Author: tfwee
CDLH-Trust – CIMB
In an upswing
• Largest hotel owner in Singapore. CDLHT is a stapled group comprising H-REIT, a real estate investment trust which owns six hotel properties and one shopping arcade; and HBT, a business trust which is currently dormant. CDLHT is the largest Singapore hotel owner with 2,327 room keys, representing a 6% share of the hotels in Singapore.
• Tourism targets to drive demand for hotel stay in Singapore. The government has set aggressive targets for tourism in Singapore, aiming to triple tourism receipts to S$30bn and double visitor arrivals to 17m by 2015. These targets should drive the demand for hotel accommodation in Singapore over the next eight years.
• Sustainable performance despite large upcoming hotel supply. New hotel rooms in 2008-10 are expected to add some 37% to the current room stock. However, we see resilience in CDLHT’s portfolio, from: 1) its centrally located Singapore assets with mid-tier pricing; 2) concentration on less price-sensitive business travellers; 3) price advantage over new hotels which face high construction costs; and 4) the possibility of demand outstripping supply if Singapore’s tourism targets are met.
• 8.2% DPU CAGR for 2008-10. CDLHT is poised for growth via acquisitions and growth in revenue per room (REVPAR) from 2008 to 2010. We expect CDLHT to acquire S$300m of properties each year from 2008 to 2010, expanding its portfolio to about S$2.5bn by end-2010. In addition, we expect REVPAR growth of up to 25% for its Singapore hotels in the same period. On this basis, we forecast a DPU CAGR of 8.2% for 2008-10 for CDLHT.
• Initiate with Outperform and DDM-derived valuation of S$2.38. We arrive at our target price of S$2.38 using DDM valuation (discount rate of 8.5%, terminal growth rate at 3%). This represents a total return of 24% from a forward yield of 5.6% and potential price upside of 18.4%.
SREITs – DB
Returning to a virtuous cycle
Re-rating based on organic growth, acquisitions and availability of funding
We expect the re-rating of Singapore REITs to continue, based on: 1) firm trading performance, 2) the availability of funding allowing the return of acquisitions to the sector, and 3) steady physical asset markets. We see a return to a virtuous cycle for the larger REITs, which have demonstrated their ability to raise capital and acquire assets. The valuations for CMT and Suntec REIT are attractive (as CMT has been weak since the Atrium acquisition, and Suntec has lagged its peers).
Better-than-expected 1Q08 earnings; reversion cycle supportive
The REITs delivered 1Q08 DPU growth ahead of expectations (avg 19.1% YoY), based on reversionary rental growth and full occupancy rates. The near-term outlook remains positive, as office and industrial passing rents still trail market rents and retail rents are firming up due to asset enhancements and the entry of new retailers.
Raising capital, a pick-up in acquisitions; majors gaining market share
Singapore REITs have announced S$2.9bn of acquisitions YTD as activity from opportunistic funds have slowed. AREIT’s acquisitions have gained momentum at the expense of competitors who face funding constraints. The REITs have been able to raise funds for acquisitions and debt refinancing, and the completion of KREIT’s S$552m rights issue helps to address concerns over refinancing. Funding costs have been largely contained, as declining swap rates offset a rise in spreads.
Physical market steady as REITs and core funds stepped up to acquire
More than 2/3 of the REITs are trading below book NAV. Recent investment transactions, such as 71 Robinson (S$3,125psf), One George Street (S$2,600psf), and the Serangoon White Site (est. breakeven S$2,000psf), suggest firm asset pricing due to REITs and core funds being more active. Book NAVs for commercial REITs are typically conservative and are at discounts to recent open market transactions.
Focus on large, quality names; smaller REITs likely takeout plays
Yield spreads remain well above average at yields of 5.0% for CY07 and 6.1% for CY08E, representing a 342bps spread over the 10-year gov’t bond and avg. 9.1% discount to book NAV. Inflows into real estate funds have improved in recent weeks, supporting global REIT markets. We prefer the larger REITs which are able to deliver organic growth, mobilize funding, and potentially gain market share. We view the smaller REITs as likely takeover targets if deep NAV discounts persist.
