Category: A-REIT
SREIT – UOBKH
Accumulating bargains after steep correction
Correction was fast and furious. Share prices for Singapore REITs have corrected 6-7% over the past four days. Large cap REITs bear the brunt of selling with steep correction for CapitaCommercial Trust (-7.1%), CapitaMall Trust (-7.5%), Ascendas REIT (-4.1%) and CDL Hospitality REIT (-7.2%). Frasers Centrepoint Trust also fell 6.8%. MacQuarie Meag Prime REIT, KREIT Asia and Parkway Life REIT were relatively unchanged.
On average, the magnitude of correction was in line with the quantum in cut to our target prices. Average distribution yield for Singapore REITs is 5.5%, in line with five-year average. Average yield spread above 10-year government bond at 2.2% is below five-year average of 2.5%.
Lock in the yields. While markets will continue to be shaken by twin fears of inflation and higher interest rates, we are starting to see value in some of the REITs. We have selected a diversified basket of three REITs, Frasers Centrepoint for retail, CapitaCommercial Trust for office and Ascendas REIT for industrial.
Frasers Centrepoint Trust (BUY/S$1.24/Target: S$1.55)
• FCT focuses on suburban retail malls, which provide defensive qualities. Revenue contribution from its largest mall Causeway Point gained 11% yoy to S$14.6m in 2QFY08, benefitting from strong rental reversion and higher turnover rent. 20,816sf of retail space at Causeway Point representing 5% of total net lettable area (NLA) was renewed at 16% above preceding rental rates in 2QFY08.
• Ready pipeline of acquisitions. FCT has a ready pipeline of acquisitions that will double NLA to more than 1.2m sf when fully completed. It has entered into a put and call option agreement with sponsor Frasers Centrepoint Limited for the purchase of Northpoint 2 at between S$139.5m and S$170.5m. Northpoint 2 is expected to obtain temporary occupation permit (TOP) by Aug 08 and is on schedule to be injected into FCT in 1QFY09. We expect YewTee Point and Bedok Mall with net lettable area (NLA) of 80,000sf each to be injected in 3QFY09 and 2QFY11 respectively. We estimate the three new malls to contribute 28.6% of total revenue in FY12.
• FCT provides attractive FY08 distribution yield of 6.24%, a spread of 2.55% over 10-year government bond.
Ascendas REIT (BUY/S$2.34/Target: S$3.00)
• A-REIT has benefitted from strong demand for suburban office space as Business & Science Park accounted for 25% of its portfolio by property value. Renewal rate for Business & Science Park was S$3.76psf pm in 4QFY08, 68.8% higher on a yoy basis.
• A-REIT had a portfolio of 84 properties and total assets of S$4.2b as at Mar 08. The weighted average lease to expiry is 5.9 years. A-REIT has a well-diversified tenant base of over 790 international and local companies.
• A-REIT provides attractive FY08 distribution yield of 6.88%, a spread of 3.19% over 10-year government bond.
CapitaCommercial Trust (BUY/S$2.08/Target: S$2.63)
• CCT owns nine properties in Singapore with 2.3m sf of office space (excluding Wilkie Edge and One George Street), which accounts for 7% of private office stock within Downtown Core. CCT is well positioned to benefit from positive rental reversion as 29.4% of leases for office space are up for renewal in 2008 and 2009.
• Market Street Car Park and Golden Shoe Car Park is strategically located at the heart of Raffles Place and represents latent potential to be redeveloped into Grade A office towers.
• CCT trades at a 25.4% discount to book NAV of S$2.79/share.
Related Post – Table
SREIT – UOBKH
Risk-reward balance tilted negative as yield curve steepens
Long-term interest rates pulling SIBOR higher. Benchmark 10-year Singapore government bond yield has further increased from 3.3% to 3.61% last week. 3-month SIBOR has remained relatively stable to 1.25% but 6-month, 9-month and 12-month SIBOR have trended marginally higher. 3-month SIBOR is likely to have bottomed and a move towards 1.5% by end-2008 is highly likely.
Crude oil prices continue to climb despite signs of demand attrition. Indonesia has cut fuel subsidies and raised petrol prices from Rp4,500/litre to Rp6,000/litre on 24 May. Malaysia has just raised petrol prices by 41% to RM2.70/litre and diesel prices by 63% to RM2.58/litre on 4 Jun. Similar adjustments are also implemented in Bangladesh, India, Sri Lanka and Taiwan. Current high level of energy prices is starting to curb consumption. Airlines have started to cut frequency of flights. Logically, consumers will also start to moderate consumption. However, crude oil prices continue to climb by 4.5% last Thursday and 8.4% last Friday to end the week at historic high US$138.54/barrel despite signs of demand attrition.
