Category: ART
SREITs – OCBC
1Q10 results review; downgrade sector to NEUTRAL
1Q CY2010 results review. Four out of the eight S-REITs under our coverage reported earnings in line with our estimates. CapitaCommercial Trust (CCT) and Frasers Centrepoint Trust (FCT) beat our DPU estimates by 7.8% and 6.7% respectively. CCT benefited from positive rent reversions and lower property tax that drove a 11% YoY increase in net property income. FCT, meanwhile, beat our estimates (and the manager’s own guidance) on the back of a strong performance from Northpoint post asset enhancement works. Conversely, A-REIT and LMIR Trust missed our earnings expectations for 1Q CY10; with A-REIT missing our DPU estimates because of one-off upfront fees for loans. As a gauge, in 4Q CY09 five REITs reported results in line, three above our expectations and none below.
Guidance was ‘cautiously optimistic’, and growthoriented. Several managers indicated an intention to optimize yield and grow the portfolio both organically (asset enhancement initiatives, including CapitaMall Trust (CMT) and Ascott Residence Trust (ART)) and inorganically (acquisitions, including Mapletree Logistics Trust (MLT)). With this focus on growth, we believe S-REIT’s balance sheet capacity and ability to raise capital will remain key valuation differentiators. It may also be the first time the relatively young S-REIT sector will see REITs refresh their portfolios through divestments and re-developments in a big way (Cambridge Industrial Trust [NOT RATED] has been leading the pack as it de-leverages its balance sheet). Another price differentiator, in our opinion, will be the manager’s skill in optimizing yield through asset works: CMT and FCT, for instance, have a proven track record in this area in our view.
Volatility in the near term. Year-to-date performance of the S-REIT index is slightly negative (-0.7%) at 613.58 points. The recent volatility in the market has led to ~100 basis point movements in yields – we think this volatility will continue as macro-economic concerns, this time in Europe, take a front seat again. In our view, investors may consequently ascribe a higher risk premium (that is, higher yields and lower price-to-book ratios) to the S-REIT sector in the near-term. Nonetheless, we see selective opportunities to pick up strong REITs at attractive valuations (on a longer time horizon), after careful scrutiny of return versus risk. In an uncertain environment, we prefer REITs with a strong earnings outlook and strong balance sheets. We tilt slightly defensive in our top picks and favor FCT, MLT and ART with estimated total returns of 19%, 19.8%, and 21.7% respectively. Downgrade broader sector to NEUTRAL on a more cautious view.
ART – CIMB
Operationally stable
• In line; upgrade to Outperform from Neutral. 1Q10 results were broadly in line with Street and our expectations. Although DPU of 1.66cts forms only 20% of our full-year estimate and 21% of consensus, we consider it to be in line due to seasonal weakness in the first quarter. Operationally, ART remained stable with gross profits improving 1.4% yoy. Our estimates and DDM-based target price of S$1.35 (discount rate 8.3%) are intact. We upgrade ART to Outperform after a 15.5% ytd underperformance. We believe upcoming catalysts also include potential apartment rate increases for Singapore in 2H10. ART offers a prospective return of 19.4% from potential price upside of 12.5% and forward dividend yields of 6.9%. ART is one of the few REITs still trading below book value (0.9x vs. sector average of 1.0x)) while prospective yields are in line with the sector average.
• Operationally stable. Gross profit was S$20.1m, up 1.4% yoy. Strong growth from Australia (+33% due to strong A$ and stronger contributions from high-margin F&B component), China (+17%, attributed to Beijing and Shanghai properties) and the Philippines (+18%, strong corporate demand) was diluted by weakness in Indonesia (-15% due to rectification work for earthquake damage), Japan (-8%, weakening occupancy in rental housing) and Singapore (-3%, additional property tax due to reassessment of property annual values by IRAS). Qoq, there was an 8% decline on seasonal weakness.
• RevPAU flat; Singapore should shine in 3Q. Portfolio RevPAU was S$120/day, flat from one year ago. Although occupancy improved in all countries except Indonesia, average rates remained flat or even declined moderately as there was a differing pace in economic recovery. The Singapore market is expected to grow strongly this year, with 1Q10 REVPAU of S$180/day up 7% yoy mainly thanks to improved occupancy. Other than the one-off property-tax reassessment, ART’s Singapore assets are also being refurbished, which took out 15% from its inventory. Completion is anticipated at end-2Q10. We expect strong apartment rates and an occupancy recovery in 3Q.
ART – Kim Eng
Look beyond the blip
Event
ART’s 1Q10 DPU of 1.66 cents is 12% below our expectations and 6% lower yoy due to one‐off expenses. Revenue grew by 3% yoy to $43.5m, driven by higher overall occupancy rates. We expect better performance in 2H to be led by the Singapore and Philippine markets. ART should remain on track to meet our full‐year DPU forecast of 7.83 cents. We upgrade ART to Buy on valuation grounds.
Our View
ART’s improved performance was mainly led by a recovery in REVPAU in Singapore, the Philippines and China as hospitality demand increased in line with higher tourist arrivals and corporate travels.
The operating performance in Australia, Indonesia, Japan and Vietnam, which account for the remaining 52% of gross profit, should remain stable in view of strong occupancy rates, though partially offset by the pressure on room rates.
