Author: kktan
MLT – OCBC
Drag from lease conversions
- 3QFY15 DPU inched up 1.6% YoY
- Positive rental reversions of 9%
- Outlook still muted
3QFY15 results within expectations
Mapletree Logistics Trust (MLT) reported a mild 1.6% YoY growth in its 3QFY15 DPU to 1.87 S cents on the back of a 6.2% increase in its gross revenue to S$82.9m. Topline growth was driven by contributions from six acquisitions in China, Singapore, Malaysia and Korea, the Mapletree Benoi Logistics Hub redevelopment project, and higher revenue from existing assets in Singapore, Malaysia and Hong Kong. These were partially offset by lower occupancy at several of its newly converted multi-tenanted buildings (MTBs) in Singapore. For 9MFY15, revenue grew 6.4% to S$245.4m and DPU rose 3.5% to 5.65 S cents. The former and latter constituted 74.6% and 74.1% of our FY15 forecasts, respectively. This was within our expectations.
Some pressure on occupancy rates
MLT’s portfolio occupancy eased 0.3 ppt QoQ to 96.9% (as at end 3QFY15), its fifth consecutive quarter of sequential decline. The drag came largely from its Singapore assets, which experienced downtime due to the conversion of single-user assets (SUAs) to MTBs. Management would focus on tenant retention during this challenging period. As at 31 Dec 2014, MLT’s leverage ratio stood at 34.7%, while ~76% of its total debt have been hedged or are on a fixed rate basis.
Headwinds to persist in the near-term
MLT managed to achieve positive average rental reversions of 9% for leases renewed in 3QFY15, but we believe the outlook remains challenging, especially in Singapore. We see headwinds ahead as 16 of its SUAs have leases which are expiring in FY16 (9.5% of NLA and 9%-10% of gross revenue). Approximately half of these leases are expected to be converted into MTBs, which would result in further downtime and pressure on margins and occupancy rates. Management is seeking to mitigate this by exploring acquisition and divestment opportunities, with net gains from divestments to be distributed back to unitholders. Maintain HOLD on MLT, with an unchanged fair value estimate of S$1.12. We believe valuations are rich, with the stock trading at FY15F P/B of 1.3x, following a 4.2% appreciation in its share price YTD
FirstREIT – OCBC
Safe haven amid macro volatility
- 4Q14 DPU +3.6% YoY
- Organic and inorganic growth
- Defensive attributes stand out
4Q14 results matched our expectations
First REIT’s (FREIT) 4Q14 results came in within our expectations. DPU of 2.04 S cents (ex-dividend on 22 Jan) represented a 3.6% YoY increase on the back of a 4.6% growth in gross revenue. The latter was in turn driven by contribution from Siloam Hospitals Purwakarta which was acquired in May 2014 as well as organic growth. For FY14, gross revenue rose 12.0% to S$93.3m, while DPU gained 7.0% to 8.05 S cents. This matched our forecast of S$93.3m and 8.07 S cents, respectively.
Balance sheet healthy; interest rate risks hedged
FREIT’s debt-to-asset ratio stood at a healthy 32.7%, as at 31 Dec 2014. Moreover, ~95% of its debt is currently on a fixed/hedged basis, thus mitigating the impact of fluctuations in interest rates and providing stability to unitholders. FREIT also has no refinancing requirements until 2017.
Structural reforms to enhance FREIT’s operating landscape
Looking ahead, management remains optimistic on the long-term potential of new Indonesian president Joko Widodo’s reform agenda. Hence, Indonesia would continue to be FREIT’s key focal market for future growth. OCBC Treasury Research expects Indonesia’s growth to remain firm and its current account deficit to become less of an issue. We also believe Indonesia’s manageable fiscal deficits, efforts to carry out structural reforms and infrastructure spending boost would enhance the stability and economic viability of the nation, thus leading to lower risks for FREIT. We thus lower our discount rate on FREIT from 8.3% to 7.0%. Rolling forward our valuations, our fair value estimate is bumped up from S$1.18 to S$1.40. We believe FREIT’s solid defensive attributes and minimal exposure to both interest rates and FX volatility make it as a good investment proposition for investors amid the current macro uncertainties. In light of the aforementioned factors, we upgrade FREIT from Hold to BUY.
Cambridge – CIMB
Weaker underlying conditions
CIT’s 4Q14 results were in line with our forecast, with its FY14 DPU accounting for 101% of our full-year estimates. While we see continued topline growth, we expect NPI margins to stay weak in FY15 as another two properties await conversion into multi-tenanted buildings (MTBs). Given this and the slow FY15 outlook in the leasing market of the industrial sector, we fine-tune our FY15-16 earnings forecasts downwards by 0.9-1.7%. This lowers our DDM-based (discount rate: 8.3%) target price to S$0.68. Maintain Hold.
4Q14 results in line
Cambridge Industrial Trust’s (CIT) 4Q14 results were in line, with its DPU accounting for 25% of our FY14 estimate. For the full year, CIT renewed 1.9m sq ft of leases, representing 23.8% of the REIT’s portfolio, with a positive rental reversion of 4.6%. During the quarter, it completed the acquisition of 16 International Business Park and the AEI at 21B Senoko Loop (Phase II). Occupancy as at 31 Dec remained stable at 96.0% (unchanged from 3Q14).
