Category: A-REIT
REITs – DBS
Examining trough valuations
Going for high risk aversion. We re-iterate our view that the S-reit sector has been de-rated sufficiently for the prospects of slowing earnings growth momentum and possibility of capital value write-downs as well as refinancing concerns. The sector is trading at 7.6% FY08 yield or a 450bps above the current Singapore 10-year bond yield and a hefty 3.7% pt ahead of our projected peak bond yield of 3.9%. The 0.94x P/RNAV already reflects an average 20% cut in capital values across all property sub-segments. S-reits are also trading between 3.5-12% implied cap rates, as investors priced in a bear case scenario.
Office and hospitality sectors may lag: Granted that at this period of higher investor risk aversion, volatile capital value outlook and tight credit conditions, valuations are unlikely to approach previous highs in the short term, we believe that at the current level, much of the anticipated risks are factored in the S-reits lowered valuations. In terms of the various segments, the office and hospitality space poses the most downside risk given the former’s strong correlation to GDP growth and skewed supply/demand dynamics as well as limited earnings visibility in the short-stay accommodation segment.
Go for defensive: While we believe DCF-based measurements are still valid to give investors a longer term total return picture, we are ascribing a discount to these values to derive our price targets given current uncertain environment. Our strategy would be to prefer the more defensive S-reits, particularly those in the healthcare, industrial and retail space. Our top picks are Parkway Life Reit, which offers a highly defensive earnings model with minimal earnings downside risks and exposure into the growing aging population. While stock liquidity may be an issue, we believe this can likely be addressed progressively in the long term. Amongst the larger cap names, we maintain our buy rating on A-reit for its long lease expiry profile and CMT, Suntec and FCT as a suburban retail players with a diversified tenant base. Share prices of ART had been bashed down significantly and at the present level, we see value emerging given its steep discount to RNAVs.
Parkway Life Reit (PREIT SP, TP $1.35)
ParkwayLife REIT (PREIT) offers an exposure to the region’s growing need for healthcare facilities due to an aging population. It is currently trading at 0.8x of book NAV and offers a net dividend yield of 6.4% for FY08F and 6.8% for FY09F. Earnings downside risk is negligible thanks to its revenue model that is based on the higher of i) base rental of S$30m plus 3.8% of the adjusted hospital revenue; or, (ii) preceding year’s rental multiplied by [1+(1%+CPI of preceding year)]. Our DCF-derived target price of S$1.35 (6.3% WACC, 1% terminal growth) offers potential upside of 29%. In addition, refinancing risk is minimal with a low gearing of
10.2%. Maintain Buy.
CapitaMall Trust (CT SP, TP $2.96)
CMT remains one of our key picks due to its strong operational history with a proven expertise in optimizing asset yields through their various AEI activities. Moving forward, catalyst for growth will derive from I) rental reversion from the expiry of 69% of its portfolio income over FY09-10, ii) planned AEI activities amounting to $288m, largely from SSC and JEC, should boost bottomline in the medium term and iii) The Atrium purchase, which is pending completion, should grow NPI further when plans to re-position the asset is completed in 2010.
Ascendas REIT (AREIT SP, TP $2.33)
We like AREIT for its i) quality portfolio of industrial assets, which are enjoying occupancies in excess of 98%, ii) business and science parks exposure that is expected to remain robust on the back of over-spilling demand from office space crunch in the CBD. This segment makes up 25% of its total portfolio. iii) proven development capability which will are higher yielding compared to asset purchases. In this aspect, AREIT has S$309m worth of development assets in the pipeline. Iii) financial flexibility, AREIT management has adopted a prudent capital management strategy which is reflected in its gearing of 38.2%.
Frasers Centerpoint Trust (FCT SP, TP S$1.26)
Frasers Centerpoint Trust (FCT) offers exposure to Singapore’s suburban retail sector through its 3 sub-urban retail malls located in major population catchment areas in Singapore. Earnings should remain resilient given that it derives mainly from non-discretionary spending. In terms of portfolio growth, acquisition of Northpoint II scheduled to TOP by by 08/early 09 kickstarts its portfolio growth plans with other properties such as Yew Tee Mall and Bedok Mall to follow suit in 1H09 and 2010/11 respectively. FCT is expected to tap debt and capital markets for these purchases.
Suntec Reit (SUN SP, TP $1.55)
Suntec Reit offers investors exposure to a more defensive business model of office and retail assets through its portfolio of 1.9msf NLA. DPU growth over the next 2 years is derived from office lease reversions and higher retail rents. Plans to enhance Park Mall and add 67000sf of GFA could provide further upside to our projections in the medium term. Refinancing concerns have been largely allayed by putting in place a $420m club loan. Our price target offers total return of 15%.