Top picks for REIT sector: CMT, Suntec REIT and AREIT
CMT is attractive after the pullback following the CB issue for the Atrium deal. We believe that CMT has the right platform to extract value and synergies from that asset. Suntec REIT continues to benefit from robust demand in both the office and retail segments. We also like AREIT for its leverage on the rising business park segment. Risks include any protracted economic slowdown affecting demand, further deterioration in credit markets, and inability to refinance.
MI-REIT – Phillip
We review MacarthurCook Industrial REIT (MIREIT) maiden full year results for FY08. MIREIT reported gross revenue of S$32.2 million and net property income of S$25.1 million. Distributable income amounts $19.6 million, translating to a full year DPU of 7.52 cents.
Full year gross revenue is 20.7% higher than our forecast mainly because we do not include service charge and reimbursement in our modeling as these components of revenue have no effect on the net property income. Net property income, distributable income and DPU are respectively 1.9% lower, 3.1% lower and 3.0% lower than our forecast.
MIREIT was listed on SGX on 19 April 2007. The property portfolio grew from the initial 12 properties to the current 21 properties, which include one industrial warehouse in Japan. Asset size expanded from S$316.5 million to S$555.4 million. By the same account, NAV per share increased from $1.13 to $1.29.
Capital management. MIREIT has total debt of S$222 million, of which S$201 million will be due in April 2009. The remainder is Japan bank loan used in the acquisition of the Asahi Ohmiya warehouse, which matures in Dec 2009. Current gearing is 40%. It has S$20 million left in available facility to fund capex requirements or acquisitions. The manager has already begun refinancing talks with financial institutions.
Three main objectives for FY09. Firstly, active management of property portfolio. The manager will look at ways to improve the properties in terms of cosmetic upgrade or increasing the lease area from available spaces. Secondly, although the manager does not expect much acquisition activities in the near term, it is still exploring opportunities both locally and in the regional markets. Regional acquisitions will be transacted through strategic alliance with local partners. Thirdly, the manager hopes to conclude talks of refinancing plans.
Tenant diversification. The biggest tenant’s rental contribution has fallen from the initial 33.6% to 20.3% as at FY08. We estimate this will drop to 18.5% in FY11F. Similarly, the ten biggest tenants account for 66.7% of rental income in FY08, dropping from 94.2% initially. However with the projected contribution from IBP Techpark kicking in from Dec 2009, we estimate that the ten biggest tenants will account for 70.3% at FY11F. Diversification by sector will improve from the current 54.6%, 35.9% and 9.4% for Warehouse and Logistics, Manufacturing and Research & Technology respectively to 49.3%, 28.8%, 7.6% and 14.3% with the addition of the Office & Tech Park sector.
Investment risks. The inherent risk faced by all REITs is the ability to raise capital in order to grow the property portfolio. Although MIREIT will not be making any acquisition in the near term and thus has no urgency in funding requirement, it will have a capital outlay of S$91 million in Dec 2009 upon completion of construction of the IBP Tech Park it is schedule to acquire. It will therefore need to increase its credit facility or raise equity for the acquisition. In the event that the acquisition is debtfunded, gearing will rise to 48.5% from the current 40%. Depending on market conditions, we believe MIREIT will prefer to acquire through equity as it then leaves it with the flexibility for further acquisitions.
Valuation and recommendations. For the full year FY2008, MIREIT paid out 7.52 cents in distribution, which translate to a distribution yield of 6.25% relative to 6.18% as projected in the IPO prospectus, based on the IPO price of $1.20. Since IPO, MIREIT share price has fallen 20%. We attribute this weakness to the general sentiment surrounding the REIT sector. We roll over our valuation and forecast a 3- year CAGR DPU growth of 13.4%. Our DPU forecast of 9.61 cents for FY09F translates to a distribution yield of 10.01%, among the highest in the S-REITs universe. Fair value derived from our DCF model is $1.18. With an attractive 10.01%
distribution yield and trading at 25% discount to NAV, we maintain our BUY
recommendation.
CitySpring – BT
CitySpring Q4 DPU 6.7% higher than forecast
CITYSPRING Infrastructure Trust has beaten projections with its performance for the fourth quarter ended March 31, 2008.
It has declared a distribution per unit (DPU) of 1.6 cents for Q4 FY2008, 6.7 per cent or 0.1 cent above the projected DPU provided at the time of its IPO in February 2007.