Fighting inflation with higher interest rates. Bank Indonesia has raised 1-month interest rate by 25 basis points to 8.5%. The Philippines central bank has similarly raised overnight rate by 25 basis points to 5.25%. The European Central Bank has also signalled possible hike in interest rate in Jul 08 due to mounting inflationary pressures. Interest rates are on the rise on a worldwide basis, except maybe the US, as central banks combat inflation.
Mounting challenges for Singapore REITs from higher interest rates. MAS has raised CPI inflation forecast to 5-6% in 2008, an upward revision from previous 4.5-5.5%. Although downside risk has heightened in recent months, MAS has maintained Singapore GDP growth forecast of 4-6%. The strong S$ is expected to provides some cushion again inflation.
The steepened yield curve pose challenges for Singapore REITs as it hamper efforts to secure longer-term funding. Investors will be concerned that REITs may face difficulties refinancing short-term borrowings and to grow via acquisitions. We have further adjusted our target prices for Singapore REITs to factor in a higher risk-free rate of 3% vs previous 2.50%. We are using required rate of return of 8.5% for our dividend discount models.
We have cut our target prices for Singapore REITs by another 4% to 6%. We have also downgraded our recommendation for CapitaMall to HOLD as the stock provides upside of only 2.1%.
Ascendas REIT (BUY/S$2.44/Target: S$3.00)
• A-REIT has benefitted from strong demand for suburban office space as Business & Science Park accounted for 25% of its portfolio by property value. Renewal rate for Business & Science Park was S$3.76psf pm in 4QFY08, 68.8% higher on a yoy basis.
• A-REIT had a portfolio of 84 properties and total assets of S$4.2b as at Mar 08. The weighted average lease to expiry is 5.9 years. A-REIT has a well-diversified tenant base of over 790 international and local companies.
Parkway Life REIT (BUY/S$1.21/Target: S$1.52)
• The minimum rent payable by each hospital is set at Consumer Price Index + 1% above rent payable in the preceding year. Assuming CPI is 5.5% in 2007, the minimum rental increase for Gleneagles, Mount Elizabeth and East Shore hospitals is 6.5%.
• Parkway Life REIT will be acquiring two nursing homes Yokohama City and Ibaraki City in Japan for S$34.9m. Nursing home operator ZECS Community Co Ltd will lease back the properties for 15 years with option to extend for an additional five years. The properties provide net operating income yield 6.1% and 6.7% respectively and rental income is indexlinked to inflation with rent reviews every five years.
AREIT – UOBKH
Riding on increasing demand for suburban office space
Benefiting from strong demand for suburban office space. The shortage of office space within the Central Business District has forced many companies to relocate non-client-facing backroom and data centre operations to suburban locations such as Changi Business Park. A-REIT has benefitted as Business & Science Park accounted for 25% of its portfolio by property value. Occupancy rate for Business & Science Park has increased from 92.4% at Mar 07 to 97.0% at Mar 08. Renewal rate for Business & Science Park was S$3.76psf pm in 4QFY08, 68.8% higher on a yoy basis.
Developing built-to-suit offices at suburban locations. A-REIT 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. Citigroup has committed to a seven-year lease for 400,000sf space at the build-to-suit facilities, which will house its international technology office supporting its consumer businesses, regional processing centres for securities and 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 partial build-to-suit sevenstorey business park building completed in 4QFY08.
A-REIT will undertake more development projects on a built-to-suit basis. Management has submitted several proposals for requests from financial institutions and IT service companies. Sponsor Ascendas is developing a purpose built nine-storey operations hub with gross floor area of 500,000sf at Changi Business Park for DBS Bank. Ascendas is also developing similar facilities for Standard Chartered for up to 225,000sf at the initial phase. These assets would eventually be injected into A-REIT.
Acquisition of 31 International Business Park. A-REIT has entered into a put and call agreement with Creative Technology to acquire 31 International Business Park for S$246.8m. Creative will leaseback the building with NLA of 541,300sf for five years with options to renew for another 3 + 2 years, providing net property yield of 6.24% for the initial five years. Creative will provide cash security deposit of S$72.2m. The acquisition will increase A-REIT’s exposure to Business & Science Park from 25% to 29%.
A well diversified portfolio. A-REIT has a portfolio of 84 properties and total assets of S$4.2b at Mar 08. The weighted average lease to expiry is 5.9 years. It has a well diversified tenant base of over 790 international and local companies. The top 10 tenants accounted for 27.9% of portfolio income. The largest tenant Singtel accounted for only 6.5% of portfolio income. Tenants for sales & leaseback properties have to provide security deposits of 12 months. A-REIT’s weighted average funding cost is 3.1% due to its corporate rating of A3 and consistent track record. It will be concluding a three-year S$200m transferable loan facility, after which the earliest date for refinancing is Aug 09.
