Author: kktan
Starhill Global – MayBank Kim Eng
NDR feedback: Tide slowly turning
- A 100bps/200bps increase in borrowing costs will shave 2%/2.5% off DPU.
- A 10% drop in all SGREIT’s forex exposure will see DPU slide by no more than 5%.
- Higher occupancy costs for SGREIT tenants are offset by their higher sales efficiency.
Key takeaways
Looking positive. We hosted SGREIT for a non-deal roadshow (NDR) in Singapore and Malaysia recently. We came away feeling more positive about its asset quality, defensive lease structures and financial standing. Management said a 100bps/200bps rise in borrowing costs will shave 2%/2.5% off its DPU; a 10% drop in forex exposure (JPY, AUD, CNY, MYR) will see a dip by no more than 5%.
Occupancy cost ratio. On the use of the industry’s de facto standard, occupancy cost ratio (OCR), to gauge mall performance, management cautioned that luxury goods tenants in its prime Orchard Road malls differ from suburban mall tenants in sales efficiency. The higher occupancy costs incurred by the former are offset by higher sales efficiency.
Traffic count. Management also took pains to explain that shopper traffic in prime Orchard Road and suburban malls differ because of the clientele. The shoppers at SGREIT’s malls are mainly tourists whereas suburban malls cater to residents in their vicinity. It added that the lower shopper traffic at Orchard Road malls vs suburban malls do not necessarily translate to lower sales as the former malls have much higher sales efficiency than the latter.
Upcoming lease renewals. In Malaysia, management is eyeing ~6.8% increase in rent when the master tenancy with Katagreen Development for Starhill Gallery and Lot 10 is up for review in 2016. For Australia, it expects rent for the David Jones Building to go up by 6% in Aug 2014.
Maintain HOLD. For now, we maintain our HOLD call with an unchanged DDM-derived TP of SGD0.84 (discount rate of 7.3%, terminal growth rate of 2%).
APTT – Lim & Tan
- As highlighted as a possibility by us earlier, Temasek Holdings has finally emerged as a substantial shareholder in Asian Pay TV Trust (APTT) after having bought 54.612mln shares at 80 cents (via married deals), raising their stake to 108,959,812 shares or 7.58% of the company. (The transaction was done on 28 Feb’14.)
- The above is positive for APTT as since its listing in mid-2013, both Prudential and Morgan Stanley have been paring down their holdings in the company and these open market share sales have negatively impacted APTT’s share price, with the stock having declined consistently since its listing to hit an all time low of 71.5 cent in Dec’13 against its IPO price of 97 cents.
- Prudential had ceased to be a substantial shareholder on 27 Feb’14 when it sold 5,150,000 shares at 80 cents each, reducing their stake to 67,327,000 or 4.69%.
- While conjectural, the uncanny timing of Prudential’s sales and Temasek’s purchases lead us to guess that Temasek could have likely taken out a large part of Prudential’s remaining 67,327,000 shares, resulting in continued strength of APTT’s share price despite negative news of Prudential’s cessation being a substantial shareholder of APTT.
- Since our initial BUY report on APTT on 13 Jan’14, the stock has risen 6.4%, outperforming the Singapore market’s 1% decline and with its still attractive dividend yield of 10% coupled with share over-hang from Prudential likely removed by Temasek and “stamp of approval” from Temasek (now a substantial shareholder with 7.58% stake), we maintain our BUY recommendation. (APTT is currently trading cum-div of 4.13 cents, which goes ex-div on 19 Mar’13)
OUE H-Trust – CIMB
A more stable hospitality play
70% a hotel and 30% a retail mall, OUEHT is situated at the heart of Orchard Road and offers exposure to both Singapore tourism and retail. With c.70% of its FY14 revenue fixed from retail rent and fixed rent from a hotel master lease, OUEHT is, in our view, a more stable hospitality play than its peers. We expect organic growth to stem from potential uplift in room rates through the Sponsor-funded AEI on MOS and embedded retail rental step-up.
We initiate on OUEHT with an Add rating and a target price of S$0.96, based on DDM at a discount rate of 7.9%. Potential catalysts include surprises in tourist arrivals and stabilisation of the Rupiah.
Stability anchors
The stability of OUEHT is anchored by the Mandarin Orchard Singapore (MOS) master lease and Mandarin Gallery (MG) retail segment. We estimate that c.70% of OUEHT's FY14 revenue is fixed through its retail rent and fixed rent from a hotel master lease. This is higher than hotel peers such as CDLHT and FEHT, which has a near 50:50 split between hotel fixed and variable revenue, and a lesser proportion of retail. Additionally, it has minimal forex and interest-rate risks as all its assets are based in Singapore and it has hedged 100% of its debt (set to expire in 2016 and 2018).
