Author: tfwee
Reits – BT
Yields are attractive but they are subject to movements in cyclical property market
By EMILYN YAP
(SINGAPORE) High yields and strong results are making real estate investment trusts (Reits) stand out in a volatile market. But there is debate over their potential as defensive plays, with some market watchers cautioning that Reits are not necessarily safer bets because of their link to the cyclical property sector.
 |
Most Reits turned in impressive results for the quarter ended June 30, 2008. The 18 which reported their performance before last Friday all achieved higher distributable income and distribution per unit (DPU) over the same period last year.
Distribution yields reported by the Reits, based on annualised DPUs and last Friday’s closing prices, ranged from 4.8 per cent to 11 per cent. Reits which offered yields above 10 per cent included MapleTree Logistics Trust, healthcare-related First Reit and Lippo- MapleTree Indonesia Retail Trust.
Overall, the Reits had an average distribution yield of around 7.8 per cent, offering a spread of over 4.6 percentage points above the 10-year Singapore government bond yield of 3.14 per cent on Friday. Compared with one-year fixed deposit rates which start from around 0.8 per cent, the Reits offered an even wider spread.
Analysts say Reits have largely performed in line with expectations. Their good performances have won them fans – with many trading at discounts to net asset values and thus offering relatively high yields, OCBC Investment Research said in a recent report that investors could ‘take a fresh look at S-Reits as defensive vehicles offering stable cash flows and high yields’.
However, others pointed out that Reits still may not match up to traditional defensive plays, including high-yielding blue chips like telcos and banks. While Reits do offer high distribution yields, the sector is influenced by movements in the property market, which tends to be more cyclical compared with, for instance, the telecommunications industry, or even banking, they say.
Distribution yields are also a function of Reits’ unit prices, so yields may look high simply because unit prices have dropped, explained one analyst. Considering both capital gains and distributions to investors, Reits have not done as well compared to around a year ago, he added. The FTSE ST Reit Index has fallen by more than 10 per cent since it was launched on Jan 10 this year.
Reit fans, on the other hand, argue that few sectors are completely resistant to economic slowdowns. Also, some Reits may be more resilient because they can lock in leases over several years, which helps stabilise earnings.
Where there is agreement among most of the market watchers BT spoke to is that Reits will continue to generate steady operating results. For those which have locked in leases or are able to gain from higher rental reversions on lease renewal, ‘there is a lot of predictability in terms of their earnings and distributions,’ said Daiwa Institute of Research analyst David Lum.
With credit conditions staying tough, however, much of the earnings growth will have to come organically. Reits may still acquire properties but they will have to be more selective, analysts say.
Analysts’ top Reit picks include Suntec Reit. ‘With 32.6 per cent of total office net lettable area up for renewal in FY09, we believe Suntec is well-positioned for rental reversion with current $14 psf signing rents versus passing rent of around $6.30 psf,’ said a Citi Investment Research report last week.
CapitaCommercial Trust was another popular choice. Goldman Sachs reiterated its ‘buy’ call on the Reit, favouring its strong organic growth and ‘leadership among office Reits’.
CMT – BT
Is CMT morphing from pure retail play into a mixed Reit?
CAPITAMALL TRUST (CMT), Singapore’s first real estate investment trust when it listed in 2002, has enduring appeal.
Six years since its flotation and with another 20 contenders in the Singapore Reit (S-Reit) market today, CMT remains Singapore’s biggest Reit with an asset size of $7.2 billion.
The market has rewarded the trust’s consistent ability to deliver total returns by according it one of the lowest costs of capital for any Singapore Reit. That is, CMT trades at one of the lowest distribution yields among S-Reits. The market demands a lower risk premium from CMT than it does for just about any other S-Reit. CMT is also trading above its net asset value. This has to do with CMT’s track record in managing retail properties.
However, lately some institutional investors have been concerned that the shopping centre trust could be morphing into a mixed development trust. In 2006, CMT bought a 40 per cent stake in Raffles City, which comprises a mall, office tower, convention space and two hotels.
In May this year, CMT announced it was buying Atrium @ Orchard – a predominantly office asset – for $839.8 million.
Is CMT being forced to buy mixed developments because of the challenge of sourcing for pure-retail assets in Singapore as more shopping centres are already owned by Reits and private property funds?
Some investors would prefer CMT to be a pure retail play. If CMT dilutes its portfolio by acquiring mixed developments with office and other components, investors may demand a higher risk premium, that is, CMT may have to trade at a higher distribution yield, putting pressure on its unit price.
Not only that, there may be potential conflict of interest within the CapitaLand stable of Reits, since CMT’s sister Reit CapitaCommercial Trust (CCT) owns mostly offices.
It may be timely to revisit some of the reasons behind CMT’s acquisitions of Atrium and Raffles City.