With gearing of 42.1%, ART has debt headroom of about $250m for acquisitions before hitting its maximum target of 50%. While asset enhancements and acquisitions remain its near‐term focus, asset divestment is also possible if the proceeds can be deployed towards yield‐accretive acquisitions. Loans of $399m are due for refinancing in 2011.
Action & Recommendation
Increasing tourist arrivals and corporate travel are key drivers for re‐rating. Asset divestment plans are still in the pipeline. We upgrade ART to Buy on valuation, based on forward yield of 7% and total return of 29%.
ART – OCBC
Mixed operating performance; DPU sub-expectation
1Q10 in line with our estimates. Ascott Residence Trust (ART) posted S$43.5m in 1Q revenue, up 3.2% YoY but down 5.6% QoQ. Overall RevPAU1 for the quarter was S$120 a day compared to S$120 in 1Q09 (flat) and S$124 in 4Q09 (down 3.2%). Distributable amount for 1Q was S$10.3m, down 5.3% YoY and down 10.9% QoQ. This is equivalent to 1.66 S cents DPU2, 11.3% below than our estimate of 1.87 S cents. However, revenue and gross profit were within 4% of our estimates. The large discrepancy in distributable income was due to one-off variances in the tax line. Ex one-offs, distributable income would be up 2% YoY.
Performance mixed by market. We understand that while occupancies continue to hold, ART has not been able to achieve significant room rate growth (an industry-wide issue). This means that while the top-line is growing, it is not flowing through fully – gross profit margin declined 106 basis points YoY to 46.2%. Performance was also mixed by market – while RevPAUs in Singapore, Australia and the Philippines were up strongly YoY; Indonesia, Vietnam and Japan (serviced residences only) recorded RevPAU declines ranging from -7% to -16.1%.
Guidance cautiously optimistic. The manager said that the “differing pace of economic recovery” in the markets where it operates will “continue to provide income stability” (which we take to mean a net flat to mildly positive performance). ART also said it “remains confident of the longer term growth in the markets in which it operates and the operating performance in 2010 is expected to remain profitable.” ART is currently leveraged at 42.1% debt-to-assets. ART’s manager has previously said it was comfortable going up to 45-50% debtto-assets. Asset works are ongoing in an attempt to optimize the yield of the portfolio. The manager said it was also considering asset divestments and yield accretive acquisitions.
Valuation. We are revising our gross profit margin estimate for FY10 down and our tax estimates for FY10-11 up. Our distributable income estimates consequently fall 6.4% and 3.6% for FY10 and FY11 respectively. This translates to a FY10F yield of 6.4%. We will also keep a careful eye on how actual performance matches up against our RevPAU growth estimates over the next quarter. We revise our fair value estimate down 4.3% to S$1.32 from S$1.38 previously. This still offers an estimated total return of 18.8% and we maintain our BUY rating. Key risks to our thesis are macroeconomic / regional economy risk and a slower-than-expected pick-up in corporate travel.
SREITs – OCBC
1Q10 results preview
In 1Q10, YoY DPU improvements for most... The majority of the S-REIT universe will report 1Q CY10 results over the next two weeks, with CapitaCommercial Trust (CCT) kicking off the season on 16 Apr. Within our coverage universe, we expect Ascott Residence Trust (ART) to show a YoY improvement in DPU on the back of stronger occupancy rates and RevPAU1 . Based on our estimates, Mapletree Logistics Trust and Frasers Centrepoint Trust (FCT) could also see a YoY pick-up in DPU for the quarter due to a boost from recent acquisitions. FCT’s earnings in the preceding year were also impacted by asset works. CapitaMall Trust may also post a YoY increase in DPU as the REIT retained part of its distributable income in 1Q09. We expect Ascendas REIT to report stable operating performance, with this quarter’s DPU up 2.8% YoY.
…but not all. On the other hand, we expect Suntec REIT to report a YoY decline in DPU due primarily to a larger unit base (roughly 1.8b units now versus 1.6b units a year ago). We also estimate that CCT may record a YoY fall in DPU due to dilution from its 2009 rights issue. Meanwhile the Indonesian Rupiah continues to re-rate strongly (6596 IDR/SGD on average in 1Q10 versus 7701 IDR/SGD in 1Q09). The IDR’s ascent over the hedged rate employed by LMIR Trust could impact YoY DPU performance despite a stronger portfolio that has seen steady improvements in occupancy.
Leaping or waiting? Our primary focus this season is on the tone of manager guidance. REIT managers have been fairly aggressive and opportunistic in 2010 so far, with a sizeable S$1,218m worth of acquisitions announced year-to-date. The equity market was also active with FCT’s S$182.2m placement and the listing of Cache Logistics Trust [NOT RATED], whose S$417.3m IPO was 7.8x subscribed. The question is what happens next – market worries about how the second half of this year pans out have been well-documented and the consensus view is for a rather benign economic recovery. How this corresponds to/deviates from REIT managers’ guidance of individual earnings performance will be important to watch. Additionally, the delicate balance between 2H10 uncertainties and market appetite may prompt REIT managers to launch acquisition/fund raising plans sooner rather than later. How managers lay out acquisition and debt re-financing plans will also be worth tracking, in our view. We maintain our OVERWEIGHT stance on the sector. Top picks are ART and Suntec.