Ascott Residence Trust (ART SP, TP S$0.94)
Ascott Residence Trust (ART), as the first Serviced Residence REIT, offers exposure to the Asean booming serviced residence industry. We believe ART presents the least earnings risks amongst the hospitality peers with a regional portfolio exposure that reduces country specific risks. In addition, its average portfolio lease of 8 months should delay an impact of a downside in spot rates. In addition, potential acquisition
Link – Table
AREIT – UOBKH
Prime beneficiary of migration to suburban office space
Benefitting from positive rental reversion. The renewal rate for business & science parks was S$4.09psf pm in 1QFY09, an increase of 45% yoy. The renewal rate for hitech industrial space in the quarter was S$3.11psf pm, an increase of 35% yoy. The business & science park and hi-tech industrial segments accounted for 30% and 22% of its portfolio by value respectively. A-REIT will benefit from positive rental reversion as business & science parks and hi-tech industrial segments account for 29.9% and 40.1% of leases expiring in FY09 respectively. Existing contract rates are only S$2.30psf pm for business & science parks and S$1.90psf pm for hi-tech industrial space, much lower than current market rates.
Maximising distribution yield through development projects. Ascendas REIT (AREIT) is developing two build-to-suit facilities and a multi-tenanted block with combined floor space of 803,600sf at Plot 8 Changi Business Park, which is scheduled for completion in phases from 4QFY09 to 3QFY11. Citigroup has committed to a seven-year lease for 400,000sf space at the build-to-suit facilities for its international technology office supporting its consumer businesses, regional processing centres for securities & funds administration and regional technology infrastructure support. Credit Suisse has also taken up a three-year lease for 26,600sf space at HansaPoint@CBP, a seven-storey build-to-suit building completed in Jan 08. Development projects provide yields of 8-9% compared with 6-7% for acquisitions.
A-REIT is the largest industrial REIT in Singapore and is rated A3 with a stable outlook by Moody’s Investors Service. Sponsor Ascendas is a subsidiary of Jurong Town Corporation, the government agency responsible for developing industrial infrastructure to support economic growth. Our target price of S$2.95 is based on a two-stage dividend discount model (required rate of return: 8.5%, growth: 3.2%).
AREIT – CIMB
Key takeaways from Singapore Corporate Day
Highlights from Corporate Day
At our recent Corporate Day, A-REIT’s management updated investors on its rent outlook, investments and capital management. Questions thrown to the management mainly related to the impact of a slowing Singapore economy and manufacturing sector, the sustainability of rents and management’s intentions to acquire outside Singapore.
Demand for industrial space to stay resilient. A-REIT expects demand for industrial space in the near to medium term to stay resilient even if the economy slows further. Management explained that occupancy costs for industrial tenants typically form not more than 5% of their total operating costs. Moreover, the early termination of leases does not exempt tenants from rent payment for the remaining portions of their leases. Thus, companies typically resort to reducing shift work and labour costs before cutting back on their demand for space. The lag time is typically 18-24 months, from a business slowdown to the pinch on real-estate demand. Hence, it will take a recession exceeding 18 months or so for demand for industrial space to be hurt. Additionally, tenants in manufacturing industries account for only 24% of A-REIT’s portfolio and default payments have been minimal at 0.5% of gross revenue so far (vs. 1.8% during the recession in 2004).
Pre-commitments for projects under development add certainty to earnings. All of A-REIT’s projects under development have been built to suit tenants. To date, more than 75% of pre-commitments have been secured, and construction costs locked in prior to commencement, adding certainty to earnings in the mid-term.
More room for rental reversions in Science & Business Park and Hi-Tech segments. Historically, rents of these two segments (catering to R&D and high-valueadded manufacturing) are about half of prime office rents. With the sharp jump in office rents, rents in these segments are now at less than 25% of prime office rents. Management expects office rents to normalise over the next 1-2 years and the ratio to return to the historical 50%. Thus, even if prime office rents fall to S$10-12psf, there is upside for rents in these segments from their current S$3.50-4.00 psf. Demand is likely to be supported by high-value-added manufacturing (including R&D), which is close to the government’s heart. Growth for light industrial space is expected to be stable with most leases being sale-and-leaseback leases incorporating either a fixed portion of stepped-up rent or rental increases pegged to the CPI. Rental growth for logistics space is expected to be flat as strong upcoming supply is likely to affect rate increases for new take-up.
