Author: tfwee
SREIT – UOBKH
Relative attractiveness of REITs affected by spike in bond yield
Long-term government bond yield on the rise. Benchmark 10-year Singapore government bond yield has spiked up from 2.4% to 3.4% last week. We believe this is a knee jerk reaction to the near collapse of the bond market in Vietnam. The worldwide trend of higher commodity prices and sustained inflation is likely to have contributed as well. The increase in Singapore’s CPI from 6.7% in Mar 08 to 7.5% in Apr 08 has reignited fear of runaway inflation.
Short-term interest rates remain unchanged. Fortunately, three-month SIBOR has remained stable at 1.1875%, suggesting ample liquidity in the banking system. This means that Singapore REITs are not affected as most bank borrowings are priced off SIBOR. Singapore REITs has been able to secure loan facilities and issue medium term notes with tenure of two to three years at competitive interest rates. Longer term funding has so far been secured mainly through issue of convertible bonds. The steepened yield curve does pose some challenges as it hampers efforts to secure longer term funding.
Big is beautiful. We remain positive on Singapore REITs with economies of scale, such as CapitaCommercial Trust (office), CapitaMall Trust (retail) and Ascendas REIT (industrial). On average, Singapore REITs provides distribution yield of 5.5%, which is fairly attractive. The strong S$ provides some cushion again inflation. Also, Singapore is drastically different compared to Vietnam, an emerging economy that has just opened itself to foreign investment. Vietnam’s bond and equity markets are relatively small and undeveloped compared to other countries in the region.
We have, however, adjusted our target prices for Singapore REITs to factor in a higher risk-free rate of 2.50% vs previous 2.35%. We will make further adjustments depending on how the financial system responds to higher commodity prices and inflation. Our preferred BUYs for Singapore REITs are Ascendas REIT, CapitaCommercial Trust and Suntec REIT.
Link – Yield Table
CMT – UOBKH
Better Value After Share Price Correction
CapitaMall Trust (CMT) has corrected by 7.4% the two days after we downgraded our recommendation from BUY to HOLD. The correction has brought valuation to a more realistic level.
Value creation through asset enhancement initiative. CMT is expected to complete the acquisition of The Atrium in Aug 08. The Atrium will be amalgamated with Plaza Singapura to create an integrated development with 170m of prime retail frontage along Orchard Road and net lettable area (NLA) of over 900,000sf. State land between the two buildings will be covered by shelters to create an open plaza. The asset enhancement initiative (AEI) will also improve traffic flows from the Dhoby Ghaut MRT station.
About 100,000sf of prime retail NLA on Levels 1 and 2 of The Atrium will be created by decanting lower-yielding spaces. Management plans to use some of the additional retail space for duplex flagship stores fronting Orchard Road. Renovation works will be carried out in phases from 2009 to 2010. We have estimated construction cost at S$400psf and have factored in contribution from the new retail space starting 3Q10.
Upgrade to BUY. CMT owns and operates 13 retail malls strategically located in suburban areas and downtown core. It is the largest retail REIT in Singapore with a market share of 13% for private retail stock. CMT has revised its local target asset size from S$8b to S$9b by 2010. We have raised our target price from S$3.72 to S$3.76 after factoring in contribution from 100,000sf of retail space at The Atrium converted from office space starting 3Q10. Upgraded from HOLD to BUY as the stock provides upside of 13.6%.
CCT – UOBKH
Organic growth from positive rental reversion
CapitaCommercial Trust (CCT) is the prime beneficiary of the escalation in rental rates for prime office space within the Central Business District (CBD). It owns nine properties in Singapore with 2.3m sf of office space, which accounts for 7% of private office stock within Downtown Core.
Benefiting from positive rental reversion in 2008 and 2009. CCT has 29.4% of its leases for office space up for renewal in 2008 and 2009. We understand that in Jan 08, Standard Chartered renewed leases for 130,000sf at 6 Battery Road at above S$15.00psf pm vs the previous rate of S$5.50psf pm. Another 26% of office space at 6 Battery Road is up for renewal in 2008 and 2009. 50% of office space is up for renewal in 2008 at Robinson Point with existing rent of only S$4.00psf pm. 51% of office space is up for renewal in 2009 at Raffles City Tower with existing rent of only S$5.70psf pm.
CCT has entered into a seven-year lease renewal agreement with HSBC commencing on 30 Apr 2012 (after expiry of existing lease) and expiring on 29 Apr 2019. The contract value of S$143.1m represents an average rental of S$8.50psf pm, much higher than existing passing rent of S$3.63psf pm.
