Author: tfwee
Suntec – OCBC
Relative value & retail attraction
Office income at turning point. In 3Q09, Suntec REIT reported a decline of 11.4% QoQ and 41.9% YoY in average achieved Suntec City Office rents to S$7.30 per square foot per month. 22.2% of the REIT’s total office NLA (including One Raffles Quay) expires in 2010. Office REITs have yet to feel the full brunt of falling rents because of the time lag created by the three-year leasing cycle. But 2007 leases, which were secured as the market began its meteoric ascent, finally begin to expire in 1Q10. We believe we have approached the inflection point where spot rents are lower than passing rents on expiring leases, impacting revenue and distributions unfavorably.
Potential dilution risk. In 2009, Suntec avoided resorting to a dilutive equity issue to refinance a chunky CMBS maturity. Looking ahead, Suntec could see gearing increase due to a fall in office asset values at the 4Q09 portfolio revaluation. With declining office income and book value risk, Suntec could decide to go the acquisition route in 2010. It is likely to keep aggregate portfolio gearing unchanged or lower, necessitating a combination of both equity and debt financing on any purchase. Assets could be acquired from the original vendors of the Suntec assets, which have (presumably) been de-levering the parent portfolio as seen with the recent Fortune REIT [NOT RATED] transaction and the sale of both the Suntec City Convention Centre and Suntec City’s property manager. Asset yields are unknown -creating potential dilution risk.
Relative value and retail attraction. Suntec has appreciated over 9% since our October upgrade. Current price-to-book of 0.65x compares favorably to the 0.73x averaged in 2006, though the 11% value gap is partially offset by the revaluation risk in 4Q09. We see relative value versus CapitaCommercial Trust [HOLD, S$1.13], which is trading at 0.78x book and 5.4% FY10F yield. Gearing for the two is also fairly comparable (34.3% Suntec, 31.2% CCT) but note that CCT’s property valuations are more recent.
We note that Suntec’s strong retail portfolio, which should benefit from the revitalization of the Marina Bay area and the full opening of the new Circle Line, is consistently undervalued. Retail income should also support distributions. We have changed our assumptions, including on the pace and extent of the recovery in office rents from FY12 onwards. Our SOTP value for Suntec increases from S$1.21 to S$1.43. Adjusting for fund-raising risks, we derive a fair value of S$1.40 (prev: S$1.21). Maintain BUY (15.6% total return).
MapleTree – OCBC
Virtuous decisions
Protected… In our opinion, Mapletree Logistics Trust’s manager has commendably protected and created value for existing investors through the crisis. Despite refinancing needs and relatively higher leverage, MLT did not raise funds at steep discounts to de-lever the REIT in FY09. Instead in Nov, MLT raised S$79.4m through a private placement at an issue price that was at a 6.1% discount to the last closing price. The proceeds and the consequent increased debt headroom were used to acquire three industrial properties in Singapore and Japan from third parties.
…and created value. NPI (Net Property Income) yields on the two new Singapore properties were above 9%, higher than the current NPI yield of the current Singapore portfolio of roughly 6.5% and the distribution yield of 8.1% on annualized 9M09 DPU (at the time of acquisition). Additionally, the manager guided for a NPI yield of over 7% on the Japan property, significantly higher than the current NPI yield on MLT’s Japan book of about 4.5%. Note that gearing is expected to stay relatively unchanged at roughly 38.5% after all transactions are completed.
Expect negative revaluations. MLT, which was geared at 38.1% as at Sep 2009, is due for asset revaluations in 4Q09. We have a negative view on the industrial sector , and expect the tough industrial market to impact valuations. This view is supported by the implied yields achieved on the recent acquisitions and by the 11.1% asset value decline booked by MIREIT [NOT RATED] over the six months from Mar to Sep 2009. The recent acquisitions will help support net asset value somewhat, in our view.
