Author: tfwee
CMT – CIMB
Meeting expectations
• DPU in line despite S$1.5m retained. 2Q09 results were in line with Street and our expectations. Total income available for distribution was S$67.1m (+17% yoy). However, actual distributed amount was S$67.9m, including S$1.5m of distributable income retained from 2Q09 in view of economic uncertainties; and S$2.3m of net capital distribution income and net tax-exempt income from CRCT retained in 1Q09. Including the S$3.3m retained in 1Q09, management has retained S$4.8m of distributable income for 1H09. It is committed to distributing 100% of its distributable income for the full year. Hence, the S$4.8m retained will represent an additional 0.15cts for distribution in 2H09. 2Q09 DPU of 2.13 cts fell 40% yoy due to an increase in the unit base, forming 25% of our forecast for FY09. 1H09 DPU of 4.25cts, including retained income, represents 49% of our full-year forecast. Net property income of S$93.8m was up 12% yoy on new contributions from Atrium@Orchard and the completion of asset enhancement work in various malls. Qoq, the income was up 1.5% as positive rental reversions were diluted by higher property tax, marketing and maintenance expenses.
• Occupancy stable at 99.7%; reversion rates flat. Portfolio occupancy stayed at 99.7%, the same as 1Q09. Average rentals grew 1.5% over preceding rates (typically committed three years ago), representing annual growth of 0.5%. Although shopper traffic was 2.2% higher than in 2Q08, gross turnover sales of tenants was only 0.2% higher, indicating more care in consumer spending.
• New-to-market brands in Orchard could be prospective tenants. Management says competition in Orchard Road could be viewed positively as new-to-market brands who would first establish themselves in the prime shopping belt could also be persuaded to take root in suburban malls.
• Maintain Underperform and DDM-based target price of S$1.30. For the rest of 2009, we expect CMT’s portfolio occupancy to be nearly full, anchored by its welllocated suburban malls. However, reversions may turn negative as improvements in retail sales still lag behind. Maintain target price S$1.30, still based on DDM valuation (discount rate 9.5%).
FCT – CIMB
Steady performer
• Met expectations. 3Q09 results are in line with Street and our expectations. DPU grew 3.2% yoy to 1.94cts, to make up 27% of our full-year forecast. Distribution income (+4.1% yoy) and net property income (+4.4%) grew despite disruptions from enhancement work at Northpoint, boosted by higher contributions from Causeway Point and Anchorpoint.
• Occupancy stable; reversions positive. Portfolio occupancy was stable at 93.2% (-0.2% qoq) even though Northpoint’s occupancy was affected by enhancement work. Renewals were on track and reversions were 14% above preceding rates. This translates to an annual increment of 4.5%, assuming typical 3-year leases.
• Northpoint and other leasing updates. Enhancement work on Northpoint is expected to end shortly. Physical occupancy was 75% as at end-Jun 09. However, 97% of the net lettable area has been leased, including space being negotiated with tenants (talks in advanced stage). Management estimates that enhancement will increase Northpoint’s average rents by 20% (to S$13.20 psf) and full-year net property income by 30% (to S$18m). Additionally, 98% of gross rental income for FY09 has been locked in.
• Northpoint 2 and Yew Tee Point ready for injection. Northpoint 2 and Yew Tee Point, currently held by sponsor FCL, appear ready for injection in the short term with committed occupancy rates of 100% and 94% respectively. In our view, Northpoint 2 is more likely to be injected first as it is already fully occupied and seamlessly integrated with Northpoint. The put and call option announced last year estimates an acquisition price of S$139.5m-170.5m (S$1,632-1,994 psf).
• Maintain Outperform and target price of S$1.12. FCT’s progress in pre-leasing renewals, positive reversions and stable occupancy reaffirm our belief that suburban retail is stable despite the downturn. Our estimates and DDM-derived target price of S$1.12 (discount rate 9.2%) are unchanged. Maintain Outperform.
ART – CIMB
Holding firm
• In line. 2Q09 distributable income of S$11m (-17% yoy) and DPU of 1.79cts (-18% yoy) were in line with Street and our expectations, forming 25% of our full-year estimate. 1H09 DPU of 3.56cts forms 49% of our full-year forecast. Gross profit of S$20.8m fell 11% yoy but improved 5% qoq. Although demand for serviced residences slowed globally yoy, ART’s qoq performance was boosted by contributions from Somerset St Georges Terrace and Somerset Westlake which were acquired after 2Q08, and improved gross profit margins (+1.3% pts qoq).
• REVPAU of S$119 was down 17% yoy. With the exception of flat REVPAU in the Philippines (+1%), REVPAU in all other countries fell: Singapore (-39%), China (- 19%), Vietnam (-12%). Yoy, portfolio REVPAU of S$119 was down 17%.