Leasing momentum remains strong. Management expects rental rates for prime office space within the CBD to have further increased in 2Q08 due to high occupancy rates although the pace of growth has moderated.
Call option to acquire OGS. CCT has obtained a call option to purchase One George Street (OGS) from CapitaLand for S$1.165b, or S$2,600psf. Sponsor CapitaLand will provide yield protection with minimum net property income of S$49.5m p.a. (yield of 4.25%) for five years from the date of completion of acquisition till 2013. This is equivalent to rental of S$10.50psf pm. The company has secured committed debt funding. We estimate that gearing will increase from 24% to 40.8% after the acquisition is completed in Jul 08.
Has refinanced short-term borrowings. CCT has issued S$100m 3-year medium term note (MTN) with fixed interest rate of 3.15% in Jan 08. It has also issued S$150m 2-year MTN with fixed interest rate of 3.05% in Mar 08. CCT has completed the refinancing for short-term borrowings and funding for the acquisition of Wilkie Edge, a mixed development project at Selegie Road. CCT has issued S$370m five-year convertible bond with coupon of 2%, yield-tomaturity of 3.95% and conversion price at S$2.6762. Proceeds from the convertible bond will be utilised to finance acquisition of OGS.
CCT provides a diversified exposure to the office market in Singapore. It provides FY08 distribution yield of 4.90%. We have raised our target price to S$2.87 after incorporating contributions from the acquisition of OGS and lease renewal at HSBC Building into our forecast.
AREIT – UOBKH
Riding on increasing demand for suburban office space
Benefiting from strong demand for suburban office space. The shortage of office space within the Central Business District has forced many companies to relocate non-client-facing backroom and data centre operations to suburban locations such as Changi Business Park. A-REIT has benefitted as Business & Science Park accounted for 25% of its portfolio by property value. Occupancy rate for Business & Science Park has increased from 92.4% at Mar 07 to 97.0% at Mar 08. Renewal rate for Business & Science Park was S$3.76psf pm in 4QFY08, 68.8% higher on a yoy basis.
Developing built-to-suit offices at suburban locations. A-REIT is developing two build-to-suit facilities and a multi-tenanted block with combined floor space of 803,600sf at Plot 8 Changi Business Park. Citigroup has committed to a seven-year lease for 400,000sf space at the build-to-suit facilities, which will house its international technology office supporting its consumer businesses, regional processing centres for securities and funds administration and regional technology infrastructure support. Credit Suisse has also taken up a three-year lease for 26,600sf space at HansaPoint@CBP, a partial build-to-suit sevenstorey business park building completed in 4QFY08.
A-REIT will undertake more development projects on a built-to-suit basis. Management has submitted several proposals for requests from financial institutions and IT service companies. Sponsor Ascendas is developing a purpose built nine-storey operations hub with gross floor area of 500,000sf at Changi Business Park for DBS Bank. Ascendas is also developing similar facilities for Standard Chartered for up to 225,000sf at the initial phase. These assets would eventually be injected into A-REIT.
Acquisition of 31 International Business Park. A-REIT has entered into a put and call agreement with Creative Technology to acquire 31 International Business Park for S$246.8m. Creative will leaseback the building with NLA of 541,300sf for five years with options to renew for another 3 + 2 years, providing net property yield of 6.24% for the initial five years. Creative will provide cash security deposit of S$72.2m. The acquisition will increase A-REIT’s exposure to Business & Science Park from 25% to 29%.
A well diversified portfolio. A-REIT has a portfolio of 84 properties and total assets of S$4.2b at Mar 08. The weighted average lease to expiry is 5.9 years. It has a well diversified tenant base of over 790 international and local companies. The top 10 tenants accounted for 27.9% of portfolio income. The largest tenant Singtel accounted for only 6.5% of portfolio income. Tenants for sales & leaseback properties have to provide security deposits of 12 months. A-REIT’s weighted average funding cost is 3.1% due to its corporate rating of A3 and consistent track record. It will be concluding a three-year S$200m transferable loan facility, after which the earliest date for refinancing is Aug 09.
Maintain BUY. Management sees opportunity to invest S$500m p.a. in Singapore through acquisitions and development projects till 2010 before shifting its focus to overseas markets (Malaysia, Vietnam and Philippines). A-REIT provides FY08 distribution yield of 6.54%. We have raised our target price to S$3.22 after factoring in the acquisition of 31 International Business Park and the three development projects at Pioneer Walk, Changi LogisPark and Changi Business Park.