Category: ART
SREITs – DBS
Upside for Industrial REITS
• Room for earnings upgrade for industrial reits
• Hospitality reits to lead earnings growth in 1Q10
• Prefer industrial, retail and hospitality reits
• Top picks – ART, CDL HT, MLT, FCT, AiT
1Q earnings growth driven by economic recovery and acquisitions. We expect Sreits earnings momentum to continue into 1Q10, led by hospitality reits. Hospitality Reits should grow by at least 10% qoq in 1Q10, owing to a secular sector recovery while industrial reits should enjoy sequential mid single digit earnings uplift from new acquisitions. Retail reits are likely to show modest growth on the back of improving retail sales and office reits are likely to see marginal qoq increase, given the previous high base in rents.
Raising our earnings projection for the industrial Sreits. Looking ahead, we see 3 catalysts for Sreits – organic growth, acquisitions and refinancing into current lower interest cost environment. We have raised our earnings estimates for industrial Sreits by 1.5-4% to factor in potential new acquisitions in FY10. On the operating front, the pick up in economic activity has resulted in increased leasing enquiries, particularly for logistics warehouse, light and hi-tech industrial space. Rental hikes in 1H are likely to remain modest, although we anticipate this trend will be more evident in 2H10. Suburban retail rents have benefited from rising retail sales and a nascent recovery in rental pricing power.
Interest burden to reduce on refinancing options. The present window of opportunity for refinancing exercises at competitive rates have brought our attention to the possible uplifting impact of reduced interest burden on earnings. Potential beneficiaries would include reits with debt refinancing due this year and next such as CCT, CMT, Suntec, K-reit and Starhill Global. This has not been factored into our existing forecast.
Going for alpha. Sreits have outperformed developers YTD and are currently trading at DPU yields of 7.4%. Our 12-month price target translates to a projected yield of 6.5%, or 13% upside from here. Our strategy for Sreits would be to look for alpha, given the outperformance to date. We continue to favour the hospitality, retail and industrial segments, that offers the greatest upside based on our price objectives. Our top picks include CDL HT, ART, FCT, Ascendas India and MLT. The risk to our view is the prospect of rising long bond yields, which could drag on share price performance.
Hospitality REITs – OCBC
Riding on earnings recovery
Growth projected for tourist arrivals. The Singapore Tourism Board (STB) is projecting 11.5m to 12.5m visitor arrivals to Singapore in 2010, up 18.6% to 28.9% from the 9.7m visitors in 2009. It also projects S$17.5b to S$18.5b in tourism receipts this year – up a whopping 40% to 49% from S$12.4b in receipts last year. Catalysts include the opening of the two Integrated Resorts (IRs), the 2010 Youth Olympic Games, and the recovery in the global economy. The STB has a 2015 target of 17m visitor arrivals and S$30b in tourism receipts.
Riding on earnings recovery. The estimates bolster the earnings recovery theme for hospitality REITs CDL-Hospitality Trusts [CDREIT, NOT RATED] and Ascott Residence Trust (ART). The two REITs saw RevPAR1 declines of roughly 28% and 14.5% respectively in FY09 on subdued individual and corporate travel expenditure. We expect hospitality players to enjoy revenue growth this year on the back of improving occupancy and a stabilization (and potential recovery) in room rates. CDREIT is a more direct beneficiary of the new developments on the local scene due to its shorter stay profile and its larger exposure to Singapore vis-à-vis ART. Both REITs should benefit, in our opinion, from the increased MICE space and the potential draw of the IRs (Las Vegas rents more convention space than any other US city).
Earnings growth from acquisitions. CDREIT took advantage of its low leverage (19.1% as of 31 Dec 2009) and the availability of distressed opportunities to enter the Australian market through the acquisition of five hotels. The properties were acquired at a discount of up to 66% discounts to their current replacement value (including land costs). We see limited debt headroom for ART at its current leverage level (41.2% as of 31 Dec) but believe it may still be able to make accretive acquisitions through a combination of debt and equity. Its manager is also focusing on asset enhancements.
Valuations still compelling. CDREIT and ART are up 302% and 251% from their 2009 lows. Nevertheless, we believe ART’s valuations remain attractive at 0.92x book. Depending on the trajectory of the hospitality recovery, there could be room for further upwards earnings revisions (we are currently below consensus). CDREIT and ART are trading at 6% and 6.4% FY10F yields respectively (based on consensus for CDREIT). We do not have a rating on CDREIT. Maintain BUY with S$1.38 fair value for ART, one of our top picks for the S-REIT sector.
REITs – OCBC
Upgrading view to OW; Ascott & Suntec top picks
4Q CY2009 results review. Five out of the eight S-REITs under our coverage reported earnings in line with our estimates, with quarterly DPU differing 0-4% from our estimates. A- REIT, Mapletree Logistics Trust (MLT), and CapitaCommercial Trust (CCT) beat our DPU estimates by 9%, 9.5% and 17.5% respectively.
