Category: A-REIT
A-REIT – DBSV
Delivering as promised
• Stable operational performance
• Active pipeline of developments, asset enhancements, to sustain growth
• HOLD, S$2.30 TP is based on DCF metric
Stable operational performance. A-REIT’s 3QFY13 result was in line. Topline and net property income grew 14% and 11%, respectively, driven by a larger portfolio, while organic growth remained steady at 4.8%. Rental reversions remained strong (+18.5%) and outpaced the slight dip in portfolio occupancy rate to 94%. Operational outlook remains stable as the portfolio will continue to benefit from positive spreads between expiring and market rents (currently 24-50%), which should more than offset weaker occupancy rates amid a more subdued demand outlook. But cost hikes continue to threaten margins.
Active development pipeline, asset enhancement projects to supplement growth. At end Dec12, A-REIT had committed to S$430m worth of investments, of which S$217m is yet to be funded. We see opportunities to extract further growth from existing assets, especially through asset enhancement initiatives (AEI) to convert single-tenant buildings to multi-tenanted buildings, to enable A-REIT to lift underlying rents closer to market rates which are c.40% higher. The completion of AEI projects will support sustained growth in distributions.
HOLD, TP S$2.30. We like A-REIT for its defensive portfolio and strong execution track record. Our HOLD call is based on valuation grounds: A-REIT offers <10% upside to our revised TP of S$2.30 (rolled-forward valuation base).
A-REIT – DMG
Stability comes at a price
3QFY13 DPU in line with expectations. Ascendas REIT (AREIT) reported 3QFY13 DPU of 3.62S¢ (+4.0% YoY), equivalent to 26.2% of our FY13 DPU estimate. Revenue and net property income came in at S$145.2m and S$104.7m respectively. The rise in NPI by 11.5% YoY was mainly due to additional contribution of full quarter rental income from completed development projects and newly acquired properties since September 2011. Going forward, we expect AREIT to register continual growth in DPU, mainly from 1) additional contribution from the new properties acquired; 2) further AEIs on its existing properties and 3) positive rental reversion contributed by low rates due for renewal in the coming quarters. Although both AREIT’s earnings and portfolio occupancy rate are expected to remain stable going forward, due to the lack of new potential acquisition targets, coupled with the high valuation it is currently trading at (1.31x P/B and FY13 forecasted dividend yield of 5.7%), we believe this counter is fairly priced at the moment. We maintain our NEUTRAL view on AREIT with a DDM based (COE: 7.3%; TGR: 1.0%) TP of S$2.67.
Consolidation of portfolio in the near term. As highlighted by management previously, given a relatively tight industrial property market in Singapore at the moment, acquisition of good quality industrial properties is becoming more challenging. Going forward, apart from the acquisitions previously announced, AREIT aims to consolidate its portfolio and grow through asset enhancements. Properties in the portfolio to undergo AEIs in the subsequent quarters include 31 International Business Park, Xilin Districentre Building D, Tech Block II, 1 Changi Business Park Ave 1 and 31 Ubi Road 1.
SSD may have limited impact on investors’ interest in industrial space. Singapore government recently introduced a Seller’s stamp duty (SSD) on industrial properties for the first time, as it tries to rein in market speculation that has resulted in doubling in prices over the last three years. However, as the market continues to be flooded by liquidity amid a prolonged low interest rate environment, we believe the capital value of industrial properties will continue to grow in 2013, albeit at a slower rate. In addition, as the jump in industrial capital value was in-part due to a spill-over effects of the ABSD introduced to the residential sector late last year. As more cooling-measures were released recently to control the residential market prices, the effects of this spill-over is likely to continue in 2013.
Fairly valued at this moment. Going forward, although we believe the stable dividend yield from AREIT remains attractive to investors, particularly on the back of high liquidity, prolonged low interest rate environment and a strong Singapore currency; we believe AREIT is currently fair valued at the moment and maintain NEUTRAL with a TP of S$2.67.
A-REIT – Kim Eng
Industrial Landlord – Best in class
3Q-9M FY3/13 results inline. 9MFY3/13 revenue at SGD430.5m, was 75% of ours and 78% of consensus estimate. 3QFY3/13 revenue at SGD145.2m, was 25% of ours and 26% of consensus estimate. 9MFY3/13 DPU at 10.68 SG-cts (+6.2% YoY) was 75% of ours and 76% of consensus estimates. 3QFY3/13 DPU at 3.62 SG-cts (+2.5% QoQ, +4.0% YoY) was 25% of ours and 26% of consensus estimates. Aggregate leverage inched up to 32.8% from 32.5% last quarter, following funding of committed investments. All-in-financing costs for 3QFY3/13 averaged 3.19% (2Q: 3.15%) with an average term of debt of 3.9 years (2Q: 4.2 years).
Stable portfolio continues to deliver. Occupancy rate (same-store basis) for the portfolio and multi-tenanted buildings (MTB) remains flat QoQ at to 96.6% and 93.4% respectively. 3QFY3/13 weighted average lease to expiry was 3.8 years, with only 2.1% of income due for renewal for the remaining FY3/13. Positive rental reversion on renewal range between 5.5%-25.3% throughout all segments of the portfolio boosting QoQ NPI margin (from 71.8% to 72.1%) and yields (from 6.6% to 6.7%). YTD rental reversion of 13.9% was achieved for the portfolio.
