Author: tfwee
MMP – OCBC
A laggard play
Flattish growth. Macquarie MEAG Prime REIT’s (MMP) 4Q06 came in within expectation. Top-line came in at S$22.6m, improving 1% QoQ, with NPI (Net Property Income) at S$17.2m (-1% QoQ). However, distributable income per unit (DPU) was better at 1.47 cents, improving 2% QoQ. The lower NPI was attributed to higher property expenses (mainly depreciation) as the result of the installation of escalators linking Wisma Atria basement to Orchard road. This is a non-tax item and is distributed back to unitholders, hence the higher DPU.
Organic growth to come from office. Presently, MMP’s retail space enjoys fairly high rentals and will see very little space up for renewal in 2007. So we do not anticipate this segment to be the growth driver. However, on the office segment we expect about 182,000 sq ft (about 70% of office space) of leases to come up for renewal over the next 2 years. More importantly, these expiring leases have a rental rates averaging at only about S$5 psf/mth, whilst present market rates are closer to S$8 psf/mth. So we can expect about a 60% rise in rates for these spaces. This higher rate in turn will translate to an increase in revenue of about S$3.0m p.a. over the next 2 years. In light of the good reversions, we have adjusted our FY07 and FY08 DPU forecasts from 5.90 cents and 6.02 cents to 6.12 cents and 6.37 cents respectively.
Where are the acquisitions? In so far as acquisition is concerned, MMP has been fairly disappointing. In the current results announcement again, there was no news of potential acquisitions. Relative to all its S-REITs peers, MMP stands out as one of the few REITs not to have bought anything since IPO. On a positive note, MMP has recently beefed up its investment team and is targeting acquisitions in China, Japan, Malaysia and Singapore. We remain hopeful of some positive developments soon.
Maintain Buy with higher revised fair value. Since our valuation upgrade in December, MMP has done exceedingly well, rising by about 17% over the last month. However, even at present trading range, its price to book of about 1.0 times remains very low relative to its peers’ P/B of 1.4-1.8 times. We thus remain positive on MMP and see it as one of the lowest-risk REITs with low expectation of growth. We see these traits as defensive and thus maintain our BUY rating and with a revised fair value of S$1.32 (from S$1.22) on the back of higher office valuations.
FrasersCT – DBS
Small is beautiful
1Q07 DPU slightly above expectations. FCT’s 1Q07 DPU of 1.54 cents is slightly above our estimates. Gross rental revenue of S$19.2m grew 8.1% y-o-y, mainly attributed to positive reversions from renewals and new leases, as well as higher carpark income and additional income from leasing of Atrium space, etc. Net property income grew 4.2%, mitigated by higher expenses. Occupancy for FCT’s portfolio continues to be healthy at 98.8%, slightly affected by Anchorpoint currently repositioning into a village-mall concept. Distributable income was S$9.47m, 4.3% above FCT’s own forecast.
Further expansion of pipeline. To recap, moving forward we expect FCT to focus on asset enhancement plans in the near term, followed by planned acquisitions. Asset enhancement is targeted to commence from Jan 2007 and span 20 months for each of the three properties in the initial portfolio. Acquisition pipeline in the near term remains status quo with Centrepoint property and Yishun extension to complete in FY08 and FY2010 respectively. In the longer term, Frasers Centrepoint (“FCL”) has recently acquired two properties in Bedok Town Centre for S$40.8m as well as an option agreement to acquire Yew Tee Point from NTUC Choice Homes, expected to complete in 2009. Therefore, small is beautiful for FCT which is slowly but steadily expanding its acquisition pipeline which we estimate to double to S$1.8bn by 2010.
Maintain hold with raised TP at S$1.53. We have rolled forward our DCF estimates to FY2011, maintaining a five-year investment horizon. Besides incorporating acquisition assumptions for Centrepoint and Yishun property to be completed by 2008 and 2010 respectively, we have also included potential acquisition of the Bedok property and Yew Tee Point in our estimates. Therefore we are raising our target price to S$1.53 based on DCF valuation but maintain our Hold recommendation for FCT.
CMT – DBS
Signing of a top Chinese player
Indirect entry into the PRC retail market. The PRC retail market has been experiencing strong demand. Retail sales have been growing by about 12.5% per annum for the past 10 years, outperforming the GDP growth at about 9.7%. Retail rental growth is expected to grow between 5-8% for the next five years and we like the exposure in PRC retail malls from CMT’s perspective.
