Author: tfwee
Suntec – CIMB
Retail catalysts
• First mixed commercial REIT in Singapore. Listed on the Singapore Exchange on 9 Dec 04, Suntec REIT owns almost 3m sf of prime commercial space in Singapore, consisting of retail and office properties in Suntec City, Park Mall, Chijmes and a one-third interest in One Raffle Quay.
• Weak office outlook, but retail has growth potential. Weighed down by large upcoming supply and increasing shadow space, the outlook for the office sector remains weak. In our view, there is more room for upside surprises from the retail segment, catalysed by an increased catchment population from two new MRT stations at Suntec City, and direct linkage to the Marina Bay integrated resort.
• Positives from ample liquidity and low interest rates. Our economists expect high liquidity and low interest rates to persist in a climate of weak global growth. This would be highly positive for REITs which should benefit from relatively easier and cheaper financing, as well as attractive spreads to government bond yields.
• Initiate coverage with Outperform and DDM-derived target price of S$1.07 (discount 9.4%). We like Suntec REIT for its: 1) quality office and retail portfolio; 2) low leverage of 34.4%; 3) absence of refinancing concerns until 2011; and 4) severely discounted price for a possible fall in asset values. We believe that downside risks for the office sector have been factored into its price while upside surprises from its retail segment have largely been neglected.
CDLHTrust – OCBC
Stalling of rally at key resistance heralds possible near-term downside
– CDL Hospitality Trust could be facing more near term downside as the price seems to have stalled at its key $0.845 resistance (also hit the upper Bollinger band) on relatively high volume. A lower close today would confirm the bearish price reversal.
– And downside momentum looks set to accelerate in the near term. The RSI has already turned down just shy of the overbought region while the stochastic indicator is about to make a negative crossover inside the overbought region. The Accumulation/Distribution indicator also made a sharp bearish reversal yesterday.
– We expect the stock to find initial support at $0.79 (2-month uptrend line and centre Bollinger band), breaking which, the next key support is likely at $0.72 (minor troughs in May ’09 and Jun ’09 and lower Bollinger band).
– Above the $0.845 key resistance, we see $0.92 (minor peak in Oct ’08) as the next resistance.
PLife – Phillip
Inflation linked revenue model provides resiliency. Over 80% of revenue is derived from hospitals in Singapore while the rest are from nursing homes and healthcare facilities in Japan. Plife REIT collects rental from its tenants based on an inflation linked formula. In August 2008, rental for the Singapore hospital was revised up 6.25% (average CPI over the 12 preceding months plus 1%). Although we have seen CPI reading sliding off from 6.7% in Sep 08 to register a negative reading of – 0.3% in May 09, unless CPI continuously register a monthly reading of –9.5% for the next four months to offset the positive readings in the prior nine months, the CPI +1% formula ensures that rental revenue grows at the minimal rate of 1%. In our forecast, we have assumed a 2% growth and maintain our projections at the moment, though we think surprise may be on the upside.
Credit rating downgrade a non-issue. Fitch Ratings downgraded Plife REIT longterm issuer default rating from BBB+ to BBB with a stable outlook. We view the rating cut as a non-issue as fundamentals remain sound. Gearing is currently 23% and Plife REIT has total debt of $247.5 million with interest cover of 6.7. $34 million of loan is due in the 2nd half of 2010 while the rest are due in 2011.
We maintained our forecast numbers and reassert our optimism in Plife REIT. Plife REIT is not subjected to the cyclicity of the economic cycle unlike other REITs. We raised our fair value estimate to $1.18 due to lower risk premium input in our DCF model.
Risk factors. Risk includes a prolong deflation scenario, which will cause our revenue estimates to be excessive. However the variance is not significant as changes to our forecasted DPU is less than 1%. We think the main risk would be a further credit downgrade as the maturity of the loans draw near and Plife REIT has not announced its refinancing plans.
Suntec – Phillip
Our fundamental view of Suntec REIT has not changed. We feel revenue is still being subjected to pressure as Singapore goes through the recession. We feel key issues for the management will be to maintain the rental while keeping occupancy of the portfolio stable.
Suntec REIT has 64% of its portfolio NLA exposed to the office sector and 34% exposed to the retail sector. 77% of office leases are expiring over the next 3 years and we are concern about falling reversionary rent achieved by the expiring office leases. Although expiring leases rent is lower than the passing average rent, however average rent for leases secured has peaked out in 2Q08 and has fallen 26% in 1Q09. Furthermore, Suntec REIT office portfolio could come under pressure from the completion of over 9.2 million sqf of office space in the core downtown area over the next five years. Given that our outlook is for a bottoming of office rent in 2010Q4, we would expect the gap between expiring leases and renewal leases to converge with a negative bias.
Suntec has no near term refinancing concern. It has successfully secure $825 million of term loan in April 2009. The current gearing is 35%. Although management has not indicated any acquisition plans, we believe that Suntec will build up its equity balance for two reasons; in anticipation of asset devaluation and to ready itself for any opportunities that arise for its next phase of growth. Currently Suntec owns approximately 57% of Suntec City Office Towers, it may resume its program to acquire strata office units not presently owned.
Valuation & recommendation. We revise our average rent and occupancy assumptions and reduce our DPU forecasts over FY09F-FY11F by 4%-9%. We maintain our Hold rating and raise our fair value from $0.69 to $0.94 mainly on lower WACC assumptions.