Category: A-REIT
REITs – CIMB
Still interesting but could grow more risky
• Downgrade to Neutral from Overweight. The SREIT sector met our Overweight expectations since our upgrade in May. While valuations are not demanding and sustained low interest rates remain favourable for REITs, we downgrade the sector on increased risks expected from non-accretive potential acquisitions and possible cash calls as well as limited upside for the large caps. No changes to our earnings estimates or individual stock ratings. Our top pick is still Cache Logistics for its attractive 8.3% yields and undemanding valuations at book value. Among large-cap REITs, CCT as the cheapest is our preferred liquid REIT, provided it is able to make accretive acquisitions. Our top short is CMT, which has limited growth catalysts for the next two years in our view, significant capex needs and possibly increased interest costs if holders of its convertible bonds exercise their put options next year.
• REIT sector trading at book levels. The REIT sector has made a good recovery since its trough and now trades at book levels, above the last two years’ average P/BV of 0.8x. The largest-cap REITs, CMT and AREIT, trade at about 30% premiums to the sector, which is their historical mean premium. A review of the debt profiles of the 14 large- and mid-cap REITs shows healthy asset leverage at 31.6%, and interest cover ratio at 5x.
• Sponsor injections likely to take centre stage in 2011. We anticipate more sponsor injections in 2011 which could include Ion Orchard Shopping Mall (into CMT), Ocean Financial Centre (into KREIT), and Pantai Hospitals in Malaysia (into PLife REIT).
• We expect risk levels to increase as: 1) asset prices rise under intensifying competition from funds and other investors; 2) assets with limited operational histories are unlikely to be accretive in the short term without income support from vendors; 3) a lack of accretive assets locally could drive REITs to acquire more overseas assets, increasing forex uncertainties and tax leakages; 4) the possibility of more cash calls particularly for mega-acquisitions as most REIT managers are unlikely to go for long-term gearing ratios beyond 45%; and 5) an increasing preference for private placements over rights issuances in recent equity fundraising points to a less equitable position for minority REIT investors.
A-REIT – CIMB
Intact for the year
• Results in line; maintain Neutral. 1HFY11 results met Street and our expectations. DPU of 6.67cts forms 47% of our full-year forecast of 14.2cts. If retained income of S$3.5m (pending approval for tax-transparency treatment) had been distributed, available DPU would have been 6.86cts. We add in S$97m of asset enhancement initiatives (AEI) as announced and lower our cost-of-debt assumptions. Our DPU estimates increase by 1-4% for FY11-13. We roll over our DDM target price to CY11, raising it to S$2.13 (from S$2.02) with an unchanged discount rate of 8.4%. We expect weakening occupancy rates to be compensated by higher yields after AEI and build-to-suit opportunities. Despite a still attractive yield of 6.8%, we believe its management premium and track record have been priced in, at a 34% premium to book value, particularly given still-weakening occupancy. Re-rating catalysts could include announcements of accretive acquisitions and development projects.
• Weaker qoq, with more conversions to multi-user buildings. Net property income of S$83.9m for 2QFY11 was down 3.9% qoq as property expenses increased with more single-user buildings (where tenants usually bear most property-related expenses) converted to multi-user facilities. Weakening occupancy despite positive macros is in line with our view of a lag time between the two. Buildings converted in the quarter included 12 Woodlands Loop, 3 Tai Seng Drive and 53 Serangoon North Ave 4.
• S$97m worth of new AEI at 8.5% yields. Management announced new AEI, totalling S$97m, which would reposition 1 Senoko Avenue, Techview and 10 Toh Guan Road for higher-value use. 1 Senoko Avenue would be redeveloped into a dedicated food hub with additional GFA of 34,519 sq m. Techview would be repositioned to court hi-tech users rather than manufacturing users which it used to house. Finally, 10 Toh Guan Road (previously occupied by TT International), would try to attract hi-tech users rather than its current logistics users. While regulatory approval is pending for Techview and 10 Toh Guan Road, management anticipates the three new projects to fetch an estimated weighted yield in excess of 8.5%, above its FY10 portfolio NPI yield of 7.3%.
A-REIT – DBSV
AEI to optimize yields
• Positive leasing efforts to boost occupancy levels in coming quarters
• S$97m enhancement works underpin earnings growth in longer term
• Maintain HOLD and raised TP to S$2.19 as we roll forward valuation to FY12.
DPU of 3.3Scts in line. A-REIT reported higher topline and net property income of S$111.1m (+8.6% yoy, -4.0%qoq) and S$83.9m (+3.5% yoy, -4% qoq) respectively, helped by contributions from completed development projects and acquisitions. Performance on a sequential basis was slightly lower due to a one-off gain reported in 1Q11. Distributable income in 2Q11 was S$63.1m (+2.5%yoy) but retained S$1.4m pending tax clearance from the authorities. DPU of 3.3 Scts was 5.2% lower due to a larger unit base but will have been 0.3% higher on a pro-forma basis.
Stable portfolio occupancy of 95.3%, expected to improve come 3Q11. While A-REIT multi-tenanted buildings have seen slight decline in average occupancy levels in recent quarters, we expect a rebound come 3Q11 due to positive results from newly secured leases from the manager’s active releasing efforts (estimated to increase by 1% qoq).