Offices make up nearly 96 per cent of Atrium’s existing net lettable area (NLA) of 373,446 sq ft. CMT’s attraction to the property, however, is due to its strategic location next to the trust’s existing mall, Plaza Singapura. By drawing synergies between the two properties, CMT can extract more value out of Plaza Singapura. Atrium is directly linked to Dhoby Ghaut MRT Station, which will be the interchange station for three lines. By integrating Atrium with Plaza Singapura, the latter will have improved MRT connectivity. CMT plans to boost Atrium’s retail NLA from about 16,100 sq ft now to 172,100 sq ft by converting the first three levels into full-retail use. It also plans to create retail space on state land that it hopes to buy in front of Plaza Singapura.
CMT could also potentially move some big tenants from Plaza Singapura’s upper floors to Atrium’s upper levels and subdivide the vacated space at Plaza Singapura into smaller units that will hopefully fetch higher rents. Another possibility is to attract fitness centres and signature restaurants to Atrium’s upper levels as office leases expire.
Given CMT’s impressive track record at asset enhancement plans and its ability to create new retail space in its properties, it’s possible to imagine Atrium transformed into a predominantly retail asset in future.
So too at Raffles City, asset enhancements have boosted the retail net lettable area by 12.5 per cent. These initiatives required the close cooperation of CCT, which owns the remaining 60 per cent in Raffles City. Had CMT bought only the mall in Raffles City, leaving the office tower to CCT, the two Reits might have had sibling arguments during the mall’s refurbishment as many common areas were involved. Instead, by taking stakes in the entire development, the two Reits worked in unison.
When Raffles City’s asset enhancement potential has been substantially realised, CMT and CCT could neaten their ownership – with CCT holding the office tower and CMT the mall. This will sharpen the two Reits’ respective foci and give investors clearer choice to invest in their preferred asset class. Likewise, when CMT is done transforming Atrium and creating more retail space, it could sell the remaining office space to CCT. After all, CMT should not be competing with CCT – a big office landlord – for office tenants at Atrium.
There will also be office space when CMT builds four more floors on top of Funan DigitaLife Mall to tap the site’s unutilised development potential. CMT has all approvals in place but will begin work only after the new office space has been substantially leased; this should make it easier for CMT to dispose of the office space and once more stick to its core strength in retail.
Moving ahead, CMT is unlikely to shy away from mixed assets as long as there are strategic reasons and where such assets have a retail component that it can add value to.
CMT will have to hope that investors will still find this defining strength endearing.
CRCT – BT
CRCT’s Q2 distributable income rises 30.4%
CAPITALAND unit CapitaRetail China Trust (CRCT) yesterday said that its second-quarter distributable income rose 30.4 per cent to $10.5 million, from $8.1 million a year ago, on the back of a new acquisition.
Distribution per unit (DPU) was 1.70 cents – the same as in Q2 2007.
CRCT decided to retain $900,000 of its income available for distribution in Q2 2008 ‘to be prudent’, it said. This is meant to help negate the fluctuating income flow in the second half of 2008, thereby providing unit-holders with stable half-yearly distributions in 2008. If the trust had distributed 100 per cent of its income, the DPU in Q2 2008 would have been 1.84 cents.
For the whole of the 2008 financial year, CRCT ‘remains committed to distribute 100 per cent of its income available for distribution’, the trust said.
Net property income for Q2 2008 was $16.6 million, an increase of 33.1 per cent over the $12.4 million recorded in the corresponding three months in 2007 – partly due to income from Xizhimen Mall, the newest addition to CRCT’s portfolio.
The real estate investment trust (Reit), however, saw its net property income for Q2 2008 come in slightly under its own forecast, which it attributed to the strengthening Singapore dollar.
Net property income of $16.6 million was 0.5 per cent lower than the forecast $16.7 million. But in yuan terms, the trust outperformed its forecast. Net property income was 84.4 million yuan (S$16.9 million), 0.4 per cent higher than the forecast 84.1 million yuan.
For the first six months of 2008, CRCT’s distributable income rose 26.8 per cent to $19.3 million, from $15.2 million for the corresponding period in 2007. DPU for H1 2008 rose 1.2 per cent to 3.25 cents, from 3.21 cents a year ago.
The trust increased the occupancy at its malls to 97.1 per cent as at June 30, 2008, from 95.6 per cent at the beginning of the year.
Lim Beng Chee, chief executive of CRCT’s manager, acknowledged that China’s inflation rate, which is estimated to reach 6.5 per cent in 2008, is a concern.
But the trust is still confident of keeping operating expenses within forecasts, he said.
‘Most of our costs have been locked in earlier, so for 2008, we will still be able to meet (earnings) forecasts,’ Mr Lim noted. But the cost of utilities, one of the biggest expenses for the Reit in China, remains a concern, he added.
The trust’s current $1.2 billion portfolio consists of eight retail malls located in five cities in China.
CRCT’s shares closed two cents down at $1.14 yesterday. The stock has shed 47.0 per cent since the start of the year.
CDLHTrust – BT
CDL Hospitality Trusts eyes Japan acquisitions
It’s considering sprucing up Orchard arcade or turning it into hotel rooms
CDL Hospitality Trusts (CDLHT), the biggest hotel owner in Singapore, is looking at the Japan market with ‘great interest’ for potential acquisitions as it now offers ‘pricing levels not seen for many years’.