Cash earnings of $20.35 million were also 90 per cent higher than projected, CitySpring said. It defined cash earnings as the aggregate of profit before income tax adjusted for non-cash income and expenses and lease receivable repayment, after deduction of capital expenditure and before principal repayment of debt incurred for the period.
From Jan 5, 2007 to March 31, 2008, cash income was $69.2 million against projection of $49.7 million, while DPU for the period was 7.08 cents compared with a forecast 6.78 cents.
According to trust manager CitySpring Infrastructure Management, the trust’s initial assets – City Gas Trust and SingSpring Trust – performed better than projected during the last quarter of the financial year.
For example, City Gas posted higher cash earnings of $4.53 million, up from the projected $1 million, while SingSpring reported cash income of $2.9 million, up from the $1.55 million forecast.
‘The healthy performance by City Gas was underpinned by increased town gas sales. SingSpring Trust continued to meet the desalinated water production requirements of the Public Utilities Board during the quarter,’ the trust manager said in a statement.
As for its Australian subsidiary Basslink, Q4 cash income dipped to $5 million from a forecast $6.18 million, due to an unplanned outage and lower risk sharing payments.
However, Basslink has been fully available since the outage on Dec 31 last year, and CitySpring expects the facility fee deduction of A$1.1 million in Q4 FY2008 to be recovered in the current year.
Basslink is the electricity interconnector linking Tasmania to mainland Australia, which CitySpring bought for A$1.175 billion (S$1.54 billion) last year.
Part of the funds came from a bridge loan, which CitySpring said will be refinanced through a $370 million three-year term loan from DBS Bank.
CitySpring Infrastructure Management CEO Au Yeung Fai said in a statement: ‘Taking a loan at the CitySpring level will enable us to further optimise our capital structure, and shows our commitment to enhance unitholder value.’
Distributions after the completion of the refinancing, which will include Basslink’s cashflows, will be raised to 7 cents for the year ending March 31, 2009.
At a briefing, CFO Tong Yew Heng said the infrastructure outlook in Singapore and elsewhere remains positive, and the firm is actively reviewing a number of investment opportunities.
Some 49 per cent of the possible deals are from China and Hong Kong, while 35 per cent are from South-east Asia. In sector terms, toll roads/tunnel take up 32 per cent, while power accounts for 28 per cent. The rest is taken up by ports, water, logistics and others.
Mr Tong commented that CitySpring is ‘in intensive talks with some parties . . . and we will be disappointed if we don’t announce something in the next 12 months’.
PLife – DBS
Two more in Japan
Story: ParkwayLife REIT announced that it is participating as an investor in the acquisition of two nursing homes in Japan for a total consideration of JPY2.617bn (S$34.9m). The investment is in relation to (1) Bon Sejour Shin Yamashita (Yamashita facility) for JPY1.44bn (S$19.2m); and, (2) Bon Sejour Ibaraki (Ibaraki facility) for JPY1.177bn (S$15.7m). Acquisition will be funded by debt and is yield accretive.
Point: The Yamashita facility has a net operating income yield of 6.1% while the Ibaraki has a net operating yield of 6.7%. The vendor of both homes is nursing home operator ZEC Community Co. Ltd. There is also a back-up operator agreement with Japan Care Services Co. Ltd. The lease agreement is for a period of 15 years with an option to extend the lease for an additional 5 years. Rentals are index-linked to Japanese inflation (on an upward basis only) and there are rent reviews every five years.
As indicated previously, these investments are part of the REITs drive for asset diversification within the healthcare space (hospitals, pharmaceutical logistics/ production facilities, nursing homes, medical suites, etc). While acquisitions are relatively small in size, it seems like management is looking at “building up volume with small numbers first”, in our opinion. As such, we still retain our view that there will be more to come in the months ahead. There is also an attractiveness in the Japan market given the high proportion of elderly citizens – 1 in 5 are
above 65 years of age in 2006, projected to go up to 1 in 3 by 2050 – and the relatively mature market.
Relevance: The acquisition will bring its gearing from 8% to 11%, which still allows significant debt headroom for further acquisitions in the future. BUY, TP adjusted slightly up to S$1.51. Dividend yield is 5.52% (FY08) and 5.68% (FY09) at current price of S$1.23. We continue to like PREIT as a defensive play, providing potential upside from hospital revenue while downside protection via 1%+CPI% growth.