Category: CCT
CCT – UOBKH
Leveraging on positive rental reversion
CapitaCommercial Trust (CCT) invests in income producing real estate used for commercial purposes. It owns nine properties in Singapore with 2.3m sf of office space, which accounted for 7% of private office stock within Downtown Core. CCT has a 30% stake in Quill Capita Trust (QCT), a commercial REIT listed on Bursa Malaysia. It has a 7.4% stake in Malaysia Commercial Development Fund (MCDF), which is the largest private real estate fund in Malaysia focusing on investments in Kuala Lumpur and the Klang Valley. CCT was assigned corporate rating of A3 with stable outlook by Moody’s Investors Services.
Huge room for rental reversions. Rentals for prime office space within Raffles Place and Marina Bay area has shoot up from S$8.60 in 1Q07 to S$15.00psf pm in 4Q07, a result of supply crunch coupled with strong demand from financial institutions and oil & gas companies. Rentals for Grade A office space is even higher at S$17.15psf pm in 4Q07. According to CB Richard Ellis, rentals for Grade A office space could average S$18.50psf pm by end-2008, a further increase of 7.9%. CCT is well positioned to benefit from positive rental reversion as 56.9% of its leases for office space are up for renewal in 2008 and 2009, when supply coming on stream is fairly limited.
54% of office space at 6 Battery Road is up for renewal in 2008 and 2009. We understand that Standard Chartered has renewed leases for 130,000sf at average rate of S$14.95psf pm for three years in Jan 08 compared to previous rate of S$7.00psf pm. 53% of office space is up for renewal in 2008 at Robinson Point with existing rent at only S$4.00psf pm. 53% of office space is up for renewal in 2009 at Raffles City Tower with existing rent at only S$3.40psf pm. Positive rental reversion from these prime office buildings provides revenue growth of 14.8% in FY08 and 12.4% FY09.
Redevelopment for Market Street Car Park. CCT has secured Outline Planning Permission for the redevelopment of Market Street Car Park into a premium Grade A office tower with estimated net lettable area (NLA) of 680,000sf. Management estimated that the site cost between S$1b to S$1.5b to be redeveloped, depending on the amount of development premium imposed. Construction is likely to commence in late-08/early-09 and completion by 1H2012. The project is likely to be undertaken by a JV with option for CCT to repurchase at a later stage when rentals have stabilised. Sponsor CapitaLand is the most likely JV partner. We believe a 50:50 JV is possible, particularly if the project is developed in phases.
No risk from refinancing. CCT’s current gearing is low at 24% in Dec 07. The company issued S$150m 3-year medium term note with attractive fixed interest rate of 3.05% in Mar 08. This has largely satisfied its funding requirements for refinancing short-term borrowings and the acquisition of Wilkie Edge, a mixed development project at Selegie Road.
CCT plans to expand asset size from current S$5.3b to S$6b by 2009. Potential pipeline of acquisitions from sponsor CapitaLand includes One George Street with NLA of 448,000sf. There is also latent potential to redevelop Golden Shoe Car Park. CCT provides FY08 distribution yield of 5.12%, a healthy spread of 3.04% over 10-year Singapore government bond yield at 2.08%.
CCT – BT
CCT MTN issues $150m fixed rate notes due 2010
CAPITACOMMERCIAL Trust (CCT) has announced that CCT MTN Pte has issued $150 million of fixed rate notes due in 2010.
CCT MTN is a wholly- owned subsidiary of HSBC Institutional Trust Services (Singapore) Ltd, which in turn is the trustee of CCT.
The notes were issued under the $1 billion multi- currency medium-term note programme established by CCT MTN on Nov 20 last year.
DBS Bank Ltd has been appointed as dealer of the notes.
The notes will mature on March 17, 2010 and will bear a fixed interest rate of 3.05 per cent per annum payable semi-annually in arrears.
CCT MTN will lend the proceeds to HSBC Institutional Trust Services, which will use the funds to refinance short-term borrowings; finance the acquisition of the Wilkie Edge property in the Selegie area as well as asset enhancement works; and for general working capital purposes. After the issuance of the notes, CCT’s gearing will be 26.9 per cent – still one of the lowest amongst Singapore real estate investment trusts (Reits), the statement said.
The Singapore Exchange (SGX) has given in-principle approval for the listing of the notes.
