Category: CCT
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
REITs – OCBC
Opportunities for yield arbitrage
Yield divergence. S-REITs have re-rated strongly YTD on the risk rally but the gains haven’t been equally distributed. We are seeing some interesting pockets of yield divergence. Using consensus estimates, Suntec REIT is trading at a 300 points yield premium to CapitaCommercial Trust (CCT) despite support from its retail portfolio and fairly similar gearing. Similarly, consensus DPU estimates for Suntec and K-REIT are identical over FY09-10, but Suntec still trades at a significant yield premium. Part of the premium, in our view, is driven by expectations of an equity issue. Meanwhile, CDL Hospitality Trusts is trading at a 260 basis points premium to Ascott Residence Trust (ART). Gearing and geography may play a part here.
Outlook driven? There is also some notable yield divergence between sectors. Pure foreign plays (excluding Saizen and First REIT) are trading at an average consensus yield of 8.8% versus the office REITs at an average of 10.1%. This is an interesting discrepancy that is overriding the typical country risk premium that is awarded to some of those names. Industrial and office REIT yields are at par on average, but average price to book is 0.7x for the industrials versus 0.5x for the office owners.
Arbitrage opportunity. Economic data is still really sideways, in our view – there is some recovery and bottoming out thanks to stimulus efforts but private sector and consumer activity is still a question mark. As such, we don’t expect much capital appreciation for the sector ex major news flow. We do expect opportunities for yield arbitrage as the divergence corrects, especially as clarity increases on the office outlook.
Rights issues, repackaged. Recent activity in the sector includes equity issues (A-REIT, round two); acquisitions (Suntec and K-REIT); and a combination of both (Fortune REIT). Things don’t change as much as branding does: managers will toss around buzz words including “position of strength” and “acquisition opportunities” but the end result will be the same: further equity issues. This is not always a bad thing, in our opinion, as either avenues of growth open up or gearing is lowered (still desirable). We expect more activity as: 1) managers exploit significant re-rating; 2)laggard REITs start de-leveraging; and 3) managers resort to inorganic options to propel the next leg of DPU growth, or even to sustain DPU. We identify Suntec, Mapletree Logistics Trust and Frasers Centrepoint Trust as likely candidates for an equity/acquisition two-for-one in the next six months. Maintain NEUTRAL; top picks are CCT and ART.
REITs – CIMB
Equity raising: Round 2 on the cards?
• Almost S$4bn of cash calls YTD. Since Jan 09, a number of SREITs have made cash calls amounting close to S$4bn, mostly to pare down maturing debt.
• Equity raising expected to continue, driven by acquisitions… Frasers Centrepoint Trust, PLife REIT, and CapitaMall Trust are most likely to make acquisitions in the next 12 months, in our estimation. We expect FCT and CMT to resort to equity raising as debt headroom is unlikely to be sufficient, in view of the sizeable potential pipeline. CMT could potentially raise more than S$1bn, assuming Sun Hung Kai also divests its 50% stake in Ion Orchard to CMT. In the medium term, we also expect Suntec REIT to acquire Suntec Convention Centre, potentially financed by a cash call.
• … and potential asset devaluation. The recent devaluation of Singapore Land Tower to about S$1,842psf is expected to put pressure on CCT to write down its two key office assets, 6 Battery Road and One George Street, with significantly higher valuations of above S$2,200psf. CCT would need to raise more than S$200m in equity to stay safely within the 40% asset leverage level if asset values fall by more than 20%.
• Mid-sized REITs preferred; PLife has lease risk of equity raising. We prefer mid-sized REITs with strong balance sheets such as FCT and PLife REIT. However, our top pick in the SREIT space for potential near-term acquisitions with the least risk of equity raising would be PLife REIT, as debt headroom of more than S$300m remains sizeable. Our target price of S$1.31 and forward yields of 7.2% have yet to account for potential acquisitions.