Maintain BUY. Management sees opportunity to invest S$500m p.a. in Singapore through acquisitions and development projects till 2010 before shifting its focus to overseas markets (Malaysia, Vietnam and Philippines). A-REIT provides FY08 distribution yield of 6.54%. We have raised our target price to S$3.22 after factoring in the acquisition of 31 International Business Park and the three development projects at Pioneer Walk, Changi LogisPark and Changi Business Park.
SREITs – DB
Returning to a virtuous cycle
Re-rating based on organic growth, acquisitions and availability of funding
We expect the re-rating of Singapore REITs to continue, based on: 1) firm trading performance, 2) the availability of funding allowing the return of acquisitions to the sector, and 3) steady physical asset markets. We see a return to a virtuous cycle for the larger REITs, which have demonstrated their ability to raise capital and acquire assets. The valuations for CMT and Suntec REIT are attractive (as CMT has been weak since the Atrium acquisition, and Suntec has lagged its peers).
Better-than-expected 1Q08 earnings; reversion cycle supportive
The REITs delivered 1Q08 DPU growth ahead of expectations (avg 19.1% YoY), based on reversionary rental growth and full occupancy rates. The near-term outlook remains positive, as office and industrial passing rents still trail market rents and retail rents are firming up due to asset enhancements and the entry of new retailers.
Raising capital, a pick-up in acquisitions; majors gaining market share
Singapore REITs have announced S$2.9bn of acquisitions YTD as activity from opportunistic funds have slowed. AREIT’s acquisitions have gained momentum at the expense of competitors who face funding constraints. The REITs have been able to raise funds for acquisitions and debt refinancing, and the completion of KREIT’s S$552m rights issue helps to address concerns over refinancing. Funding costs have been largely contained, as declining swap rates offset a rise in spreads.
Physical market steady as REITs and core funds stepped up to acquire
More than 2/3 of the REITs are trading below book NAV. Recent investment transactions, such as 71 Robinson (S$3,125psf), One George Street (S$2,600psf), and the Serangoon White Site (est. breakeven S$2,000psf), suggest firm asset pricing due to REITs and core funds being more active. Book NAVs for commercial REITs are typically conservative and are at discounts to recent open market transactions.
Focus on large, quality names; smaller REITs likely takeout plays
Yield spreads remain well above average at yields of 5.0% for CY07 and 6.1% for CY08E, representing a 342bps spread over the 10-year gov’t bond and avg. 9.1% discount to book NAV. Inflows into real estate funds have improved in recent weeks, supporting global REIT markets. We prefer the larger REITs which are able to deliver organic growth, mobilize funding, and potentially gain market share. We view the smaller REITs as likely takeover targets if deep NAV discounts persist.
Top picks for REIT sector: CMT, Suntec REIT and AREIT
CMT is attractive after the pullback following the CB issue for the Atrium deal. We believe that CMT has the right platform to extract value and synergies from that asset. Suntec REIT continues to benefit from robust demand in both the office and retail segments. We also like AREIT for its leverage on the rising business park segment. Risks include any protracted economic slowdown affecting demand, further deterioration in credit markets, and inability to refinance.
AREIT – CIMB
A-REIT acquires Creative Building for S$246.8m
A-REIT has entered into a put and call option to acquire Creative Building at 31 International Business Park from Creative Technologies (CREAF SP, S$6.53, Underperform, target price S$5.31) for S$246.8m. The purchase comes with a leaseback term of five years, and an option to renew for 3+2 years. Additional rent is payable in the third and fifth years of the lease if Singapore’s cumulative CPI in years 1-3 and in years 4-5 exceed 5%. The additional rent payable would be equivalent to the inflation rate in excess of 5%.
Yield-accretive and rents secured. The building is being acquired at an average yield of 6.24% for the initial 5-year lease, above A-REIT’s current trading yield of 6.1%. Creative Technologies will be paying a cash security deposit of S$72.2m, almost equivalent to its 5-year rent. Rent payable under the lease will be deducted monthly from this deposit. This lease arrangement offers almost a 100% guarantee of the rent of the 5-year lease period and excludes only the additional payments pegged to the inflation rate.
Asset leverage increases to 44% from 43%. This is A-REIT’s single largest acquisition to date. A-REIT’s portfolio will increase to 90 properties totalling S$4.6bn by the end of FY09. A-REIT’s business parks component will also be raised to 30% of its portfolio, from 25%. We estimate that asset leverage will reach 44%, assuming 100% debt funding for all its acquisitions this year. Additional acquisitions for the rest of FY09 are likely to require equity-funding, in order to keep asset leverage within the long-term target of 45%.