Category: ESR
SREITs – DMG
Euphoric aura could further compress yields
Raising target prices on lower cost-of-equity assumptions. We are raising our target prices for S-REITs to account for continued low interest rates. We lowered our 10-year risk free assumptions by 50bps to 2.5%, resulting in the concomitant reduction in cost-of-equity. CDLHT (BUY/TP: S$2.15) is our top pick for large-cap S-REIT and CREIT (BUY/TP: S$0.64) is our top pick smallcap S-REIT. Sector now trades at FY10 yield of 6.8%.
Supernormal visitor growth of 30% – a real possibility! We are sanguine that CDLHT remains the best proxy to a multi-year tourism resurgence that will take place next year. The success stories of countries with similar service offerings reinforce our view that Singapore’s visitor growth will easily punch through the 15-20% level in the initial year of opening (possibly even 30%), with sustained 5-10% growth thereafter. Our feedback from hotel operators indicates that pricing power will return when occupancies hover above 80%. We expect systemic occupancies to rise to 84% next year, with ARRs rising to S$250. Amara Holdings, (UNRATED, RNAV: S$0.68-0.75) is another hotel play that could enjoy colossal spin offs from Singapore’s monumental tourism boom.
Prime office rents likely to fall by a further 20% to S$6/sqft. With 3.9m sqft of new office space (5.4% of existing supply) coming on stream in 2010, the market has become so competitive that it is increasingly common for landlords to offer sweeteners such as fitting-out costs to attract new tenants. Despite the economy being technically out of a recession, it is clearly still a tenants’ market and the focus on tenant retention remains paramount for all landlords including CCT (SELL/TP: S$0.87). Our channel checks indicate that some landlords in prime areas are currently negotiating rents at between S$6-7/sqft, 20% lower
than 3Q09’s figures.
Euphoric aura could see further yield compression. We believe the stabilising global economy and the twin openings of the IRs will remain as euphoric events in 2010, providing sustained performance for the REIT sector. We, however, see minimal upside for CMT and A-REIT (NEUTRAL) as both counters are already trading close to their heyday yields of ~5% and 6%, respectively. We recommend BUY entries for CMT at S$1.55 and A-REIT at S$1.80. We continue to favour Suntec (BUY/ TP: S$1.45) as leasing activities
at Suntec Tower remains buoyant and expiring rents are marginally underrented. Suntec trades at attractive 8.6% yield for FY10.
Interesting small-cap REITs to watch. We believe acquisitions are in the works for FCT (BUY/TP: S$1.53). With a low cost-of-equity, we expect potential acquisitions to be DPU accretive. Cambridge REIT (BUY/TP: S$0.64) has a defensive business structure with an FY10 yield of 11.4%. We believe the stock
is a major laggard to A-REIT, trading at a spread of 4.4%, way above its historical average of 1.4%.
Link – Table
Cambridge – CIMB
Above expectations
• DPU above expectation. 2Q09 results are in line with consensus forecast but 6% above our expectation mainly due to amortised loan transaction costs that were added back into distributable income. Distribution of S$10.7m (-13.8% yoy) and DPU of 1.35cts (-13.8% yoy) form 31% of our FY09 forecasts. 1H09 DPU of 2.64cts represents 60% of our full-year forecast. The yoy decrease in distribution can be traced to higher management fees paid in cash and higher borrowing costs. Net property income of S$16m was flat (-0.3% qoq), while portfolio occupancy was stable at 99.5% (+0.3% pt qoq) as at Jun 09.
• Assets devalued by 9%. In 2Q09, the manager commissioned a full valuation of CREIT’s assets, with a 9% fall in asset value to S$880.3m. This was mainly due to higher cap rates and lower rents used by the valuers. After the valuation, asset leverage rose to 43.8% from 39.9%, while NAV/unit decreased to S$0.62 from S$0.73cts. Management anticipates flat valuation by the end of the year.
• Private placement of S$28m diluted DPU by 8%. On 27 Jul, management announced a private placement of 71.1m units to raise gross proceeds of S$28m. This represented 9% of the units in issue as at 31 Dec 08. Assuming no other changes, DPU would be diluted by 8%. About 23% of the privately placed units will go to its sponsors NAB (19%) and Oxley (4%). Units issued to NAB and Oxley will be priced at S$ 0.399/unit, based on the adjusted volume-weighted average price (VWAP) of units for the full market day on 24 Jul 09. Units issued to other investors will be priced at S$0.392, a 5% discount to VWAP.
• Changes to our estimates. We reduce our rental decline assumptions for CREIT in FY09 to -2% (from -5%), in view of the stable performance in 1H09. Additionally, we adjust the number of units to factor in the private placement, and add back the amortised loan transaction cost to distributable income. The net result for our FY09- 11 DPU forecasts is an upgrade of 12-18%.
• Maintain Outperform; higher target price of S$0.52 (from S$0.48). Our target price rises in tandem with our increased DPU forecasts to S$0.52 (from S$0.48), still based on DDM-valuation (discount rate 9.4%). We maintain our Outperform rating given its share-price upside potential and forward yields of 12%.
Cambridge – DBS
Building up its coffers
• 2Q09 results showed stable performance
• Private placement exercise leads to c10% dilution
• Impact on AEI activities only in the medium term
• Downgrade to HOLD, TP S$0.41 based on DCF.
Results in line. Cambridge Industrial Trust (CREIT) 2Q09 results were in line with expectations. Results were underpinned by a portfolio mainly secured on sale and leaseback leases. Distributable income came in 14% lower at S$10.7m (DPU of 1.345 Scts), largely a result of management fees paid in cash and higher borrowing costs.
Private placement- to National Australia Bank/ Oxley. In a recent announcement, Cambridge REIT announced a private placement exercise @ S$0.39 per unit to National Australia Bank & Oxley to raise cS$28m of proceeds. Total shares to be issued are estimated to be c.10% of share base.
Proceeds for asset enhancement purposes. Proceeds from the placement will be utilized to embark on asset enhancement initiatives (50-70%) and general working purposes (50-30%). While we understand that several of their assets have yet to fully utilize their plot ratios, raising equity at c. 12 -13% yield does present a relatively high cost of capital hurdle to overcome in order to make any investments accretive. In addition, Cambridge REIT may have to seek respective tenants’ approval before embarking on any meaningful enhancement works, which could mean that the potential impact on earnings is likely to be delayed.
Downgrade to HOLD. DPU is expected to be diluted by c7-9% in FY09-10F to c. 4.8 – 4.7 Scts. Our DCF based TP will be reduced to S$0.41, which is close to its closing price. As such, we downgrade to HOLD. Cambridge REIT currently offers a FY09-10F yield of 12%.