Author: tfwee
SREITs – DMG
Euphoric aura could further compress yields
Raising target prices on lower cost-of-equity assumptions. We are raising our target prices for S-REITs to account for continued low interest rates. We lowered our 10-year risk free assumptions by 50bps to 2.5%, resulting in the concomitant reduction in cost-of-equity. CDLHT (BUY/TP: S$2.15) is our top pick for large-cap S-REIT and CREIT (BUY/TP: S$0.64) is our top pick smallcap S-REIT. Sector now trades at FY10 yield of 6.8%.
Supernormal visitor growth of 30% – a real possibility! We are sanguine that CDLHT remains the best proxy to a multi-year tourism resurgence that will take place next year. The success stories of countries with similar service offerings reinforce our view that Singapore’s visitor growth will easily punch through the 15-20% level in the initial year of opening (possibly even 30%), with sustained 5-10% growth thereafter. Our feedback from hotel operators indicates that pricing power will return when occupancies hover above 80%. We expect systemic occupancies to rise to 84% next year, with ARRs rising to S$250. Amara Holdings, (UNRATED, RNAV: S$0.68-0.75) is another hotel play that could enjoy colossal spin offs from Singapore’s monumental tourism boom.
Prime office rents likely to fall by a further 20% to S$6/sqft. With 3.9m sqft of new office space (5.4% of existing supply) coming on stream in 2010, the market has become so competitive that it is increasingly common for landlords to offer sweeteners such as fitting-out costs to attract new tenants. Despite the economy being technically out of a recession, it is clearly still a tenants’ market and the focus on tenant retention remains paramount for all landlords including CCT (SELL/TP: S$0.87). Our channel checks indicate that some landlords in prime areas are currently negotiating rents at between S$6-7/sqft, 20% lower
than 3Q09’s figures.
Euphoric aura could see further yield compression. We believe the stabilising global economy and the twin openings of the IRs will remain as euphoric events in 2010, providing sustained performance for the REIT sector. We, however, see minimal upside for CMT and A-REIT (NEUTRAL) as both counters are already trading close to their heyday yields of ~5% and 6%, respectively. We recommend BUY entries for CMT at S$1.55 and A-REIT at S$1.80. We continue to favour Suntec (BUY/ TP: S$1.45) as leasing activities
at Suntec Tower remains buoyant and expiring rents are marginally underrented. Suntec trades at attractive 8.6% yield for FY10.
Interesting small-cap REITs to watch. We believe acquisitions are in the works for FCT (BUY/TP: S$1.53). With a low cost-of-equity, we expect potential acquisitions to be DPU accretive. Cambridge REIT (BUY/TP: S$0.64) has a defensive business structure with an FY10 yield of 11.4%. We believe the stock
is a major laggard to A-REIT, trading at a spread of 4.4%, way above its historical average of 1.4%.
Link – Table
PLife – CIMB
Factoring in acquisitions
• Maintain Outperform; target price raised to S$1.49 (from S$1.31). We have increased our target price for PLife to S$1.49 from S$1.31, still based on DDM valuation (discount rate 7.2%). We now assume S$250m worth of acquisitions in 2010 (from zero previously). We also increase our cost-of-debt assumption to 3.5% from 3.1%, and roll our target price forward by one year. Our DPU estimates rise by 5-14% for FY10-11. We prefer PLife to Frasers Centrepoint Trust in the short term. Although both could potentially benefit from near-term acquisition catalysts, the likelihood of full debt funding for PLife would make its acquisitions more DPUaccretive, while we anticipate some equity funding by FCT. PLife is also cheaper at 0.89x P/BV vs. FCT’s 0.95x P/BV.
• We believe acquisitions will materialise soon, as the spreads between the cap rates of healthcare assets in the region and dividend yields as well as cost of equity widen, making DPU-accretive acquisitions highly possible. Ample credit facilities and debt headroom point to full funding by debt, rather than equity.
• Buying third-party assets in Japan and Australia more likely than buying from sponsor. Although sponsor Parkway Holdings has a large pipeline of assets, we expect these to be ready only after 2011. On the other hand, cap rates of healthcare assets in Japan and Australia look attractive.
K-REIT – BT
K-Reit posts 18% rise in Q3 distributable income
Net property income up 29% over Q308; trust eyes more local, regional acquisitions
OFFICE trust K-Reit Asia said yesterday that its third-quarter distributable income rose 18 per cent on the back of positive rental reversions.
Distributable income for the three months ended Sept 30 rose to $18 million, from $15.2 million a year ago. Distribution per unit (DPU) accordingly rose to 2.69 cents from 2.34 cents.
The trust, which is a unit of Keppel Land, also reported a 29 per cent rise in net property income to $12.3 million, from Q3 2008’s $9.5 million.
K-Reit’s portfolio – which includes Bugis Junction Towers and a one- third stake in One Raffles Quay – attained 94.9 per cent committed occupancy as at end-September; the trust reported the same occupancy rate at end-June.
The average gross rental rate for K-Reit’s portfolio was $7.91 per square foot (psf) in September, down slightly from $8.13 psf in September 2008.
Looking ahead, the trust said that it was well positioned to capitalise on economic stabilisation due to its ‘high-quality asset portfolio, strong tenancy profile and broad tenant diversity’.
K-Reit also pointed out that, based on committed leases as at end-September, gross rental income for FY2009 already exceeds that for FY2008.
