Category: CCT
REITs – UOBKH
We compare Singapore REITs (S-REITs) with other Asian REITs to source for its comparative attractiveness.
Falling yield premiums. We observe that yield premiums across Asia has generally fallen. However, as we note that investors are not just looking for yields but also higher capital gains, mentioned in our last ‘Office REITs – Season For Picking’ report, Singapore still looks attractive in terms of risk-returns. Yield premiums of Malaysia REITs (M-REITs) have negated, while that of Japan REITs (J-REITs) looks relatively attractive at 0.96% considering that it is a matured market. S-REITs are currently trading at a yield premium of 0.35%. It is also interesting to note that HK-REITs have a very high average ROE of 10.1% while PB is only 0.95.
S-REITs still look attractive in terms of PB vs ROE. Compared to its Asian REITs market peers S-REITs still looks attractive in terms of its price-to-book vs its ROE, especially so as S-REITs consists of high quality REITs. Amongst the S-REITs, we like CCT (Target price: S$3.72), K-REIT (Target price: S$3.39), and A-REIT (Target price: S$3.13).
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CCT – OCBC
CCT’s associate grows. CapitaCommercial Trust’s (CCT) 30% Malaysian associate Quill Capita Trust (QCT) recently announced its intention to acquire 2 properties in Kuala Lumpur for RM215m. This would be QCT’s first acquisition post IPO and is in line with its growth strategy to double its asset size to RM 560m by end 2007. The acquisition is to be equity funded and CCT intends to subscribe to its allocation to maintain its proportionate stake in QCT, and the amount is small at under S$30m. More importantly, with its gearing standing at 32% and an investment portfolio value of about S$3.8bn, its balance sheet is well able to support additional debt of over S$500m.
Divestment gains. One of the assets that QCT is buying is Wisma Technip, which CCT has an interest via its 100% investment in its junior bonds. The acquisition price of RM125m will result in CCT recognizing a divestment gain of RM4.4m (about S$2.0m). As completion is in 4Q07, we will adjust our forecast upon the release of CCT’s 1H07 results expected in late July.
Asset enhancement at Raffles City. Presently, the key development is the asset enhancement works (AEW) at Raffles City. CCT intends to decant space currently used for mechanical and engineering equipment. This will release about 41,000 sq ft of space for retail use. It will be spread over 3 levels and will encompass building a 3-storey island podium. The estimated cost is S$56m and funding will be via debt. As stated previously, we see no issues with respect to debt funding. Construction has started and completion is expected by end 2007. The estimated bottom-line accretion from this AEW is about S$2.7m, or a DPU of 0.20 cent.
Maintain HOLD. In light of the development and the expected rapid growth of QCT, we are including QCT’s market capitalization into CCT’s valuation. Presently, the effect is small at about S$0.04/CCT unit. However, depending on how the REIT sector pans out in Malaysia, QCT’s valuation to CCT could be meaningful in the future. More significantly is the expected asset size growth for CCT, and management has guided on S$5-6.0bn by 2009. We see this as achievable with the positive outlook for the office sector. Our valuation has an asset target size of $5.5bn. Finally with the inclusion of QCT, our fair value estimate is revised up from S$2.58 to S$2.62. We maintain HOLD rating.
CCT – UOBKH
More Than An Office Play
With the largest portfolio of prime office properties in Singapore, CapitaCommercial Trust (CCT) has the highest exposure to the Singapore office segment. Its portfolio also consists of office and business park properties in Malaysia through a 30% stake in Quill Capital Trust (QCT) and a 7.4% stake in Malaysian Commercial Development Fund.
Strong rental reversions to drive DPU. CCT will benefit from substantial office lease renewals in the next few years. 70.8% of its portfolio comprises office assets. Of these, 74.6% will see their leases expire between now and FY09. We expect strong positive rental reversions to drive its DPU. Asking rents for 6 Battery Road is already at a high of S$17.5 psf pm, and that the momentum will last well into FY09.
Retail yields to improve from Raffles City asset enhancement. CCT will begin its RCS phase 1 AEI works in 2Q07, which are scheduled for completion by 4Q07. This will add 41,000 sf (+12%) of net lettable area (NLA) and increase net property income (NPI) by S$7.0m p.a. following an increase in average rentals from S$14.55 psf pm to S$15.05 psf pm. Phases 2 and 3 will add another 0.15m-0.2m sf of NLA with the creation of retail space at Basement 2 and 3, with direct access to City Hall MRT station and the new Esplanade MRT station. Estimated net increase in monthly rents for the increased retail NLA is S$10.00-15.00 psf, contributing to a net increase in NPI of S$12.6m-25.2m and yielding an ROI of 20-29%.