• Asset value down S$60.6m to S$1.55bn; 100% cash distribution. As at 30 Jun 09, HVS International revalued ART’s portfolio at S$1.55bn (-1.8% from Dec 08 valuation). After revaluation, NAV is now S$1.36 and price/NAV is 0.62x. Management says cap rates had not changed from December levels, and the lower valuation was blamed on lower REVPAU assumptions for serviced residences in China and Japan. It expects valuations to remain flat in Dec 09, in line with an anticipated improved performance in 2H09. There has been more aggressive marketing of ART’s properties, particularly for longer stays of more than one month and it expects fruits by 2H09. REVPAU is expected to improve moderately by 5- 10%. ART says it will be maintaining its 100% cash distribution policy.
• Downgrade to Neutral from Outperform; no change in estimates and DDMbased target price of S$0.79 (discount rate 10.3%). We maintain our forecast of a 13% decline in full-year REVPAU, in keeping with guidance. Our capex assumptions for FY09-11 are also in line with guidance. ART has risen 22% since our upgrade on 10 Jul, to exceed our target price of S$0.79. As such, we downgrade it to Neutral.
ART – OCBC
Signs of stability; upgrade to BUY
QoQ improvement. Ascott Residence Trust posted a 2% QoQ increase in 2Q revenue to S$43m, and a 1.4% QoQ increase in distributable amount to S$11m. The 1H distributable amount made up 53% of our full year estimate. Portfolio RevPAU for the quarter was S$119 compared to S$120 in 1Q09. ART will pay out 3.55 S cents for 1H09.
Performance encouraging. Market concern was that performance would continue to slide in 2Q09 on top of the steep falls in the last two quarters. Instead performance in major markets levelled off or recovered slightly. ART noted that corporate travel is showing signs of life: for instance, project group demand – which had largely dropped off as companies froze spending – is back, albeit on shorter commitments. Going forward, the manager sees “signs of stability with a slight bias towards an uptrend” as aggressive marketing efforts and steep rate cuts pay off. Singapore and China guidance was positive. We do note that our channel checks show continued rate
weakness and aggressive free-nights promotions in the Shanghai and Beijing markets. Generally the extended-stay market seems to have bottomed out but the size and shape of the recovery is still uncertain, in our view.
Balance sheet concerns easing. ART recorded a revaluation deficit of S$61m, with 2Q NAV down 10% QoQ to S$1.36. The manager maintains it is comfortable within 45% leverage (40.7% now) and 3x interest cover (3.4x now), and does not need to recapitalize its balance sheet. The credit markets have unclogged and we don’t expect the S$105.7m loan maturing this year to present any significant refinancing challenges. We also believe that the need for, and impact from, any recapitalization-focused cash call has diminished in view of the recent price rally and improved operating outlook. Any equity-raising attempt would likely be paired to an acquisition,
in which case ART can afford to wait for even better equity pricing.
More benign expectations. Our FY09F and FY10F distributable amount estimates are up 9% and 17% over previous estimates, reflecting our expectation of stabilization at current levels. Our new SOTP value for ART is S$1.14 (prev: S$0.82). This excludes our previous cash call assumption, as its current valuation impact is minimal. Market conditions have eased dramatically and we feel the risk of further stress on ART’s portfolios and balance sheet has abated. Consequently, we are lowering our “uncertainty discount” to SOTP from 25% to 15%. Our new fair value estimate is S$0.97 (prev: S$0.61). Upgrade to BUY.
FCT – DBS
Solid as a rock
• In line with expectations
• Pace of rental growth on reversions still at double digits
• Outlook resilient, Northpoint construction works completed
• Buy with TP of $1.08
Results largely in line. FCT recorded a 3.4% yoy rise in distribution income to $12.1m (DPU 1.94cts) in 3Q09 on a 0.5% uptick in revenue to $21.2m. NPI improved 4.4% yoy to $14.7m thanks to lower maintenance and other expenses, which lowered expense ratio to 30.7%.
Rental growth on reversion maintained at double-digit levels. The better performance was attributed to renewal of 12% of portfolio NLA (77,566sf) in Q3 at rents 14% above preceding levels while overall occupancy remained at 93%. FY09 income is well secured with only 2% of NLA left to be contracted this FY. The group’s pure exposure to the suburban retail sector and lack of competing properties within its malls vicinity should continue to provide income resilience. It augurs well with 10%, 42% and 35% of its income is up for renewal in FY10, FY11 and FY12 respectively. Beyond this, AEI works at Northpoint will be completed and is 75% occupied presently. Up to 97% of the 149,400sf NLA is leased or under negotiation and average rents are expected to be 20% higher than before. This should lift bottomline by c8%.
New acquisitions remain a closely watched driver. Plans to include Northpoint II and Yew Tee Mall are still in place. With cost of equity declining owing to higher stock price, any transaction would likely be accretive for unitholders.
Maintain Buy. We have raised FY09 DPU to 7.3cts as rental rates have generally held up well vs our projection of a 5% decline. Share price have appreciated in recent weeks and the stock is trading at 0.8x P/bk NAV and implied portfolio yield of 6.5%. Our revised DCF target price of $1.08 offers a total absolute return of 15% over the next 12 months.