Inheriting CRCT’s robust pipeline. With ROFR to acquire assets under two Capitaland funds in CapitaRetail China Development Fund (“CRCDF”) and CapitaRetail China Incubator Fund (“CRCIF”), CRCT now holds a proprietory pipeline of acquisitions to more than 70 retail malls. They cover over 3.2m sqm of gross retail space which when injected, would see CRCT expand its portfolio by more than six fold. Based on the sheer size of the acquisition pipeline for CRCT, CMT now possess an alternative channel of growth, leveraging on the strong growth of the PRC retail property market.
Upgrading to Buy, TP S$ 3.30 based on sum of parts valuation. In view of expected robust growth for CRCT, we now view that a sum-of-parts valuation is more appropriate, pricing the cash flows of CMT’s portfolio as well as upside from the strategic stake in CRCT. We now peg our fair value of CMT based on 1) DCF valuation of CMT’s portfolio and 2) marked-to-market value of CRCT. Therefore in view of strong acquisition pipeline, further value creation from AEI initiatives, and active leasing management driving asset yield, we are positive on CMT with an added avenue for growth now, leveraging on exposure to China retail property sector through CRCT. Therefore we upgrade our recommendation from Hold to Buy, TP S$ 3.30 based on our new sum-of-parts valuation for CMT.
A-REIT : Phillip
Continuing to Perform
3Q07 Results. 3Q07 net income available for distribution increased 6.8% YoY to S$41.0m. 3Q07 DPU of 3.2 cts increased 6.3% YoY and 1.3% QoQ. Annualized DPU based on 9 months to 31 Dec 06 works out to be 12.6 cts, up 8% YoY. Gross revenue was up 16% YoY mainly due to additional rental income from the following completed acquisitions: Steel Industries, Hamilton Sundstrand, Thales, Aztech, Noel Corporate, 138 Depot Road and 150 Ubi, Sembawang Kimtrans, Logistics 21 and LabOne. As of 31st Dec 06, gearing worked out to be 39.5% with a debt of S$1,126m and interest cover ratio of 5.7x. NAV per unit of 136 cents translates to a current P/B of 1.95x. The ex-date of the distribution of 3.2 cts per unit is on 24 Jan 07 and will be paid out on 28th Feb 2007.
As of 31st Dec 06, weighted average lease term to expiry was 6.3 years based on 68 properties. Portfolio occupancy increased to 96.1% with multi-tenanted buildings occupancy (54% of portfolio) at 93.1%. Concentration risk from top 10 tenants dropped from 35.7% at 31st Dec 05 to 33.8% at 31st Dec 06, representing a well-diversified portfolio.
Investment highlights. AREIT has recently completed the purchase of two properties, Super Industrial Building and 26 Senoko Way, for S$49.0m, funded by bank debt. Asset enhancement is ongoing for Alpha building, and has been completed for Telepark. Courts Megastore has been completed on schedule in Dec 06 with lower than expected development cost. In summary, S$211m worth of acquisitions has been completed year-to-date and S$214m worth of investments as shown in Fig. 1 is in progress for completion.
Singapore Industrial Property. According to URA, prices of multiple-user factory space rose 1.1% QoQ in 3Q06 with rentals of multiple-user factory space remaining unchanged. Prime industrial space increased QoQ at a range of 1.2% to 3.8%. The best performer goes to high-tech space which increased 7.6% QoQ for the ground floor and 4.9% QoQ for upper floor, backed by the improving manufacturing sector, research & development firms and government injection of S$1.5 billion into the biomedical sciences. Results have been within our expectation and we believe that demand for high-tech space will continue to remain high and drive rental rate up.
Valuation. 12 acquisitions and developments were announced in financial year to date amounting to S$425m, exceeding our initial assumption of S$400m. We revise our projection for acquisitions upwards to S$500m worth of acquisitions for FY07 as well as FY08. Interest rate decrease over the last quarter has also allowed us to decrease our required rate of return (WACC) to 6.8%.
Using DDM with a growth rate of 2.5%, we increase our fair value to S$2.74, representing a FY07F yield of 4.66% and a healthy spread of 1.6%. FY07F P/NAV using our fair value is 1.94x but we believe that this will decrease after AREIT revalues its properties for FY07. We maintain Hold on AREIT.