tellus Marine”) for the acquisition of 39 Senoko Way. The property consists of an existing four‐storey industrial building and a proposed extension, a single storey workshop, and has 10 years remaining on its lease (expiry February 2024), with the option of a further 30‐year term. Upon completion of the acquisition in 2Q2014, the building will be leased to Tellus Marine, the current occupant, under a triple‐net lease for a term of 10 years. The cost of the acquisition is S$18.3m, including a purchase consideration of S$18.0m and other acquisition related costs.
First step towards growth. We like the 10‐year leaseback term with annual rental step‐ups, and believe the acquisition will be DPU accretive as the median rent for Senoko Way properties stood at S$1.7psf in 2013. Also, we noted in January 2014 that Soilbuild REIT has an additional debt headroom of S$79.9m at its current aggregate leverage of 29.3%. Assuming the acquisition is fully funded by debt, we estimate aggregate leverage increases to 30.7%, a reasonable level in our view.
Reiterate BUY, TP S$0.90. We like Soilbuild REIT for its consistent performance: exceeding its forecast DPU by 3% and managing borrowings prudently to achieve a lower all‐in interest rate of 3.12% versus the forecast rate of 3.28% in its prospectus. We estimate the acquisition to add 3 cents to our previous fair value of S$0.87, assuming a S$2.00 psf rental rate, 2.5% annual rental step‐ups, and the completion of the proposed extension in 2Q15. This increases our forecast FY2014 DPU by 0.5% to 6.2 cents and FY2015 DPU by 3.0% to 5.7 cents. Our forecast DPU provides a generous 8.1% yield over the last traded price of S$0.765.
FCOT – OCBC
Growth catalysts in sight
- Boost from CPPU distribution savings
- Office rents to see continued growth
- Rental uplift upon master lease expiry
Still benefitting from CPPU distribution savings
Frasers Commercial Trust (FCOT) recently delivered a strong set of 1QFY14 results, with DPU jumping 29.7% YoY to 2.05 S cents on the back of distribution savings from its convertible perpetual preferred units (CPPUs). While FCOT’s DPU growth is likely to moderate going forward given that the net conversion/redemption of the CPPUs commenced in 2QFY13, we expect FCOT to continue to benefit from the positive flow-through on its DPU for the rest of FY14. On 5 Mar 2014, FCOT announced that an additional 53,465 CPPUs will be converted into 45,133 new ordinary units in FCOT following the exercise of conversion right by CPPU holders (leaving 178,479 CPPUs outstanding). As such, we believe further upside for FCOT’s DPU is possible, as the distribution savings from the CPPUs continue to outweigh the impact of an enlarged unit base.
Industry outlook looking rosy
Operationally, we are also positive on FCOT’s performance. We note that its portfolio assets are currently under-rented, and that the existing vacant spaces are expected to place FCOT in a good position for further income growth. According to CBRE MarketView report, leasing activity in the office market had witnessed a significant uptick in 4Q13, resulting in healthy net absorption and a broad-based drop in vacancy rates across the various sub-markets. This pushed the average rents for both Grade A and Grade B office spaces up 2.1% QoQ to S$9.75 and S$7.25 psf pm, respectively. For the next two years, CBRE anticipates continued rental growth in the office market amid limited office supply and tightening of available office space. We see FCOT as the beneficiary of this potential market upturn, in view of its exposure to the Singapore office space.
Maintain BUY
Come Aug 2014, the master lease at Alexandra Technopark will expire and FCOT will be taking over direct management of the property. As FCOT is currently receiving S$1.80 psf pm net rent for the master lease vs. S$3.40 gross rent for underlying leases, the property is also well positioned for strong rental uplift. Based on its last price, FCOT is trading at undemanding P/B of 0.81x and offers a compelling FY14F yield of 7.1%. We maintain BUY and S$1.45 fair value on FCOT.