Embedded organic growth
We expect revenue to grow organically by c.3% in FY14. This is largely led by MOS's S$23.1m AEI, which will yield an additional 26 rooms and refurbish 430 rooms. The AEI will be sponsor-funded and completed in phases during FY14-15. So far, renovated rooms have registered 15% increment in room rates. We expect this to lead to 2% growth in RevPAR for FY14-15. There is embedded growth in MG's rent as about 50% of the leases by NLA have step-up structures with annual step-up of c.4.7%.
Supply risk manageable
The upcoming supply of hotel rooms is a risk, but a manageable one, in our view, because 1) historical growth in supply has lagged behind demand, 2) upcoming supply is largely in the mid-tier segment and 3) supply is supported in the mid- to long-term by tourist arrivals . We have factored in 1% drop in occupancy for 2014 and 2015, which will be more than offset by an estimated 3% increment in average room rates
Office REITs – Maybank Kim Eng
Big supply leaves rents in limbo
- The key to rental rate increase in the Central Area lies in continued hiring in the financial, insurance and business services sectors.
- But an uptick in headcount is unlikely this year, considering sub-trend GDP growth, sluggish financial services activities, lower hiring expectations and tightening labour market
- Short-term reprieve next year but ample supply still looms. With vacancy rate tipped to rise in 2016, we see modest rental upticks of 3%/5% in FY14/15 before sliding 2% in 2016.
What’s New
The office REITs segment was recently abuzz with renewed interest from investors after the Urban Redevelopment Authority’s Office Property Rental Index recorded a ~1% YoY increase in rent for both the Central Area and Central Region in both 3Q13 and 4Q13. The uptick came on the back of four consecutive quarters of YoY decline since 3Q12.
What’s Our View
Abundant supply a nagging worry. While we anticipate a reprieve from new office space next year, the fact remains that there is still ample supply – an estimated 6.4m sq ft of net leasable area in the Central Business District (CBD) is expected to come on-stream in 2014-2017. With the labour market moderating and overall hiring expectations on the wane, we do not think headcount numbers will jump sharply this year, especially considering the sub-trend GDP growth and financial services activities remaining sluggish. We estimate net absorption during this year and next would balance out previous outstanding (~4.8m sq ft in the Central Area) and new incoming supplies, leading to an occupancy rate of 90-92% in the Downtown Core (4Q13: 90%). However, in 2016-2017, occupancy rate could slide to 88-90% as ~5m sq ft of new office space becomes available.
Maintain Neutral. With vacancy rate tipped to creep up only in 2016, we see rents rising a modest 3% in 2014 and 5% in 2015 before declining 2% in 2016. We maintain our Neutral stance on the office REITs sector, with HOLD calls on CapitaCommercial Trust (CCT, TP SGD1.50) and Keppel REIT (KREIT, TP SGD1.25). The key downside risk to our call is an abrupt capital flight from Asia. Liquidity outflows will not only hit asset prices sorely, but may also lead to a cutback in headcount for the financial, insurance and business sectors, causing a dent in rentals.
OUE C-REIT – CIMB
Prime-grade REIT
OUECT is a prime-grade commercial REIT with a large pipeline of prime commercial properties for potential injection by its sponsor, which is known for executing well-placed acquisitions. We believe it is well-placed for both organic and acquisition growth.
We initiate coverage with an Add rating and a target price of S$0.90 based on DDM (discount rate 7.6%). Catalysts are expected from a Singapore office-market recovery.
Prime-grade REIT
OUECT’s initial portfolio is valued at S$1.56bn (S$1.59bn if including income support) and comprises OUE Bayfront (OUEB) in Singapore and the Lippo Plaza Property (LP) in Shanghai, China, with a total GFA of 105,296 sq m. Both are prime-grade office properties, located in central business districts. In our estimation, OUEB, which makes up 69% of its aggregate value and FY14 rental income, is its crown jewel. We believe that office rents have bottomed and OUECT will be well-placed for an office-rental recovery. OUE Limited, its sponsor, will provide ROFR assets, which could potentially add up to 4m sf of GFA of prime-grade commercial properties for the REIT. Its sponsor has a good record of executing well-placed acquisitions. We believe that this is the key differentiator for OUECT.
NPI support
OUECT’s FY14 asset leverage is estimated to be 42.4%, higher than the average of 37.2% for commercial REITs listed in Singapore. We expect positive rental reversions at OUEB and occupancy uplifts at LP, which should lift its underlying NPI by 4-6% p.a. in FY14-15. Meanwhile, income support will be provided by its sponsor for OUEB for five years, implying a blended gross rent of S$11.80 psf/month, in line with the through-the-cycle average for prime Grade-A commercial properties. This implies a 15% or so uplift in five years, which we think is conservative.
Key risks
Risks include: 1) its inability to renew the lease at LP, with 31 years of lease left as at 1 Jul 13; 2) failure to obtain tax transparency for the income support for OUEB; and 3) weakness in tenant demand in Shanghai on rising supply.