Manager commitment is attractive. We have used pre-crisis valuations as a sanity check on current pricing. MLT’s FY10F yield of 7.8% outperforms 2006 levels but is fairly similar to the consensus 7.58% averaged in 2007. The current price-to-book value of 0.83x compares favorably to the 1.02x and 1.19x book averaged in 2006 and 2007 respectively. Note that with a 10% decline in asset values, the current price is valued at roughly 2006 levels. Valuations are attractive relative to peer Ascendas REIT [HOLD, FV: S$1.76], which trades at 1.2x book and 6.7% FY10F yield. With MLT prioritizing tenant retention over positive rent reversion, the outlook for organic DPU growth is limited. But if the manager can continue on a virtuous cycle of accretive acquisitions, a persuasive investment case emerges. Maintain BUY with S$0.78 fair value (14.6% total return). Key risk to our thesis is heightened regional economic risk, which could dampen investor sentiment towards diversified REITs.
LMIR – OCBC
Staying cautious in anticipation of 2010
Spotty track record. LMIR Trust has had a spotty earnings track record this past year with DPU falling short of our expectations two out of the last four quarters for various reasons. In 3Q09, distributed income fell 6% QoQ to S$13.1m or 1.22 S cents per unit. The manager attributed the QoQ decline to the dramatic appreciation of the Indonesian Rupiah, which caused the gap between the hedged rate on distributions and the physical rate to reverse unfavorably in 3Q09. As a result, LMIR booked a realized (cash) forex loss this quarter of S$0.4m – pushing distributed income down despite a roughly 3% (our estimate) increase in revenue and NPI in IDR terms.
Tenant issues will likely impact 4Q09. In 3Q09, anchor tenant Rimo department store, which was occupying about 4,000 sq m in Istana Plaza (IP) and about 3,250 sq m in Gajah Madah Plaza (GMP), exited the two malls. As a result, occupancy as at 30 Sep fell 8.5 percentage points to 89.8% at GMP and fell 15.4 percentage points to 80.1% at IP. The vacant space at both malls is being taken over by LMIR’s sister company and key tenant Matahari Department Store but a timing gap due to the fitting out process is likely to adversely impact 4Q09 revenue. Note the manager is guiding for roughly 99% occupancy at GMP and IP once Matahari opens.
IDR appreciation could also hit DPU. We note that the IDR continues to show strength in 4Q09 and is roughly 5% stronger than the hedged rate disclosed in the IPO prospectus. This unfavorable gap between the hedged rate on distributions and the physical rate will further weigh on 4Q09 distributions as LMIR may book another realized forex loss. Our 4Q DPU estimate of 1.16 S cents, a 5% QoQ decline, is based on a rate of 6900 IDR/SGD. If the IDR stays below these levels, a larger than estimated DPU decline is possible.
Staying cautious in 2010. We have always liked the LMIR portfolio and the medium-term Indonesia retail story. However, the near-term retail outlook looks to be in doubt. The retail property sector remains soft and we believe rents and occupancy may continue to languish in the year ahead. Realized forex losses may act as an additional drag on DPU. If regional economy risks are heightened, investor sentiment could be further subdued. With near-term catalysts continuing to look anemic, we maintain our HOLD rating on LMIR Trust with S$0.48 fair value estimate.
FCT – OCBC
It’s the sponsor’s move now
Asset values likely stable in 2010. Frasers Centrepoint Trust (FCT) booked a revaluation surplus of S$37m in 4QFY09 (end Sep), a 3.5% YoY increase in portfolio value. Surprisingly, this was despite the independent assessor hiking cap rates by 25 basis points for Northpoint (NP) and Causeway Point (CP) and by 65 basis points for Anchorpoint (AP). We are neutral on the retail property segment and believe asset values in 2010 may be supported by the high liquidity environment fostered by global central banks.