Business Park exposure not fatal. AREIT’s business/science park portfolio constitutes 38% of our FY3/14 GAV and gross revenue. We are heartened that A-REIT has secured commitment for about 31% of the lettable space (complete in 3Q12, 223k sqft) at Nexus@one-north last quarter, despite the onslaught of ~7m sqft of new known supply in 2012-2015. We noted that the majority of this supply (~81%) is in the central region (One North and Mapletree Business City), where AREIT has ten out of 23 existing properties. According to our estimates, the central region assets comprises ~40% of AREIT’s business park revenue and NLA. Predominantly, AREITs business park portfolio (~60%) is still concentrated in the east and west region, namely the International Business Park (IBP) and Changi Business Park (CBP). At 94% occupancy for business park with mostly MNC tenants, we think AREIT stands in good stead to weather the impending supply.
New Asset Enhancement Initiative. AREIT has also initiated enhancement work at 31 International Business Park, at a cost of SGD13.2m, to take advantage of prospective future demand in the area. The AEI will complete by 3Q13. We raise our FY3/13-3/15 DPU by 0-0.34% in view of the enhancement. We continue to like A-REIT for its stable DPU yield, healthy lease expiry (<25% of income expiring per annum) and debt maturity profile. Reiterate BUY with an unchanged DDM-derived TP of SGD2.60.
S-REITs – Kim Eng
Go Selective On REITs
Year in Review. The S-REITs has been one of the best performers in 2012 (39% price return in FY12). Last year, we have seen many pension, insurance and income funds switching into REITs to pursue higher returns for the sheer fact that the yield-curve is almost flat. This is further aggravated by the almost “zero-bound yields” which meant that yields have no more room to fall, erasing any prospects of fixed income capital gains for investors. In the quest for returns, many such funds had to turn to slightly riskier asset classes such as REITs, Infrastructure Trusts and Master Limited Partnerships (MLPs) etc for stable recurring distributions.
S-REITs 2013 forecast. In the absence of real sustainable global economic growth, we believe that continuing rounds of QE Infinity, ECB’s unlimited bond-purchase program and BoJ’s yen-asset-purchase program will persist to keep interest rates low and liquidity high. This, in turn, will sustain property prices moving forward. Nonetheless, we DO NOT think that S-REITs will be able to repeat its stellar performance in 2012. In our view, S-REITs will find it challenging to complete yield-accretive acquisitions in 2013, given that property prices in most segments are already past their 2008 peak levels. We also see limited opportunities for further positive rental reversions (3-8% DPU upside per annum) as rentals face more downward pressure in 2013, following looming supply and softening of business sentiments.
Year of consolidation. 2013 is probably a year of consolidation for S-REITs, that will warrant further yield compression of at most 30-40bps, translating to a maximum of 6-8% upside. Given the high price-to-book of S-REITs (1.15x sector-wise), we downgrade S-REITs to NEUTRAL from OVERWEIGHT. For greater upside, we see more prevailing opportunities in developers (especially local high-end and diversified big caps) than landlords. We also see heightened risk of equity fund raising for S-REITs in asset enhancements, redevelopment projects or/and sponsor injections.
Stock picks. Selectively, our TOP picks remain with the more defensible Retail and Industrial REITs, namely Starhill Global (SGREIT SP, BUY, TP SDG0.85), Capitamall Trust (CT SP, BUY, TP SGD2.29) and Ascendas REIT (AREIT SP, BUY, TP SDG2.60), that can expect to benefit from near-term DPU upside with asset enhancements and ongoing redevelopment projects. We will advise investors to shun the more cyclical Office and Hospitality REITs.
A-REIT – Kim Eng
Still Room for Yield Compression
Business Park exposure not fatal. AREIT’s business/science park portfolio constitutes 38% of our FY3/14 GAV and gross revenue. We noted that there is an onslaught of ~7m sqft of new known supply in 2012-2015. The majority of this supply (~81%) is in the central region (One North and Mapletree Business City), where AREIT has ten out of 23 properties. According to our estimates, the central region assets comprises ~40% of AREIT’s business park revenue and NLA. Predominantly, AREITs business park portfolio (~60%) is still concentrated in the east and west region, namely the International Business Park (IBP) and Changi Business Park (CBP).
More than 50% supply pre-committed. In addition, we estimate that ~60% of the impending supply is already pre-committed. Most of the available space will also be catered for specific uses and hence limit the choices available for existing occupiers. The Singapore government is committed to provide incentives to attract established MNCs to Singapore, and this will stabilize occupancy in our opinion. At 94% occupancy (as of 30 Sep) for business park with mostly MNC tenants, we think AREIT stands in good stead with its East+West concentrated business park portfolio and remain confident that it will be able to lease out its upcoming Nexus@onenorth project (complete in 3Q12, 223k sqft) in due course.
New Asset Enhancement Initiatives and Developments to drive growth. The former Aztech Building and Ultro Building are undergoing refurbishment works till 2Q13 and 4Q13 respectively. We forecast rental upside of 117% for Aztech (SGD 2.73 psf/mth from SGD1.25 psf/mth) and 56% for Ultro (SGD3.90 psf/mth from SGD2.50 psf/mth on completion). We expect existing developments (Unilever Four Acres, Nexus@one-north) and AEI works (Freight Links, Xilin, TechPlace II) to be the main growth driver for AREIT in 2013.
Yields can be compressed by another 60bps. We continue to like AREIT for its stable DPU yield, healthy lease expiry (not more than 25.5% of income expiring per annum) and debt maturity profile (not more than SGD400m maturing per annum). In addition, only 19.8% of AREIT’s NLA is used for conventional manufacturing, which is a plus given that the per annum net demand for factory space has been modest compared to warehouses and business parks. From our estimates, the implied cap rate for AREIT is 5.5%. If we take this cap rate as the floor for FY3/14 DPU yield, we believe that yields can be further compressed by another ~60bps from our forecasted FY3/14 DPU of 6%. Reiterate BUY with a DDM-derived TP of SGD2.60.