Category: ART
REITs – CIMB
Ripe for the picking
• Looking cheaper than ever. YTD, the Singapore REIT index has fallen 56% (vs. the STI’s 48% decline), driven by fears of REITs’ inability to secure refinancing, and falling rents and occupancy in an economic downturn. Average P/BV for the S-REIT sector has fallen to 0.51 while average yields have doubled to 14% in the last two months.
• REITs with strong credit and risk metrics get gold. Despite the credit crunch, there are still REITs that exhibit strong credit and diversified risk metrics. The presence of strong sponsors and government-linked sponsors is advantageous at this juncture. To these, banks are not only willing to lend but lend on more favourable terms. Some REITs have even managed to move away from borrowings that require pledges on their assets or rental income, thereby retaining financial flexibility.
• Asset devaluation risks small, financing ability not impaired yet. Most of the REITS are still within safe gearing levels. This implies a low risk of breaching impairment levels and could mean debt funding would still be available to them.
• Look for efficiency. In the midst of the credit crunch, acquisitions and asset enhancements requiring significant outlay would be difficult, particularly in 2009. More attention should be focused on the operational efficiency of the REIT manager in pushing every dollar of rent from the top down to the distribution level. CDLHT stands out as an efficient REIT manager with a remarkably close match between its revenue growth (222%) and DPU growth (211%), in our comparison.
• Overweight on S-REITs; top picks are PLife and CCT. With the strong selldown of REITs, we see an opportune time to accumulate positions. We maintain our Outperform ratings on A-REIT, CIT, FCT and PLIfe. We upgrade CCT and MLT to Outperform from Underperform and Neutral respectively. We maintain our Underperform on ART but downgrade CDLHT to Underperform from Neutral. While PLife remains our top pick for its limited earnings downside and strong financial flexibility, CCT emerges as a deep-value pick with the lowest P/BV of 0.28x among REITs under our coverage, and below the S-REIT average of 0.5x. We believe that all negatives have been priced in and forward yields at 12.2% (CY09) look attractive.
Link – Table
AscottREIT – DBS
Challenging outlook
Story: Ascott Residence Trust (ART) performed well in 3Q08, in line with our expectations. Gross revenues and profits grew by 25% and 49% to S$53m and S$27m respectively. China contributed to 55% of the increase, on the back of higher occupancies and room rates during the Beijing Olympics. Performances from other countries were mixed, with Singapore, Vietnam and Australia continuing to show growth while Philippines was affected by softening room demand. On a portfolio wide basis, average RevPAU posted a 21% increase yoy to S$163.
Point: Moving forward, uncertain economic outlook and slowing business activities is likely to dampen demand for rooms. Hence, we have assumed a 10% decline in RevPAU in FY09, staying steady in FY10. ART has a healthy balance sheet with a projected net gearing at 35.7% as at end-08, backed by its strong credit standing and sponsor. In addition, 73% of its total debt is locked in fixed rates.
Relevance: Valuations remain attractive at 0.3x P/BV coupled with a FY08 – FY10 DPU yield ranging 16.6 – 18.3%. However, we do not expect any positive newsflow in the near term clouded by the economic uncertainty. Due to the lack of catalyst for the sector moving forward, we maintain our HOLD call, TP $0.57 based on 30% to our RNAV estimate.
AscottREIT – CIMB
Changing seasons
• Above expectations. 3Q08 results were in line with consensus estimates but above our expectations due to lower-than-forecast interest expense. DPU of 2.61cts grew 31.2% yoy to form 32% of our forecast of 8.16cts for FY08. Gross revenue of S$53.0m was up 25.3% yoy on double-digit revenue per available unit (REVPAU) growth in Singapore (+31%), Australia (+63%) and China (+55%). YTD DPU forms 87.4% of our full-year estimate, above expectations.
• Slower last quarter guided. While the going was good in 3Q08, management guides that the fourth quarter of the year is typically the weakest. Strong REVPAU growth in China from a surge in average daily rates during the Olympics Games is likely to normalise from now.
• Changes to assumptions. In line with our house view that the US financial crisis could result in a marked slowdown in Asia, we have cut our REVPAU forecasts (a function of occupancy and average daily rates) to reflect up to a 20% decline per annum in the next three years. Separately, we reduce our acquisition assumption for FY08 to S$84m (acquisition of Somerset St Georges Terrace in Perth) from S$364m as we do not expect any acquisitions in the current credit climate. We also lower our cost of debt assumption for ART to 3.5% from 4% for FY08.