S$97m planned for enhancement works (“AEI”) to underpin higher asset yields in medium term. Plans include major construction works to increase the properties’ average net lettable area as well as refurbishment & repositioning of the properties for higher value use. The manager targets a weighted average return of 8.5% from these AEI plans when completed from 1Q12 onwards.
HOLD call maintained, TP S$2.19. We lowered our FY11-12 earnings by 2% as we adjust our revenue recognition from the above AEI works. TP is raised to S$2.19 as we roll forward our valuation to FY12. However, given limited upside from current level, we maintain our HOLD call. A-REIT currently offers a prospective FY11-12 yield of 6.4-6.7%.
A-REIT – BT
A-Reit’s $97m plan to enhance 3 properties
ASCENDAS Real Estate Investment Trust (A-Reit) will be investing an estimated $97 million to enhance three properties in its portfolio.
The business space and industrial Reit said this yesterday as it released results for the second quarter ended Sept 30.
A-Reit’s net property income in Q2 was $83.9 million, up 3.5 per cent from a year ago. Acquisitions and the completion of development projects contributed to the improvement.
Distributable income rose 0.4 per cent to $61.8 million. Distribution per unit (DPU) was 3.3 cents – 5.2 per cent lower than the 3.48 cents a year ago.
Adjusting for units issued for a placement exercise and for the payment of a base management fee and an acquisition fee, the proforma DPU last year would have been 3.29 cents – leading to a 0.3 per cent growth this year.
Tan Ser Ping, CEO and executive director of A-Reit’s manager, said that the manager has identified three asset enhancement opportunities ‘to capitalise on under-utilised plot ratio or to enhance the attractiveness of the properties’.
One of the largest projects involves the redevelopment of 1 Senoko Avenue for $59 million. A-Reit is raising the site’s plot ratio to 2.5 from 0.6, creating an additional 34,519 sq metres of gross floor area. The property will be positioned as a ‘food hub’ for the food and beverage industry when works are completed in Q4 FY2011/12.
A-Reit is also seeking regulatory approval for a $33.7 million enhancement of 10 Toh Guan Road. Plans include the creation of more parking facilities and the improvement of the building’s exterior facade.
In addition, A-Reit will be spending $4.3 million to create a courtyard on the upper floors of Techview at Kaki Bukit.
A-Reit expects these projects to deliver a weighted average yield exceeding 8.5 per cent.
Portfolio occupancy slipped in Q2 to 95.3 per cent from 96.8 per cent a year ago. But on the bright side, A-Reit managed to secure a larger lease commitment from Citibank for a facility in Changi Business Park – the bank will be leasing the entire building, up from 50 per cent of it.
For the half year, A-Reit’s net property income rose 5.8 per cent year on year to $171.3 million. Distributable income inched up 1.9 per cent to $124.9 million.
A-Reit closed one cent up yesterday at $2.11.
A-REIT – RBS
Proxy to growing industrial rents
We expect strong increases in industrial rents following 41.5% growth in the manufacturing sector in 1H10. All signs suggest tenants in AREIT’s portfolio may look to expand. Shares in AREIT is likely to outperform, in our view, as it is the largest proxy to the industrial property sector. Upgrade to Buy.
Industrial rents look set to rise
We expect growth in industrial rents to accelerate from a mild 1.3% qoq in 2Q10, due to a strong expansion in the manufacturing sector. We now assume spot rental growth of 5-15% in FY11 and 5-10% in FY12 vs a 10% decline in both years previously. Leading indicators suggests that leasing activities at AREIT should improve, as: 1) the tenant retention rate is now close to 80% or similar to pre-crisis levels vs 70% six months ago; 2) tenants’ orderbook increased to nine months vs six months six months ago; and 3) tenants are now operating close to full capacity vs 80-90% six months ago. Enquiries for new space by new players have also increased across all segments for AREIT’s portfolio. Thus, we increase our occupancy rate assumptions by 1-2ppt to 94% for its multi-tenanted buildings (MTB).
A laggard in S-REIT sector
AREIT has underperformed the REIT index by 10pp ytd and the two largest REITs by 10.6pp (CMT) and 17.3pp (CCT). This could be because AREIT’s occupancy rates declined for five consecutive quarters before stabilising at 95.6% (-0.1pp qoq) in June 2010. Industrial property rents tend to lag the manufacturing index by six months, so we believe growth in industrial rents will accelerate given a strong rebound in the manufacturing sector in 1Q10.
Small acquisitions likely in the near term
We believe AREIT is likely to make acquisitions, in line with its plan to increase asset base by S$300m-500m pa. Given it acquired S$238m worth of properties in February, potential acquisitions are likely to be small at S$30m-40m and may involve greenfield projects. Equity raising is hence unlikely given its relatively comfortable gearing of 34%, in our view.
Upgrade to Buy from Hold
We upgrade AREIT to Buy and raise our DCF-based target to S$2.55 (from S$2.00), reflecting the improved outlook we see for the industrial property sector and the lower cost of equity on the back of lower risk free rate. AREIT is the largest industrial REIT in Singapore and should ride the recovery in industrial property sector well, in our view.