Expansion plans
Acquisition opportunities in Singapore still available. Management shared that there are still sizeable acquisition opportunities in Singapore, with about 6m sq m of investment-grade industrial space (or 17% of islandwide industrial space supply) not held by REITs. Yields for logistics and light industrial space have trended moderately up to 6.7-7.0%, above A-REIT’s trading yield of 6.7%. Gearing limitations and rising interest rates have attenuated competition for assets from other REITs and opportunistic funds.
Venturing overseas? A-REIT is unlikely to acquire overseas assets in the near term in view of the sufficient domestic opportunities and development projects in progress. In the medium term, if it acquires outside Singapore, it is likely to begin with South- East Asia.
Capital management
Ease of fund access. Management is in the process of completing a S$1bn mediumterm note programme (estimated in October). Short-term debt of S$255.4m forms 14% of its total debt of S$1,841m, and should be refinanced with existing bank lines. AREIT’s weighted average cost of debt had declined from 3.42% in Jun 07 to 3.16% in Jun 08, reflecting its ability to secure favourable rates even in the current environment.
Asset leverage to stay within 45%. Management intends to keep asset leverage at a self-imposed 45% and rules out any rights issue in this financial year.
Valuation and recommendation
No surprises; maintain Outperform. We continue to like A-REIT for its long lease tenures and earnings visibility in the medium term, as well as the relative resilience of the industrial sector to slowing macro conditions. No change to our FY08-10 estimates and DDM-derived target price of S$2.60 (discount rate 9.6%).
AREIT – DBS
Confidence boosting 1Q09 results
Story: Ascendas REIT (AREIT) begins the new financial year on a good note. Gross revenues and NPI grew 19.6% and 20.1% yoy to S$92.5m and 69.7m respectively and are within 25% of our full year forecasts. Distribution income also increased 16% to $51.7m, translating to a DPU of 3.89cts. A-REIT’s portfolio also enjoyed high portfolio occupancy of 98.6%.
Point: The strong performance was largely attributed to contributions from an enlarged asset base following completion of several properties in the last quarter. In the current quarter, AREIT added 2 more properties to its portfolio, bringing it to 86 properties worth c.$4.5bn. In the near term, we expect growth from i) contributions from the recent purchase of Creative Building and 8 Loyang Way in coming quarters, and ii) positive rental reversions from 7.1% of its NPI. In the medium term, its development projects worth S$326m currently WIP will provide support for NPI growth, not forgetting potential 3rd party asset acquisition opportunities. In this aspect, we have assumed S$400m worth of asset acquisitions in FY09- FY11, funded by a combination of debt and equity in the later 2 years, leading to a LT gearing ratio of 44%.
Relevance: Maintain BUY with TP S$2.48. We have adjusted our DCF valuation downwards to take into account a higher risk free rate of 3.9 and a lower terminal growth rate of 0.5%. AREIT is currently trading at 1.2x P/NAV and offers investors a stable FY09 and FY10 DPU yield of 7.4% and 7.6% respectively.
SREIT – DBS
Facing headwinds
Sector outlook and valuation: The S-reit sector is currently trading at average FY08 yield of 7%, a 360bps spread over the 10-year bond yield and at 0.79x P/book NAV. We believe that much of the rising interest rate expectation and slower economic outlook is likely factored in the current share price. While the sector is likely to continue seeing headwinds from the negative newsflow from the tight credit and sluggish capital markets, valuations are not excessive by historical standards, as yield spreads are trading above their longterm average levels.
Raising cost of capital assumptions. Using higher debt and equity costs have eroded S-reit returns. Even then, Sreits are trading at steep 24% discounts to DCF-backed price projections, which are based on these greater cost of capital assumptions. Essentially, we have lowered our price targets by 19% by increasing our equity discount rates by 107bps. Another issue surrounding the S-reit sector is the relatively short debt expiry profile, estimated at 2.9 years. S-reits have an estimated $5.1b (43% of total) debt to be renewed in the next 12-18 months. However, with more than 75% of total debt on fixed rates or are hedged, the impact of the hike would likely be moderated.
Stock selection is key. Under the present dampened acquisition growth environment, we would be selective in our S-reit picks and would prefer those with strong organic growth potential to drive DPU expansion, such as retail reits as well as those with long lease expiry profiles such as industrial reits. Amongst our top picks are CMT and A-reit. CMT has a multi-pronged growth strategy through organic and asset enhancement activities. A-reit has a relatively long weighted lease expiry profile of 5.5 years that would enable them to have earnings certainty and visibility. There is potential for more rental hikes given that industrial rents have not appreciated significantly from the low. Share price of A-reit had declined 23% since May 08 and is currently offering 7.4- 7.5% FY09 and FY10 yields.