Aggressive acquisition trail not without risks. CCT will likely stay focused on office as it targets to grow its asset size to S$5.0b-6.0b by FY09, with QCT as its preferred vehicle for exposure to Malaysia. QCT intends to double its portfolio to RM500m from RM276m by end-07 with the injection of four new assets. Key risk, however, arises from the difficulty of acquiring yield-accretive office assets amid keen competition going after high capital values, which results in lower yields. This could be the fundamental reason for CCT to look to China for potential acquisitions. Also, CCT’s unsuccessful offer for Temasek Tower may suggest limited leverage on its parent CapitaLand for potential yield-accretive injections.
Initiate with BUY; target price S$3.72. We initiate coverage of CCT with BUY at a target price of S$3.72, implying a 17.0% upside and a total return of 23.9%. We factor in acquisitions of S$500m-800m p.a. to reach an investment portfolio size of S$5.6b by end-09.
CCT – DBSVickers
Wisma Technip sale. CCT intends to sell Wisma Technip to Quill Capita Trust (“QCT”) for RM125m (S$56.1m) through asset securitisation vehicle Aragorn in which CCT owns 100% of the junior bonds. CCT would gain about S$2m from transaction, expected to complete by 4Q07, pending a funding raising exercise by QCT for the acquisition.
QCT as main channel of growth in Malaysia. While it’s the first asset sale by an S-REIT since its inception, it’s CCT’s strategy to focus on growth in the Malaysian office market through its 30% strategic stake in listed investment vehicle QCT. We believe this is a positive for QCT (Buy, TP RM2.37) which would benefit from growth through acquisitions as Capitaland’s main platform for opportunities in Malaysia and Capitaland’s 28%-owned incubator, Malaysia Commercial Development Fund (MCDF).
Minimal impact, TP S$2.97 unchanged. We like CCT’s platform of growth in Malaysia through QCT, but see a small, albeit positive impact on CCT in the near term. While CCT would primarily remain Singaporecentric, we continue to see organic growth through strong positive rental reversions for CCT’s portfolio. On the acquisitions front, 3rd party acquisitions continue to elude CCT at this point since the HSBC acquisition in 2005, apart from the injection of 60% stake in Raffles City from developer sponsor Capitaland in 2006. With the sale of Wisma Technip, this would reduce distribution income estimates in FY08 by 0.8% with DCF based target price of S$2.97 unchanged. Maintain Hold.
Office REITs – DBS
All-time high for office property. Office asset values continue to heat up, with transacted prices hitting new highs and now past the last peak, driven by property funds active in asset transactions. With the previous high for office assets set by the sale of 7 floors of Prudential Towers by Straits Steamship Land (Keppel Land), a record of S$2,200 psf set in 1996, office capital values have now hit an all-time high with latest sale of 1 Finlayson Green by Hong Leong to UK-based property fund Develica at unit price of S$2,650 psf (S$2,470 assuming full efficiency). This transaction is hot on the heels of the recent sale of Parakou Building at Robinson Road for S$2,013 psf.
Asset revaluation across office REITs set to continue. Along with the latest year-end revaluation, the Singapore office portfolio for S-REITs has been revalued upwards (CCT +10%, Suntec +30%, K-REIT +7.3%, Allco +7%). We expect asset reflation for office S-REITs to continue, with growth in average rents to boost office asset appraisals.
Boom and bane for office Reits. Office REITs are direct beneficiaries of asset reflation from potential upward revaluation based on market comparison of market transactions. However, with the current bullish outlook for Singapore office rentals, price expectations of asset owners have also escalated, compressing physical yields to lower levels (below 3% for the case of the Temasek Tower acquisition by MGPA). Yield accretiveness of acquisitions are reduced, and coupled with strong competition for assets from private property funds with more flexibility and less stringent regulations on investment and access to funds, S-REITs in our view are currently priced out of the market for commercial assets.
Overseas expansion would be a natural course to drive acquisition growth. K-REIT stands out in asset reflation scenario. While we prefer the DCF approach in valuing S-REITs because it takes into account the intrinsic cashflows generation ability of the underlying assets, RNAV approach could also possibly breach the gap, as it factors in asset pricing by market players acquiring assets at capital values pricing in future rental growth prospects. In an asset reflation scenario, K-REIT stands out with potential upside of 93% versus CCT (-2.7%), Suntec (+7.3%) and Allco (+48%). We have BUY recommendation for K-REIT with target price of S$3.70 per unit based on DCF estimates.