Lower NPI margins
Though CIT’s topline increased by 3% yoy, DPU rose only 0.6% yoy. This was attributable to the continual softening in NPI margins (74.5% in 4Q14 vs. 81.4% in 4Q13) as management converts more buildings into MTBs while rental rate has yet to catch up. In 4Q14, DPU was in part supported by management taking on 100% of its management fees in units (rather than cash) to bridge the gap of lower income as a result of these conversions. If the same amount of distribution via capital in 4Q13 was paid out in 4Q14 and management fees were fully paid in cash, DPU in 4Q14 would have dipped by c.4.4% yoy, based on our estimation. With another two properties to be converted to MTB, coupled with a soft outlook for the industrial leasing sector, we expect CIT’s NPI margins to remain soft in 2015. Given its leverage ratio of 34.8%, the REIT is expected to grow via inorganic means in FY15; though that remains a challenging avenue in view of the current high asset valuations and tight acquisition market.
Maintain Hold
We see little reason to be excited over CIT given its still-weak NPI margin and limited room to expand inorganically. Currently, CIT offers a FY15 dividend yield of 7.4% – a level similar to its peers. Maintain Hold.
FirstREIT – AmFraser
Results broadly in-line. With locked-in master leases and revenue derived mostly from base rents, full year results came in well, with revenue (+12% YoY), NPI (+15% YoY) and DPU (+7% YoY) in-line with our forecasts. We like the continued DPU growth fuelled by acquisitions, though we keep our target price of S$1.38 unchanged. Full-year DPU of 8.05c translates to a yield of 6.3% – an attractive 4.5% spread over the 10-year risk free rate.
Sheltered from refinancing and interest rate risks. The bridge loan of S$26.5m will be refinanced to a fixed rate loan in 1H15 and come due only in 2019. After which, the earliest debt will come due only from 2017, with ~95% of the total debt hedged on fixed rates. Therefore, there is little interest rate risk in the next 2 years.
Strong potential for upward rerating remains. The potential for yield-accretive acquisitions remains given that First REIT owns only 11 out of 18 hospitals that Siloam currently operates. Management revealed that 29 hospitals remains in the pipeline, of which First REIT has the ROFR. First REIT has also highlighted the potential for asset enhancement at3 of its original IPO assets. With the distribution reinvestment plan in place, we believe that First REIT may utilize the reinvested capital for acquisition.
Maintain BUY with rerating catalysts in view. Although our target price implies only ~14% upside after including dividends, the fair value may be higher given potential yield accretion from the acquisition pipeline. We note that over the last 5 years, the total returns on First REIT is more than 200% (assuming reinvestment of dividends into the stock). This is in part contributed by 9 acquisitions that enlarged the portfolio size to 16 assets, and we believe that similar acquisitions may continue to propel growth. However, the accretion from each property will likely be at a lower rate than before as future acquisitions are likely to be partly funded by equity (and no longer solely by debt) as First REIT nears the gearing limit of 35%.
SPH REIT – OCBC
Stable performance
- 1QFY15 DPU grew 2.3% YoY
- Positive rental reversion of 12.4%
- Valuations not cheap
1QFY15 results came in within our expectations
SPH REIT reported its 1QFY15 results which were in-line with our expectations. Revenue inched up 1.8% YoY to S$50.6m on the back of higher rental income. This formed 24.6% of our FY15 forecast. Distribution to unitholders and DPU grew 2.9% and 2.3% to S$33.5m and 1.33 S cents, respectively, with the latter constituting 24.4% of our full-year projection.
Healthy rental reversions achieved
Both SPH REIT’s Paragon and The Clementi Mall remained fully leased. Overall rental reversions of 12.4% was achieved for its portfolio in 1QFY15, driven largely by Paragon (+12.5%) and marginally by The Clementi Mall (+2.3%), although the latter had only one lease renewal during the quarter. In terms of asset enhancement initiatives, the chiller decanting project at Paragon will create an additional 5,000 sq ft of NLA when it is completed by FY16.
Tenancies for the new space have already
been committed and are expected to contribute an incremental rental income of close to S$1m per annum. Management is also carrying out planning works to create another NLA of 5,000 sq ft at Paragon. This would be phased in from FY16.
Maintain HOLD
Looking ahead, headwinds facing the retail sector will continue to pose challenges to the operating landscape. Nevertheless, average prime retail rents in Orchard Road still managed to increase marginally by 1% on a YoY and QoQ basis to S$34.55 psf pm in 4QCY14, according to CBRE. This highlights the attractiveness and value of assets which are strategically located in good catchment areas. We maintain our HOLD rating and S$0.99 fair value estimate on SPH REIT, as we believe its current valuations look fully priced. The stock is trading at FY15F P/B of 1.1x and distribution yield of 5.2%, versus its retail peers’ forward P/B of 1.0x and distribution yield of 6.1%.