K-Reit on Sept 30 proposed a one-for-one rights issue to raise $620 million. The stock fell since most investors and analysts were taken by surprise as K-Reit’s gearing was already comparatively lower than its peers’. The company had also conducted a rights issue in January 2008 to raise $551.7 million, which had cut its aggregate leverage then. Upon completion of the latest rights issue exercise, K-Reit’s aggregate leverage is expected to decrease from 33 per cent to 9.1 per cent.
The trust also did a revaluation of its portfolio as part of the proposed rights issue, and saw its portfolio value fall from $2.1 billion at the end of December 2008 to $1.97 billion at the end of September 2009.
‘Going forward, with the added financial flexibility upon completion of the proposed rights issue, the manager intends to pursue opportunities for strategic acquisitions in Singapore and across Asia,’ K-Reit said in its statement yesterday. ‘The manager will also continue to focus on tenant retention, attract new tenants and seek to manage K-Reit Asia’s assets and operating cost structure more efficiently.’
K-Reit shares closed unchanged at $1.12 yesterday.
Shipping Trusts – OCBC
3Q results preview
3Q results preview. We expect FSL Trust and Pacific Shipping Trust to release 3Q09 results next week, with Rickmers Maritime following later in the season. We will be tracking: 1) performance of the trusts’ charters; 2) balance sheet factors including loan-to-market-value levels and repayment schedules; and 3) how this translates to forward strategy and DPU guidance. Maintain UNDERWEIGHT on the sector as we believe the unwinding of this leveraged play structure is still playing out. The shipping industry is still hurting and counterparty risk and aggressive leverage remains a key concern. FSL Trust [BUY, S$0.72 fair value] is our preferred pick for its diversified vessel portfolio.
FSL Trust (FSLT). In September, FSLT secured loan-to-value (LTV) covenant waivers and raised equity through a placement. As such, we expect 3Q results to be fairly uneventful relative to the other two trusts. FSLT is the only trust to have given clear guidance for 3Q09 payout: 1.5 US cents is guided for pre-placement unitholders (1.27 US cents already paid out). We expect the trust to meet its guidance. The placement proceeds are earmarked for acquisitions but it may be too soon to expect concrete news on this front.
Pacific Shipping Trust (PST). Rate renegotiation discussions with customer CSAV are now in their sixth month with no resolution achieved so far. 3Q09 revenue will likely outperform our expectations as we had priced in a rate cut from 2H09 onwards. Our view is that it is only a matter of time before some flavor of rate concession is granted. Meanwhile, PST’s Board is reconsidering its payout strategy and has only said that 3Q09 payout will be no less than 70% of distributable income. This may be a significant quarter as the Board spells out its forward payout and growth strategy. PST has already outlined its ambitions to grow, but any serious attempt would require fresh equity, in our opinion.
Rickmers Maritime (RMT). RMT paid out 0.6 US cents DPU in 2Q09, and its circumstances are unchanged. We don’t expect any immediate resolutions to its challenges including LTV covenant breach concerns, maturing loans, and an outstanding order book. We do not believe there is scope for DPU increase till these issues are resolved and believe it more prudent to not price in any payout. While fresh equity may be eventually necessary, loan covenant concerns create a chicken and egg situation. Like FSLT, RMT may need to secure (at least conditional) LTV waivers before it can attempt to raise equity.
ART – Kim Eng
Ascott REIT
Previous day closing price: $0.98
Recommendation: Buy (upgraded from Hold)
Target price: $1.23 (up from $0.77)
Upgrade to Buy from Hold
Located in gateway cities of Asia, ART’s assets are poised to benefit from the Asian economic recovery, which will drive REVPAU growth in its key markets such as Singapore, China, Vietnam and Philippines. According to the management, REVPAU appears to have bottomed and results in 2H09 are likely to beat our previous forecasts.
Asian asset portfolio to ride on recovery
The ADB has just raised its economic growth forecast for Asia. Demand for travel is picking up, with tourist arrivals in Singapore showing the smallest yoy decline in August; The IATA had reported a strong improvement in the passenger demand of Asia Pacific carriers; Major hotel chains in Asia are anticipating growth and still expanding in 2009 despite the downturn. Finally, the opening of Singapore’s IRs is expected to draw a throng of expatriates, boosting REVPAU.
On the prowl for acquisition targets
Besides organic growth, ART could also begin to tap on its sponsor’s sizeable pipeline of assets in Asia for acquisitions. Based on indicative cap rates for serviced residences, Vietnam shows up as an attractive target market (9-10%). The sponsor, Ascott Group (100% owned by Capitaland) has some 1182 units of serviced residences in Vietnam, which could potentially be injected into ART. ART is also keen to invest in India, possibility through an asset injection from its sponsor.
Gunpowder for acquisitions
Our stress test shows that a further 10% decline in ART’s portfolio asset value will lift gearing from 40.7% to 45.2%. Although ART is comfortable with a gearing of around 45%, we believe this level is unsustainable given the higher prospects for acquisitions. Being committed to protecting shareholders’ value, ART has indicated that an equity-raising will only be done when there are confirmed acquisition plans.
Raising target price to $1.23
We forecast REVPAU growth of 5-20% across the key markets. Our DPU forecast for FY09-10F have been raised by 2-13%. Applying a normalized cost of equity (8.8%) and terminal growth rate of 2%, our DDM-derived target price has been raised to $1.23 (prev. $0.77). We upgrade ART to Buy.