Acquisition pricing key risk. FCT is likely (in our view) to acquire retail malls Northpoint 2 (NP2) and YewTee Point from sponsor Fraser & Neave [FNN, NOT RATED] in the near term. In November, FCT and FNN extended their put and call option agreement on NP2, which indicates a price range of S$139.5m to S$170.5m, by six months. No other pricing details are available for the two malls but the manager has indicated that it intends to fund any acquisitions using a combination of debt and equity. Our key concern is accretion – physical prices of retail assets have held up better than the prices of the REITs themselves. While FCT has re-rated significantly, the magnitude of un-levered and levered accretion that FNN is willing to concede to FCT is a question mark.
Further investment into Hektar? Malaysia-listed Hektar REIT [NR] said recently that it is in talks to buy new assets, which may be partially financed through fresh equity. FCT may be unwilling to let its 31.06% strategic stake in Hektar be diluted. So if Hektar launches a rights issue, FCT will probably (in our opinion) subscribe and inject further funds into the REIT. The accretion concern also holds true here – if Hektar’s manager does not utilize capital effectively, it impacts the returns to FCT and consequently to FCT’s unitholders.
It’s the sponsor’s move now. FCT is now trading above our S$1.30 fair value estimate and has appreciated some 17% since our September upgrade. It is currently trading at about 1.07x book value and a forward yield of 6.2% based on our estimates. Relative to an average P/NAV of 1.14x in 2006 and 1.22x in 2007, we note that upside from current levels is limited. Meanwhile, the current forward yield already exceeds the average 6.35% forward yield over 2007 (based on consensus estimates). With limited upside and accretion uncertainty on the potential acquisitions, we believe the risk-reward ratio is no longer compelling. Downgrade to HOLD with S$1.30 fair value (unchanged).
CCT – OCBC
Tough operating conditions in 2010
Negative rental reversion to kick in in 2010. Going into 2010, we expect operating conditions to get tougher for CCT. Negative rental reversions are likely to set in as the higher rents secured in 2007 will be due for renewal in 2010. Some of these expiring rents (at Six Battery Road and Raffles City Tower) are significantly higher than the current Grade A office rents of S$8.80 psf pm. Although the decline in office rents has slowed, the downward pressure is expected to persist with the upcoming supply of new office spaces in 2010 and we believe that this could widen the negative reversionary gap.
No major refinancing in 2010. CCT did a Rights issue in mid-2009 and after repaying its borrowings with part of the proceeds from the issue, gearing level is now at a comfortable 31.2%. For 2010, CCT has S$235m of medium-term notes due for refinancing and this could be partially repaid using the remaining balance of the Rights proceeds of ~S$140m. On this assumption, we estimate that CCT’s gearing would fall to 29.7% after refinancing the borrowings due in 2010.
Acquisition plans may be constrained by refinancing in 2011. While CCT’s low gearing gives it significant headroom for debt-funded acquisitions, we believe that the significant refinancing needs in 2011 will be the key focus of management in 2010 and this could limit CCT’s acquisition plans. CCT has total borrowings of S$652m due for refinancing in 2011 and this figure could increase by S$370m if the convertible bond holders exercise their put option.
Maintain HOLD; Buy at more attractive valuation and yield. Undeniably, CCT has a strong portfolio of quality assets and tenants that make it stand out as one of the stronger office landlord in Singapore. Nevertheless, on absolute and relative basis, valuation and DPU yield are no longer attractive in our view, after the recent gain in share price. CCT is currently trading at a Price/NAV of 0.78x and a projected FY10 DPU yield of 5.4% whereas its closest peer, K-REIT Asia [unrated], is now trading at a Price/NAV of 0.72x and a consensus FY10 DPU yield of 6.5%. We are keeping our estimates unchanged and maintain our fair value of S$1.13 on CCT, which is pegged at par to our RNAV estimate. With a total return of 1.6%, we maintain our HOLD rating on CCT. We advise investors to accumulate at prices closer to S$1.05-S$1.10.