Category: CDL H-Trust
SREITs – BT
Reits likely to see more drops in asset values
Prices of retail and industrial Reits have yet to reflect risks, says Nomura
REAL estate investment trusts (Reits) are likely to experience more drops in asset values and negative rental reversions, according to Nomura Singapore.
Furthermore, the research house believes that prices of retail and industrial Reits have yet to reflect these risks.
‘With asset values likely to see further downward adjustments, the fact that retail and industrial Reits are now trading near to or at premiums to book value appears somewhat inconsistent with property market trends,’ wrote analysts Tony Darwell and Sai Min Chow in an Oct 16 report.
Investor interest has returned to Reits in the last few months as the sector largely managed to refinance its loans. The FTSE Real Estate Investment Trust Index has risen by more than 50 per cent since the start of the year.
But Nomura believes that downside risks remain. It estimates that capitalisation rates – a rough measure of properties’ rates of return – have softened by around 25-75 basis points and could drop by another 25-50 basis points.
The outlook for rents also remains weak, Nomura said. And while prices of office Reits reflect the various risks, the same cannot be said of retail and industrial Reits.
‘We see risks being priced into the office sector, though we retain our view that the market has been too complacent in its assessment of the retail and industrial Reit sectors,’ its analysts wrote.
The research house is particularly bearish on CapitaMall Trust (CMT) and Ascendas Reit (A-Reit). CMT gained four cents to close at $1.80 yesterday, while A-Reit lost eight cents to close at $1.86.
DMG & Partners Securities expressed different views in a separate Oct 16 report. It is more pessimistic about the office sector’s prospects, because of the large amount of space coming on-stream.
Landlords in the Raffles Place district ‘will almost certainly be scrambling to put forward highly competitive rates, a scenario that could further dampen the already fragile rental market,’ wrote analyst Jonathan Ng. ‘We believe CapitaCommercial Trust could feel the biggest impact.’
DMG was more sanguine about the hospitality sector’s performance – the integrated resorts could draw more visitors, driving hotel occupancies and pricing powers up.
The house has a ‘buy’ call on CDL Hospitality Trust (CDLHT), and believes that the counter is the ‘best proxy to a multi-year tourism resurgence that will take place next year’.
CDLHT ended trading at $1.56 yesterday, one cent up.
CDL H-Trust – DMG
‘V’ recovery engenders yield compression
Best proxy to a multi-year tourism resurgence. We raise our TP to S$2.15 from S$1.80 on the back of lower cost-of-equity assumption. CDLHT will be reporting 3Q09 results on 30 Oct and we expect annualised DPU of 8.0¢, a 25% decline over FY08. We are sanguine that CDLHT remains the best proxy to a multi-year tourism resurgence that will take place in 2010. CDLHT is our top pick among the large cap S-REIT counters. Price target is based on a 8.5% (9.3% previously) cost-of-equity assumption. Maintain BUY.
Supernormal visitor growth of 30% – a real possibility! 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. Visitors are expected to extend their stay, leading to a 20-35% spike in visitor days in 2010. 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. We believe room demand will immensely overshadow the 16% new supply in 2010.
Stock has outperformed, but still at mid-cycle valuations. We believe 2Q09 reflects the bottom of the earnings cycle for hotel operators, and a ‘V’ recovery will likely transpire beyond 2010, powered by the resurgence in tourism offerings. Despite surging from its S$0.43 March lows, we do not think stock price is fully reflective of the sated impact of the IRs. In the heydays of 2007-08, CDLHT traded at ~5% yield, below the current 7.2% level. We estimate FY10 DPU to spike 35% to 10.8¢, inching above the FY08 levels of 10.6¢.
Euphoric aura could see yields compress to 5%. We believe the stabilising global economy and the twin openings of the IRs will remain as euphoric events in 2010, providing sustained performance for CDLHT’s stock price. We suspect CDLHT could trade towards its heyday yields of 5%, implying a recursive fair value of S$2.15. CDLHT trades at 6.9% FY10 yield, which in our view suggests that the stock has further legs to ride the ‘V’ recovery.
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