• Downgrade to Underperform from Outperform; new target price of S$0.56 (from S$1.45). Following our adjustments, our FY08 DPU estimate increases by 5%, while our FY09-10 estimates decrease by 26-39%. We apply a higher discount rate of 10.5% (previously 8.5%) (risk free rate 5.0%, market equity premium 4.6%, beta of 1.2) to our DDM valuation to reflect increased risks for the short-stay tenures of the hospitality industry (average of eight months for ART’s portfolio) in this climate vs. other property segments (average 3-year leases). Our earnings reductions account for 80% of the change in our target price. Our new target is
S$0.56 (from S$1.45). Downgrade to Underperform in view of the weakening macroeconomic outlook.
AscottREIT – BT
Ascott Reit’s DPU up 31% in Q3
ASCOTT Residence Trust (ART) achieved a unitholders’ distribution of $15.86 million for the third quarter ended Sept 30, a 32 per cent increase year-on-year. Distribution per unit (DPU) for the quarter is 2.61 cents, a 31 per cent increase from a year earlier.
Lim Jit Poh, chairman of Reit manager Ascott Residence Trust Management Ltd (ARTML), said: ‘Ascott Reit posted a strong operating performance. Revenue increased $10.7 million. Sixty-six per cent was attributable to organic growth across the portfolio. The other 34 per cent was contributed by newly acquired properties subsequent to Q3 2007.’
ARTML chief executive Chong Kee Hiong said ART continued to benefit from geographic diversification and its extended-stay business model. Its properties in Beijing enjoyed strong growth in average daily rates during the Olympic Games. And its Australian and Singapore properties also performed well.
As at Sept 30, ART’s gearing was 34.9 per cent – well within the 60 per cent gearing limit allowable under MAS’s property fund guidelines.
The trust’s average cost of debt was 3.3 per cent, and its interest cover a healthy 5.1 times. ARTML said that more than 70 per cent of ART’s debt is on a fixed-rate basis, as it has consistently taken a conservative approach to capital management.
Some $84.6 million or 15 per cent of total debt is due for refinancing in the current Q4. The trust said it has sufficient cash and bank facilities to meet these refinancing needs. More than 80 per cent of total debt is not due for refinancing until 2011 and beyond.
‘We will continue to focus on active management of our properties to maximise asset yields to deliver stable returns to unitholders, despite the difficult economic conditions,’ Mr Lim said.
Hotels – DBS
August’08 visitors number shows a continuing slide
Story: Based on STB statistics yesterday, Singapore continues to see weaker visitor numbers in August ’08; 842,000 visitor arrivals, which was a 7.7% decrease from a year ago. Average Room Rate (ARR) in August 2008 was S$232, + 4.9% YoY, Average Occupancy Rate (AOR) was c.81%, posting a 9.5% decline a year ago. As such, RevPAR growth narrowed to only +2.8% YoY at S$187 for the month.
Point: The performance is largely in line with our expectations. As per our Hospitality Sector report dated 4th Sept’08, titled ” Playtime is Over”, we have highlighted that 2H08 tourism sector performance to moderate compared to 1H08, and (i) Aug’08 should remain weak due to the distraction from the Chinese Olympics, (ii) high regional inflation and slowing GDP growth leading to cuts in discretionary spending and (iii) in the medium term, a slowing tourism sector arising from a global slowdown.
Moving forward, although Sept’08 sector performance is expected to be boosted by the Formula One Night race held over the coming weekend, weak underlying fundamentals could lead to further slowing tourism numbers in the medium term.
Relevance: Given the lack of catalyst for a re-rating and potential headwinds moving forward, we are maintaining our Neutral Call on the sector. In terms of stock picks, we remain selective as slowing tourist arrivals could imply weaker earnings for hoteliers moving forward.
We maintain BUY on ART, TP $0.94, which is trading at an attractive 30% discount to our revised RNAV of S$0.94. Earnings should remain resilient with leases locked in for an average of 8 months ahead.
For CDL HT, we view that exposure to slowing RevPAR could lead to weak earnings and thus cap performance in the near term. As such we maintain HOLD, TP $1.23.