Author: kktan
MLT – DBSV
Acquisitions to drive earnings
- Resilient 3Q15 results
- Meaningful acquisition prospects in medium term
- Downgrade to HOLD, TP S$1.27
3Q15 results in line. Mapletree Logistics Trust (MLT) continued to deliver a sustainable set of results in 3Q15. Revenues and net property income came in at S$82.9 m (6% y-o-y, 2% q-o-q) and S$62.5m ( 3% y-o-y, 1% q-o-q). The stronger performance was mainly due to contribution from the acquisitions of six properties and positive rental reversions of c.9% which more than offset (i) the lower portfolio occupancy rates (c.96.9% vs 97.2% in 2Q15) due to newly converted multi-tenanted properties, and (ii) loss of income from 5B Toh Guan road as it undergoes AEI. Distributable income grew 3% y-o-y to S$46.2m, translating into a DPU of 1.87 Scts. YTD DPU of 5.65 Scts forms 75% of our forecast.
Moderating prospects dampened by conversions of singleuser properties. Faced with a competitive operating outlook, MLT has done well in managing its leases and maintaining a high occupancy rate of c.96.9% with average reversions of 9.0%. Looking ahead, we expect downward pressure on occupancies from (i) downtime due to further conversions of multi-tenanted properties (estimated that half of the 16 single-tenanted properties will be converted) to increase inFY16 across its major markets. Rental reversions are expected to further moderate owing to heighted supply completions. In terms of inorganic growth, pipeline from sponsor remains highly visible but we note that meaningful growth is likely to come only in the medium term. In the meantime, MLT might look at recycling its assets through divestments to maximise value and redeploy proceeds to higher yielding assets.
Downgrade to HOLD on valuations, TP of S$1.27 as we roll forward valuations. We believe that at a P/Bk NAV of 1.3x, a forward yield of 6.1-6.4% reflectsinvestors’ high confidence in MLT’s earnings resilience and management execution ability on growth. However, it is near our revised TP of S$1.27 as we roll forward valuations. Given limited upside to our price objective, we downgrade our call to HOLD.
MIT – DBSV
Completion of Equinix to drive growth
- DPU of 2.65 Scts in line
- Development projects completing in 2015
- Maintain BUY, TP S$1.66
Highlights
DPU of 2.65 Scts in line
- Gross revenues and net property income grew steadily at 3.3% and 5.4% higher y-o-y to S$78.1m and S$58.0m respectively and was mainly due to (i) higher portfolio rent achieved (S$1.83psf) while occupancy rates remained stable at 90.8%, and (ii) contribution from completed development projects. NPI margins improved to 74.2% due to utility savings from lower tariffs and is expected to continue. MINT also increased its hedge ratio to 86% during the quarter.
Outlook
Development projects to drive earnings growth; back-filling of Signature space a positive
- Occupancy rates at properties post-asset enhancements at Toa Payoh (98% occupied) and Woodlands (80% occupied) continue to improve. We note that Signature has also backfilled a substantial part of its vacant space (occupancy 63% vs 43% in 2Q15) and will contribute to earnings in the subsequent quarter. Looking ahead, the development project for Equinix is on track to complete by Mar’15 and will contribute fully in FY16.
Conservative gearing as MINT undertakes its most extensive development project for HP (TOP in 2017)
- Current gearing is conservative at c.32%; implying that the manager has the capability to take on debt-funded acquisitions when the opportunity arises. Gearing is estimated to inch up slowly to c.38% as the Trust starts on the redevelopment of Telok Blangah project for HP in 1Q15.
Rental reversions to moderate but still positive
- We note that average passing rates are near market rental reversion levels and are expected to moderate further to <10%. That said, earnings should remain stable.
Valuation
We maintain our BUY call and raise our DCF-based TP to S$1.66. At its current price, MINT offers investors a dividend yield of c6.5-6.7%, an attractive level given its strong credit backing and quality name.
Risks
Rising interest rates
- An increase in refinancing rates will negatively impact distributions. However, MINT looks to minimise the impact by having c.77% of its interest costs fixed with a duration of > c.2 years.
Economic risk
- A deterioration in the economic outlook could have a negative impact on industrial rents and occupancies as companies cut back on production and require less space. Industrial rents have a strong historical correlation with GDP growth.
KeppelREIT – DBSV
Riding through the trough
- 4Q14 DPU declines 23% y-o-y upon divestment of Prudential Tower
- Portfolio reversions of 17% supported by strong expansion in tech, media and telecoms (TMT) sector
- Full contribution from MBFC Phase 2 may not mitigate drop in rental support for OFC
- Maintain HOLD, TP S$1.29
Highlights
Results below due to later-than-expected acquisition completion
- Keppel REIT (K-REIT) reported 4Q14 revenue of S$42m (-11% y-o-y) and NPI of S$34m (-8%), largely attributable to lost income stemming from the divestment of Prudential Tower in 3Q14. DPU of 1.51 Scts was 23% lower y-o-y on the back of a dilution in share base post-placement and a delay in the completion of the MBFC Phase 2 acquisition.
Diversification of tenant base to include more from TMT sector
- K-REIT completed c.450k sqft of lease renewals, with average portfolio reversions of17%. This was driven by strong interest from new-to-market as well as relocating companies in the technology, media and telecommunications (TMT) industry. As a result, new leases signed in the Raffles Place/Marina Bay areas averaged S$12 psf pm.
Outlook
Positive rental outlook for 2015
- Close to 420k sqft of leases will be up for renewal or rent review, representing c.13% of portfolio NLA. We understand that the majority of spaces are located in the Raffles Place and Marina Bay areas, where new office space is not expected to be available until FY16. As such, we believe that these leases will continue to see upward reversions of 10-15%.