CDLHT, a stapled group comprising CDL Hospitality Real Estate Investment Trust (H-Reit) and CDL Hospitality Business Trust (HBT), is also mulling whether to spruce up Orchard Hotel Shopping Arcade or convert it into hotel rooms.
If converted, the 53,000 sq ft facility could yield about 78 hotel rooms, which would add to Orchard Hotel’s existing 653 rooms.
‘We’re are still doing studies and to some extent waiting for construction costs to reach more reasonable levels,’ Vincent Yeo, CEO of M&C Reit Management, said yesterday in an interview with BT. M&C Reit Management is the manager of H-Reit.
CDLHT yesterday posted a 68.7 per cent jump in second-quarter distributable income to $25 million. For the first half ended June 30, 2008, distributable income jumped 79 per cent to $48.6 million, on the back of organic growth across the portfolio as well as a full period’s contribution from Novotel Clarke Quay, which was acquired on June 7, 2007.
‘I like the acquisition environment today much better than what we have experienced in the last couple of years. Because of the tight credit conditions today, there are more motivated sellers and there are more deals that we’re seeing now, and consequently this means that we can be a lot more selective in terms of location and strategic assets,’ Mr Yeo added.
‘Japan has also gone through a very adverse credit situation and there are a lot of deals. Assets as recently as last year used to trade at 4 per cent yield. We’re now seeing them gravitate above 6 per cent,’ he said.
CDLHT’s gearing level as at June 30, 2008, stood at 20.3 per cent.
Despite softness in Singapore visitor arrivals in June, CDLHT’s Singapore hotels posted average occupancy rate of 87.1 per cent in Q2 ended June 30, 2008, up 1.1 percentage points from 86 per cent for proforma Q2 2007 (assuming Novotel Clarke Quay had been acquired on April 1, 2007).
Revenue per available room increased 30.6 per cent year-on-year to $222 in Q2 2008. Mr Yeo noted that the dip in Singapore’s visitor arrivals in June was mitigated by the increase in the average length of stay per visitor.
CDLHT’s hotel portfolio comprises Orchard Hotel, Grand Copthorne Waterfront, M Hotel, Copthorne King’s Hotel and Novotel Clarke Quay in Singapore, and the Rendezvous Hotel Auckland in New Zealand.
CDLHT posted a 42.4 per cent year-on-year jump in Q2 gross revenue to $29.5 million. For the first-half, gross revenue increased 48.3 per cent to $57.4 million.
Unitholders will receive a total distribution per unit of 5.89 cents for the first half comprising 5.37 cents of taxable income and 0.52 cent of tax-exempt. The total payout works out to an annualised figure of 11.84 cents, reflecting an 8.2 per cent annualised distribution yield based on CDLHT’s closing price of $1.45 yesterday. The counter ended one cent lower from the Tuesday close.
CDLHT’s net asset value per stapled security stood at $1.61 as at June 30, unchanged from the Dec 31, 2007 figure.
‘While we are cautious over the outlook for the remainder of 2008 due to the weakness demonstrated in visitor arrivals in the month of June, we still expect to register growth for the next reporting period.
‘We believe that the general outlook for the hotel industry continues to be positive over the medium and long term,’ CDLHT said.
CDLHTrust – DBS
Outstanding RevPAR growth
Story: CDL HT reported a strong 2Q08 performance of a 42.4% and 41.7% growth in gross revenues and NPI to $29.5m and $27.7m respectively. Distributable income grew 68.7% to S$25m, translating to a DPU of 3.03 cts for the quarter. Together with 1Q08, unitholders are getting a DPU of 5.89 cts, which works out to an annualized yield of 8.18%.
Point: Main driver for a strong overall performance was largely organic with their hotel portfolio registering growth in excess of 12% yoy. Singapore hotels outperformed, registering revenue growth in excess of 20%, with a full quarter contribution from Novotel Clarke Quay. RevPAR was impressive; its Singapore hotels grew c30% yoy to $222 while occupancies remained high at 87.1% for the quarter. Average daily rate for its Singapore hotels was $255, which exceeded our full year forecast of $240.
While management expects 2H08 to remain stable with RevPar growth moderating due to a higher base, in our estimates, we have chosen to be conservative in our RevPAR assumptions taking into account; (i) potential slowdown in tourists growth on the back of inflationary factors, (ii) Olympics fever in Beijing diverting away tourist attention. Therefore, we adjust forward RevPAR growth in FY08 to 25% and 8% in FY09, keeping occupancies stable at 85%.
Relevance: Maintain BUY, TP is reduced to S$2.02 from S$2.90. Our DCF valuation incorporates a higher risk free rate of 3.9% and lower terminal growth of 1.5%. CDL HT is currently trading at 0.9x P/BV and offers investors a 7.9% and 8.4% FY08-FY09 DPU yield.