CCT posted distributable income of $32.3 million in last year’s final quarter, an increase of 14.5 per cent from a year ago.
Full-year 2007 distributable income rose 52.7 per cent to $120.4 million on the back of a 54.2 per cent jump in gross revenue to $240.1 million.
The trust also reported $1.3 billion fair value gain on the revaluation of its investment properties, boosting its total asset size to $5.3 billion as at the end of December 2007.
The trust has secured commitments for more than half of the 9,600 sq m office space at Wilkie Edge, ahead of the development’s completion expected in Q4 this year.
SREIT – Kim Eng
REITs Sector
♦ Defensive and high-yielding SREITs in the limelight amid stock market volatility
- REITs offer varying yields and geographical exposure. Attractive yields from industrial REITs, offering spreads over Government bonds of about 4%.
♦ M&A theme in focus
- Strategic review of MMP REIT signals possibility of privatization or M&A, in view of the relatively attractive P/B ratio.
♦ Watch out for retail REITs which have potential strong organic and inorganic growth
- Fraser Centrepoint Trust with several acquisitions from the Sponsor’s pipeline. Likewise for CapitaCommercial Trust and CapitaMall Trust for the strong management and direct benefit from CapitaLand’s capital recycling model.
♦ Inflation-hedged REIT
- Parkway Life REITs has an in-built rental mechanism that is hedged against increases in the consumer price index (CPI)
♦ Hospitality-centric REITs to benefit from higher room rates
- CDL Hospitality Trust (CDLHT) and Ascott REITs are well-positioned to enjoy higher RevPAR, given the rising hotel room rates. CDLHT could be best proxy to Singapore’s hospitality sector.
Tables here
SREITs – BT
MacarthurCook, Cambridge and Allco seen as potential takeover targets
CAMBRIDGE Industrial Trust, MacarthurCook Industrial Reit and Allco Commercial Reit are among potential takeover targets among Singapore real estate investment trusts (S-Reits), says Goldman Sachs in a report this week.
‘We believe that Reits with relatively smaller market caps, fragmented shareholdings or larger shareholders which may be open to exiting their stakes, and relatively high yields compared with sector peers are likely takeover targets,’ the report authored by analyst Leslie Yee said.
The current S-Reit climate, with disparity in distribution yields at which Reits in the same asset class are currently trading on the stock market, provides fertile ground for merger and acquisition (M&A) activities, the bank contends.
‘Hypothetically, a Reit trading at a lower yield that acquires a Reit trading at a higher yield, would be making an accretive acquisition, if the acquirer trades at the same yield post-acquisition,’ it added.
It may be easier for S-Reits to grow by acquiring other Reits as the traditional method of growing – through the acquisition of physical assets – has become more difficult. This is because the slump in S-Reit prices on the stock market has raised their distribution yields, making it harder for them to make yield-accretive acquisitions of properties.
Goldman Sachs said other factors that have brought forward M&A as a theme for the S-Reit space include the prices of certain Reits trading below net asset value, increasing openness of management teams discussing the possibility of M&A, and trade sales.
In mid-February, Macquarie MEAG Prime Reit’s (MMP Reit’s) manager announced a strategic review to enhance value for unitholders following the receipt of unsolicited bids made to Macquarie Real Estate, which holds a 26 per cent interest in MMP Reit.
‘We think this strategic review can lead among others to an outright sale of the Reit or sale of underlying assets on a piecemeal basis. There are precedents among the Australian Reits of acquisitions of entire Reits and piecemeal divestments of their properties. We see either of these actions as among the many ways in which Reits trading below book value can help realise book value,’ Goldman said.
‘We believe that MMP Reit’s efforts could cause shareholders of other Reits trading below NAV to seriously consider how best to unlock value. We note that Reits in mature markets like Australia divest assets on a piecemeal basis to optimise their portfolio, and we do not rule out S-Reits divesting individual assets to reconfigure their portfolios or even pay special dividends,’ it added.
‘Besides Reits’ takeovers, another possibility is the takeover of Reit managers. We note ARA Asset Management has stated it is keen to acquire other Reit managers,’ the report said.
The M&A theme will be positive for S-Reits. For large-cap Reits which trade at relatively low yields, M&A will create another avenue for growth. For smaller Reits trading at relatively high yields, investors should be able to cash in on premiums paid to buy out their respective Reits. ‘We expect the focusing of M&A as a theme by investors to result in narrowing of discounts to RNAV,’ Goldman said.
