Author: tfwee
CCT – CIMB
Divestments to come
• Results in line; maintain Underperform. Full-year results met Street and our expectations (101% of our estimate). Changes in our assumptions, reflecting more positive occupancy and lower cost of debt, raise our FY10-11 DPU estimates by 8-13%. We also introduce FY12 estimates. Following our upgrade, our DDM-based target price rises to S$1.09 from S$1.01 (discount rate 8.1%). Nevertheless, maintain Underperform as we expect negative rental reversions to set in from FY10. Possible re-rating catalysts could come from any positive portfolio repositioning, to improve the asset quality in its portfolio.
• Full-year DPU of 7.06cts (CIMB-GK 7.02cts). DPU declined 35.8% yoy due to increased units from a rights issuance in 2009. Net property income of S$300.2m was up 28.6% yoy mainly on positive rental reversions, full-year contributions from One George Street and Wilkie Edge and lower property-related expenses.
• Robinson Point sale to reduce exposure to non-Grade A assets. CCT announced a sale of Robinson Point to AEW Asia. The sale price of S$203.25m (S$1,527psf) is 11% above the property’s valuation of S$182.5m (S$1,370psf) and 70% above CCT’s purchase price of S$120m (S$901psf). Proceeds will be used to acquire Grade A assets although the time line for such acquisitions remains vague. The next asset under review would be StarHub Centre at Cuppage Road. The Urban Redevelopment Authority has given outline planning permission to change the use of this property from commercial to residential.
• Changes to our assumptions. We view the divestment of non-core assets positively and are less pessimistic on the degree of rental and occupancy erosion in 2010 in view of good progress in forward renewals, CCT’s ability to sustain occupancy and rents, and Singapore’s economic outlook. We raise our occupancy assumptions for CCT’s top-4 office buildings to 98-99% (from 92-100%); and lower our cost-of-debt assumptions to 4% (from 4.8%) in view of a much strengthened balance sheet after the divestment. Asset leverage following the sale of Robinson Point is expected to fall to 31.1% (from 33.2% as at Dec 09).
CCT – DBS
Proactive asset management
• Results slightly ahead of expectations
• Sells Robinson Point, reviewing asset plans for Starhub Centre
• Maintain Hold with TP $1.23
Results slightly ahead of street estimates. CCT reported 4Q09 NPI of $80m, 3.8% better sequentially, on a revenue of $103.2m, up 0.6% qoq, on cost savings and marginally higher leasing income. Distribution income rose 0.5% qoq to $52.9m, translating to a DPU of 1.88cts. The group wrote down the value of its property portfolio by 5.4% to $5.7b, translating to a book NAV of $1.37 per unit. Correspondingly, gearing rose to 33.2%.
Looking ahead, a return of business confidence has led to a recovery in demand for office space while lower rents has resulted in a flight back to quality. However, rents are expected to trend lower owing to the large new supply over the next 2-3 years. As such, we anticipate negative rental reversions to kick
in this year as re-contracted rents are likely to fall below expiring levels, dragging on earnings.
Proactive asset management.CCT has emerged as the first major Sreit to execute a portfolio reconstitution strategy. It is selling Robinson Point to AEW for $203m, 11% above Dec 09 book value, and is planning to redevelop Starhub Centre into a residential/commercial property. We believe such activities, although DPU dampening in the immediate term, would enable the group to actualize its NAV as well as deepen its financial flexibility with a capacity of $3.4b of unsecured assets and MTN programme. Proceeds from the sale, including the tax-free gains, are likely to be reinvested in newer properties with better locations or for asset enhancement activities.
TP raised to $1.23. We are retaining our Hold call on CCT with a revised DCF-backed TP of $1.23. While we expect the portfolio review exercise could narrow the gap between stock price and book NAV over time, other catalyst such as reinvestment may take longer to materialize as current prime office cap rates of 4.25-4.5% are lower than the group’s implied property yield of 5.7%.
K-REIT – DBS
Results in line
At a Glance
• Results in line, lifted by positive rental reversions
• Moderating leasing environment
• Maintain fully valued, TP $1.11
Results in tune with estimates. Kreit’s 11.4% yoy jump in distribution income to $19.4m (DPU 1.45cts) is in line with expectations. This was achieved on a 13.8% rise in net property income to $13.4m while revenue increased a higher 19.1% to $17m. The better performance was due to higher rentals on reversion as well as contributions from the additional strata space acquired at Prudential Tower. Portfolio occupancy of 95% was slightly better than a quarter ago but below last year’s 99%. The group recognized a positive $21.1m surplus on its portfolio value over the level in Oct 09, bringing total writedown to $71.7m for the year, translating to book NAV of $1.47.
Operating environment moderated but still challenging. Operations wise, the office leasing market has experienced some recovery in demand as economic conditions improved. However, rents are expected to continue declining, although at a smaller pace than before due to oversupply while tenants’ flight to quality buildings would mean a more challenging leasing environment for older office buildings. On the acquisition front, the group’s current balance sheet is under optimized with a net gearing of <1% following its recent rights issue and would enable it to pursue a pan Asian acquisition strategy or for asset enhancement activities.
Recommendation
Maintain Fully Valued, TP $1.11. Amongst office Sreits, Kreit’s yields of 5.2% and 4.9% for FY10 and FY11 respectively are on the lower end of the 5-7% range. We believe a re-rating catalyst would appear only when it deploys its funds into new acquisitions both in Singapore and overseas.