Significant activity year-to-date. In the past two months, the S-REIT sector has announced a sizeable S$1,218m worth of acquisitions. These have primarily been funded on the back of proceeds from equity issues completed in 2009 and 2010. K-REIT [NOT RATED] and CDL Hospitality Trusts [NR] made their maiden foray outside of Singapore into Australia. We believe this was primarily motivated by a search for value – distressed or even stressed opportunities are currently more plentiful in regions such as Australia and Japan vis-à-vis Singapore. Meanwhile, CCT agreed to divest Robinson Point for S$203.3m or roughly S$1527 per square feet of net lettable area to a private real estate fund. It also announced it was exploring options to re-develop Starhub Centre and change its use to a mix of residential and commercial. The equity market was also active with Frasers Centrepoint Trust raising S$182.2m to fund the purchase of two retail malls from its sponsor. ARA Asset Management [NR] and CWT Ltd [NR] also announced plans to launch a new logistics REIT. We expect REIT managers to continue down the acquisition path with stressed opportunities emerging as the broader market deleverages and with investors demanding yield growth. In turn, this growth push is likely to require further equity issues due to increased leverage conservatism.
Upgrading sector view. In a volatile market, we believe yield is an increasingly important contributor of overall return. Greater visibility may also drive further price-to-book compression. Ascott Residence Trust continues to be one of our top picks as a proxy to corporate investment and travel. We replace MLT with Suntec REIT as our second top pick on Suntec’s often over-looked retail portfolio and a possible shift in sentiment towards office REITs on increasing leasing activity, active supply management, and a slowing rate of decline in office rents. MLT continues to be a viable investment option, in our view, for investors seeking yield and stability. We upgrade our view on S-REITs to OVERWEIGHT from NEUTRAL. Key risks to our thesis are macro-economic risk, interest rate hikes (more of an issue for big caps REITs that have re-rated strongly, in our view) and an uncertain policy climate (the easy liquidity regime has to end at some point).
ART – OCBC
Still a compelling story
Scope for high yielding acquisitions. Ascott Residence Trust’s (ART) peer CDL-Hospitality Trusts [CDREIT, NOT RATED] announced last week that it intends to acquire five hotels in Australia. The assets were acquired from Tourism Asset Holdings, a private entity that we understand was
previously linked to Australia’s beleaguered Babcock & Brown. The assets were acquired on fairly attractive terms with the purchase price estimated to be at a discount of up to 66% to the current replacement value (including land cost). This deal, in our view, indicates scope for distressed or at least stressed acquisitions in the hospitality space.
Higher leverage than CDREIT not insurmountable to accretion. CDREIT is leveraged at 19.1% debt-to-assets as of Dec-09 and currently plans to fund the purchases using debt alone, taking its leverage to a still healthy 30%. ART, on the other hand, has a different balance sheet profile as it is already leveraged at 41.2% debt-to-assets. ART’s manager said it was comfortable going up to 45-50% debt-to-assets. With the easing of credit conditions and the re-rating of equity markets versus a year ago, we believe ART could make an accretive purchase using a combination of both debt and equity (potentially improving free float). A virtuous cycle of cheap acquisitions at cheaper capital is achievable if the manager maintains its focus on value protection and creation.
Asset enhancement plans in the meantime. Meanwhile, ART is targeting refurbishments of five properties each in 2010 and 2011. This includes Somerset Liang Court and Somerset Grand Cairnhill in Singapore and Somerset Grand Hanoi in Vietnam. These properties were last refurbished 11-13 years ago. ART is planning to spend roughly S$24.5m on the aforementioned three properties and expects payback within five years. The planned works will be funded using a combination of debt and operating cash flows.
Still a compelling story. As mentioned in our last report, we expect a pick-up in RevPAU in Singapore, China and Australia this year itself. We believe ART makes for a compelling earnings recovery story over 2010 and 2011 on the back of increasing business confidence and a revival of corporate travel. ART is currently trading at 0.85x book and a FY10F yield of 7%. We maintain our BUY rating with S$1.38 fair value estimate (28% total return). Key risks to our thesis are a slower-thanexpected global economic recovery and heightened regional economic risk, which could dampen investor sentiment towards diversified REITs.
ART – CIMB
Full year in line
• Results in line; maintain Neutral. FY09 results met Street and our expectations (101% of our estimate). Changes in our assumptions, reflecting contributions from asset-enhancement initiatives and more positive REVPAU growth, raise our FY10-11 DPU estimates by 3%. We also introduce FY12 estimates. Following our upgrade, our DDM-based target price rises to S$1.35 from S$1.21 (discount rate 8.3%). We see re-rating catalysts from accretive acquisition announcements.
• FY09 DPU of 7.32cts (CIMB-GK: 7.28cts). 4Q09 and full-year DPU numbers were in line with Street and our expectations. Distributable profit of S$45.2m and DPU of 7.32cts were up 15% and 16% respectively. Full-year gross profit of S$84.6m was down 11% yoy as occupancy and daily rates weakened.
• Portfolio REVPAU down 16% in 2009, to S$122. However, the qoq decline in 4Q09 was much more muted at -7%. The declines were led by Singapore (-33%) and China (-26%). Average length of stay remained stable at seven months.
• Asset enhancement in Singapore and Vietnam. Management has commenced and will continue with the asset enhancement of three assets: Somerset Liang Court (Singapore), Somerset Grand Cairnhill (Singapore) and Somerset Grand Hanoi (Vietnam). Management anticipates 5% and 9% cap rates for its Singapore and Vietnam asset-enhancement works respectively. Some 514 apartment units will be refreshed at an estimated cost of S$24.5m. Completion is expected in 2011. The cost will be funded by operating cash flow and existing bank facilities. As the refurbishment will be carried out in phases, and newly completed units will be priced higher, management anticipates a marginal impact on distribution.
• Sentiment turning positive. Management remains cautiously optimistic on 2010, and guides for moderate yoy growth. Acquisitions are likely to resume this year.