OFC income support to be fully drawn down by 1Q15
- According to the Manager, income support for Ocean Financial Centre is anticipated to run out by 1Q15, and we estimate that this will have a 6% impact on DPU.
- While full-year contribution from MBFC Phase 2 will more than cover lost income from the divestment of Prudential Tower, we do not expect additional income to cover the shortfall in rental support. As such, we have forecasted FY15 DPU to decline by 7%.
Valuation
Our target price of S$1.29 is based on the discounted cash flow (DCF) model; as K-REIT generates recurring rental income from its tenants. At its current price, K-REIT offers investors a dividend yield of 5.4% for FY15. We have a HOLD recommendation.
Risks
Interest rate risk
- Any increase in interest rate will result in higher interest payments that the REIT has to make annually to service their loans. This reduces the incomeavailable for distribution, which will result in lower distribution per unit (DPU) for unitholders.
Currency risk
- As income for S-REITs are distributed in Singapore dollars, any income derived in a foreign currency will have to be exchanged into SGD. As K-REIT earns rental income from its Australian assets in AUD, any depreciation in the AUD would result in relatively lower contributions from Australia to K-REIT’s total distributable income.
Economic risk
- A deterioration of the economic outlook could have a negative impact on office rents, which have a strong historical correlation with GDP growth.
CCT – AmFraser
Growth delivered, as expected. CCT’s FY14 results came in within expectations, as full-yearDPU rose by 3.9% YoY to 8.46 cents, led mainly by stronger contributions at Capital Tower and Six Battery Road. While we expect more growth ahead with CapitaGreen (CG) coming online, we believe CCT is fairly-valued and its FY15F DPU yield of 4.6%is relatively uncompelling. Maintain HOLD and TP of S$1.76.
Capitalising well on tight market. CCT’s portfolio occupancy was robust at 96.8% as at 4Q14. Excluding the recently completed CG, its office properties operate at occupancies in excess of 97%. Capital Tower and Six Battery Road saw their revenues increase by 8.8% and 12.8% YoY respectively, offsetting the 5.8% decline at One George Street due to the cessation of its yield protection in July 2013.
CapitaGreen leasing demand beat expectations. As at Dec 2014, CG achieved a commitment rate of 69.3%, exceeding management’s target of 50%. To minimize potential impact when the wave of new Grade A office supply hits the market in 2016, most tenants at CG have been signed on leases longer than three years, with 91% (by gross rental income) of the committed leases expiring only in 2019 and beyond. Management expects CG to contribute meaningfully to Distributable Income only in FY16, as tenants progressively move into the property.
Not if, but when. CCT has a call option to acquire the remaining 60% stake in CG from its JV partners, CapitaLand and Mitsubishi Estate. The option is valid for three years starting from Dec 2014 with the completion of the property and will be priced at market valuation. CCT has debt headroom of S$1.3b assuming 40% gearing, which will cover the cost of the potential acquisition. We reckon that CCT will trigger the option only when the property’s occupancy rate exceeds 95% to minimize the need for income support.
Fairly valued, maintain HOLD. We like CCT’s sound capital management, with a low gearing of 29.3% and 83% of its borrowings are on fixed rates which minimizes uncertainty when interest rates rise. However, valuations are no longer compelling with FY15F DPU yield expected to be merely 4.6%. Our DDMderived TP remains unchanged at S$1.76.
MIT – OCBC
Decent results, but valuations rich
- 3QFY15 DPU up 6.4% YoY\
- Positive rental reversions for renewals
- Leasing environment challenging
3QFY15 results within our expectations
Mapletree Industrial Trust (MIT) reported a decent set of 3QFY15 results which was inline with our expectations. Revenue rose 3.3% YoY to S$78.1m, while DPU growth of 6.4% to 2.67 S cents was underpinned by lower borrowing costs and an improved NPI margin (+1.5 ppt to 74.2%) as a result of lower utilities expenses. For 9MFY15, revenue increased 4.6% to S$234.5m, or 75.3% of our FY15 projection. DPU grew 5.0% to 7.78 S cents and constituted 76.0% of our full-year estimate. Average portfolio occupancy dipped slightly from 91.5% in 2QFY15 to 90.8% in 3QFY15 due to the continued relocation of tenants from the Telok Blangah Cluster (11% occupancy rate). Positive rental reversions of 5.9%, 4.8%, 3.2% and 6.9% were achieved for renewal leases for MIT’s Flatted Factories, Hi-Tech Buildings, Business Park Buildings and StackUp/Ramp-Up Buildings, respectively.
Strong financial position
MIT’s balance sheet remains healthy, with an aggregate leverage ratio of 32.8%, as at 31 Dec 2014 (-0.3 ppt QoQ). Management also increased its interest rate hedge ratio from 77% to 86%, thus putting it in a strong position to weather any possible spikes in interest rates in the foreseeable future.
Maintain HOLD
We are keeping our forecasts intact given this set of in-line results. Looking ahead, we expect the leasing environment to remain challenging due to competitive pressures and the soft macroeconomic landscape. Rental reversions are likely to continue to moderate as the gap between MIT’s passing rents and market rents are narrowing. Maintain HOLD on MIT with an unchanged fair value estimate of S$1.43. MIT’s share price has already risen 6.4% YTD, and the stock is now trading at FY15F P/B ratio of 1.3x, which we deem as rich. This is approximately one standard deviation above its average forward P/B ratio since its IPO.