CCT – BT
CapitaCommercial Trust to revamp portfolio; value falls $328m
It is selling Robinson Point, looking at Starhub Centre redevelopment
OFFICE Reit CapitaCommercial Trust (CCT) wrote down the value of its investment properties by another $327.6 million and unveiled plans to revamp its portfolio.
The trust also said yesterday that it will receive $9.3 million from parent company CapitaLand to make up for a shortfall in income from One George Street.
CapitaLand sold One George Street to CCT in 2008 with a yield protection clause in case the net property income from the property is less than $49.5 million a year. The developer was required to pay for the shortfall for 2009, which resulted from lower operating performance as a result of global economic slowdown as well as the low rental rates for some of the existing leases that have not expired, CCT said.
The Reit also said it will sell Robinson Point to a private fund managed by AEW Asia for $203.3 million. CCT will book a gain of $19.2 million from the sale.
The trust is also looking at redeveloping Starhub Centre at Cuppage Road. The property is currently zoned for purely commercial use but CCT is hoping to convert it into a residential and commercial development.
It has obtained outline planning permission from the Urban Redevelopment Authority to change the use of the property, but the change of use is still subject to other government authorities’ approval. CCT will only decide on the next course of action after all relevant approvals are received, it said.
Both Robinson Point and Starhub Centre are non-Grade A properties, which the trust said have not performed as well as its Grade A projects in the current downturn.
‘Our Grade A offices continue to show resilience by recording an increased average occupancy rate in Q4 2009 to 98.7 per cent, significantly higher than the Grade A office market occupancy rate of 93.8 per cent,’ said Lynette Leong, chief executive of CCT’s manager. In comparison, the overall portfolio occupancy stood at 94.8 per cent in Q4.
Robinson Point was identified as being ripe for divestment. Selling it will allow CCT to re-invest in a Grade A property instead, Ms Leong said. Starhub Centre, which now suffers from lower than usual occupancy, could be given a revamp.
CCT also reported a downward revaluation of its properties from $6.03 billion in May 2009 to $5.7 billion at end 2009. The write-down follows an earlier one in May, where the value of CCT’s portfolio was reduced from $6.71 billion in December 2008.
CCT reported a 39 per cent climb in distributable income to $52.9 million for Q4 2009, from $38 million a year ago. Distribution per unit (DPU) – adjusted for rights units – rose to 1.88 cents from 1.36 cents.
For the full 2009 financial year, CCT reported a distributable income of $198.5 million, up 30 per cent from $153 million in 2008. The full year DPU (adjusted for rights units) of 7.06 cents is a 29 per cent year-on-year increase from 2008 DPU of 5.48 cents.
K-REIT – BT
K-Reit may buy stake in MBFC
K-REIT Asia is looking to add to its portfolio and may take a stake in the upcoming Marina Bay Financial Centre (MBFC).
The commercial real estate investment trust said this yesterday after releasing its results. Net property income was $13.4 million for the fourth quarter ended Dec 31, 2009 – up 13.8 per cent from a year ago.
Earnings were lifted by positive rental revisions and contributions from newly purchased strata floors in Prudential Tower. Distributable income to unitholders also rose, by 11.4 per cent to $19.4 million.
However, distribution per unit (DPU) fell as the unit base grew from a $620 million rights issue in November last year. DPU in Q4 was 1.45 cents, down 45.7 per cent from 2.67 cents a year ago. Adjusting for the rights issue, DPU in Q4 last year would have been 1.32 cents, reflecting a 9.8 per cent increase.
K-Reit will pay out 2.77 cents per unit on Feb 25, for July 1 to Dec 31.
At a press briefing, K-Reit manager CEO Ng Hsueh Ling said that the trust is actively looking at acquisition opportunities. She told BT that a stake in MBFC held by its parent Keppel Land is under consideration. This confirms what several analysts have been deducing in the past few months.
The Reit has not struck a deal because the first phase of MBFC is still on its way to completion. ‘We will only look at it when there is greater stability of income,’ Ms Ng said.
And because a deal between K-Reit and Keppel Land would be an interested party transaction, both sides will have to work on getting the ‘right and best value’ for their investors, she added.
K-Reit has considerable capacity for acquisitions because of the rights issue. As at end-December, its aggregate leverage was 27.7 per cent, almost the same as that a year ago. This could drop to 9.1 per cent should it pay off a loan due to Kephinance Investment.
Its debt headroom would be about $438-648 million, assuming an aggregate leverage of 30-40 per cent.
K-Reit’s portfolio value stood at $2.1 billion as at Dec 31, which works out to an average of $1,616 per sq ft (psf). This is 5.3 per cent lower than a year ago.
The portfolio occupancy rate slipped to 95 per cent from 99 per cent over the same period. On a brighter note, the average portfolio rent in December last year inched up to $8.16 psf.
For FY2009, K-Reit’s net property income grew 23.3 per cent to $48.9 million. Distributable income to unitholders also increased 21.1 per cent to $70.5 million.
Annualised DPU was 5.28 cents – 40.7 per cent less than the 8.91 cents a year ago. The annualised distribution yield would be 4.8 per cent based on K-Reit’s closing unit price of $1.10 as at Dec 31.
Annualised DPU would have risen 19.7 per cent year-on-year if the FY2008 figure was adjusted for the rights issue to 4.41 cents.
K-Reit units gained two cents yesterday to close at $1.20.