It also recommends investors to be ‘overweight’ on S-Reits given the defensive nature of these instruments and their relatively high distribution yields.
‘Based on our stress tests, we are comfortable that downside risk to our revised 12-month target prices is capped at about 14 per cent on bear case scenarios which we do not expect to materialise. In a flight to quality environment, we favour well-managed big-cap names, with debt capacity to fund acquisition growth, and which trade at discount to RNAV and show strong near-term organic growth.’
Goldman has upgraded office landlord CapitaCommercial Trust from ‘neutral’ to ‘buy’ and added it to its Conviction List of top ‘buy’ calls. It has also upgraded Ascendas Reit from ‘sell’ to ‘neutral’. The bank also has ‘buy’ recommendations for CDL Hospitality Trusts, K-Reit Asia and Suntec Reit. It has downgraded CapitaMall Trust from ‘buy’ to ‘neutral’, and MMP Reit from ‘neutral’ to ‘sell’.
SREITs – ML
S’pore REITs: High quality dividends and a strong currency
Singapore REITs have high single digit dividend yields that are relatively secure due to long lease tenure, conservative balance sheets and exposure to the property sector’s strong fundamentals.
We also expect the Singapore dollar to appreciate by as much as 5% this year.
In sum, this is a safe place to be.
CapitaCommercial Trust (CMIAF; S$2.12; B-1-7) Top pick for office sector, significantly undervalued. High organic growth from rental reversions.
We have a Buy rating on CCT and 12-month price objective to S$2.70/share. Our price objective is based on our DCF valuation derived from 10 years of forecasts. Key assumptions include a risk free rate of 3.0%, an equity risk premium of 5.7% and a beta of 1.0. Risks are a downturn in the economy, higher interest rates, lower than forecast rental and occupancy rates and the possibility that future acquisitions may provide lower-than-expected returns.
Macquaire Meag Prime REIT (MQPRF; S$1.25; B-1-7) Top pick for retail sector. M&A target with near term potential to trade to NAV.
We are setting our price objective with reference to current NAV of S$1.61/share.The NAV is derived from 4% cap rates for Singapore office exposure and 5% cap rates for Singapore retail exposure. Risks are a downturn in the economy, higher interest rates, lower-than-forecast rental and occupancy rates and the possibility that future acquisitions may provide lower than expected returns.
CDL REIT (CEHSF; S$2.33; B-1-7) Top pick for hotel sector. Singapore hotel room rates continue to rise, strong balance sheet.
We have a Buy rating on CDL Hospitality Trusts (CDLT) and a 12 month price objective of S$2.88/share. Our price objective is based on our DCF valuation derived from 10 years of forecasts. Key assumptions include a risk free rate of 3.4%, an equity risk premium of 5.7% and a beta of 1.2. Risks are a downturn in the economy, higher interest rates, lower than forecast rental and occupancy rates and the possibility that future acquisitions may provide lower-than-expected returns.
Cambridge Industrial (XCMBF; S$0.70; B-1-7) Top pick for industrial sector. Most defensive asset class. Long lease expiries support income security.
We have a Buy rating on CREIT and a 12-month price objective of S$0.88/share. Our price objective is based on our DCF valuation derived from 10 years of forecasts. Key assumptions include a risk free rate of 3.0%, an equity risk premium of 5.7% and a beta of 1.0. Risks are a downturn in the Singapore economy, higher interest rates, lower-than-forecast rental and occupancy rates and the possibility that future acquisitions may provide lower-than-expected returns.
First REIT (FESNF; S$0.74; B-1-7) Investors reluctant to take Indonesian risk, yet the Indonesian stock market itself is one of the best
We have a Buy rating on First REIT and a 12 month price objective of S$0.84/share. Our price objective is based on our DCF valuation derived from 10 years of forecasts. Key assumptions include a risk-free rate of 5.5%, an equity risk premium of 7.1%, and a leveraged beta of 0.90. Risks to our price objective are an increase in short-term interest rates which may result in higher interest costs on existing borrowings; increases in long-term interest rates which could impact our DCF valuation due to the assumption of risk-free rates; and a deterioration in economic activity that may impact occupancy and rental growth of assets held within the investment portfolio.