Category: CMT
SREIT – OCBC
3Q09 results preview
Results preview. Four of the S-REITs under our coverage are releasing 3Q CY09 results this week, with the rest following suit in the next two weeks. Ascott Residence Trust (ART) is likely to give a poor YoY showing compared to an exceptional Olympics-driven 3Q08. For Frasers Centrepoint Trust (FCT), we expect QoQ improvements due to greater contributions from Northpoint as asset works wrap up. Our 3Q forecasts for Mapletree Logistics Trust (MLT) are fairly cautious as we expect lower occupancy levels to put a dampener on 2H09 earnings. Dilution from equity fundraising activity drives our estimate of YoY declines in DPU for CapitaCommercial Trust (CCT), CapitaMall Trust (CMT) and MLT.
Focus on occupancy & reversion data… Our primary focus will be on occupancy and rent metrics provided by the various REITs, especially in the industrial and office space. Industrial space occupancy has continued to fall, potentially leading to a moderation in portfolio occupancy at MLT (prev: 98.3%). We expect the rate of decline of achieved office rents at CCT and Suntec REIT to slow versus 1H09. Occupancy at Suntec City Office Towers fell from 96.3% as of March-end to 92.5% as of June-end as tenants redelivered part of previously-leased space. We will be looking for Suntec to at least maintain or improve that level. We will also be looking for evidence of occupancy stabilization at ART – the next challenge will be increasing rates, which requires sustained high occupancy levels.
…and on forward guidance. The tone of manager guidance versus 2Q CY09 is also worth watching. We believe managers are likely to be more optimistic in describing the outlook for the next six months (whether it is calling for stabilization or some sort of recovery depending on the property sub-sector). Guidance provided on capital market activity is also significant. We had previously highlighted FCT, Suntec and MLT as likely candidates for an acquisition/cash call two-for-one in the near-term. At last quarter’s briefing, MLT’s manager indicated interest in third-party acquisitions, provided these buys are coupled with an equity issue to at least maintain (or reduce) current gearing levels. But in October, it walked away from a fund raising proposal. Market skepticism towards cash calls has increased in the past three months in our view, which may affect managers’ position on this issue. We maintain our NEUTRAL stance on the sector, and see continuing opportunities for yield arbitrage. Top picks are ART and FCT.
CMT, CRCT – BT
CapitaMalls IPO set for year-end
FRESH details have emerged on CapitaLand’s plans to list its malls unit, CapitaLand Retail, which were first made public earlier this month.
South-east Asia’s biggest developer will list a stake of 25-30 per cent in its malls unit, to be renamed CapitaMalls Asia, by the year-end, chief executive Liew Mun Leong said yesterday.
Mr Liew, speaking on the sidelines of a conference, said that the listing would follow an extraordinary general meeting (EGM) of CapitaLand shareholders at the end of this month, who need to approve the flotation.
When CapitaLand first announced its plans for the listing, sources said that it could raise at least US$1 billion.
Rising consumer spending and increased presence of malls in countries such as China should mean ‘shopping malls will be the darling of real estate investing’ in Asia, Mr Liew said.
He said that the EGM would be followed by an investor roadshow. — Reuters
CMT – DMG
Fully valued; needs the acquisition push
Raising our target price to S$1.45 from S$1.74. Our DDM-backed target price reflects a lower cost-of-equity assumption of 9.3% (10.2% previously). We reduced our risk free rate assumption by 50bps due to continued low interest rates. CMT will be reporting 3Q09 results on 22 Oct and we expect annualised DPU of 8.39¢, a 41.3% decline over FY08. The decline in DPU is attributed to the rights adjustment. Maintain NEUTRAL. Await entry at S$1.55.
Attention could shift to CapitaMall Asia (CMA). The potential listing of CMA as an alternative Asian retail play could entice major investors. We believe this would be mildly negative on CMT. However, CMT still holds the first right of refusal to CMA’s assets including ION Orchard. We have not factored this into our estimates.
Actively scouting for assets. CMT has articulated its criteria for acquisitions as: 1) initial DPU accretion; 2) scope for asset enhancement; and 3) sustainability of market rents. We understand CMT is particularly keen on third party malls especially those of Pramerica, which could provide a strategic fit with its existing portfolio. Pramerica owns 4 suburban malls in Singapore.
Strong connectivity to boost retail footfalls despite rising competition. Singapore will see an unprecedented increase in retail space of 5.3m sqft by 2011. Out of which, downtown accounts for half of this new supply. Raffles City and Plaza Singapura (~30% of CMT’s rental income) are situated within this zone. We therefore expect higher competition; however this will be mitigated by its excellent connectivity to MRT stations. We are sanguine that the opening of the Circle Line and the two integrated resorts in 2010 will boost shopper traffic.
Maintain NEUTRAL rating. CMT trades at an unattractive 5.2% FY10 yield. While we continue to recognize CMT’s impeccable mall management expertise, valuations for the counter appear rich compared against its historical heyday yield of 5.7%. With a subdued earnings visibility, we view risk-returns on the counter as unfavourable and recommend investors not to accumulate the stock at current levels.
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
CMT, CRCT – BT
Spinoff by CapitaLand: Will Reit units lose out?
CAPITALAND on Monday announced plans to spin off its $20.3 billion retail portfolio into a separate listed entity. While the move by itself just realigns ownership, some key benefits will be derived for CapitaLand.
However, concerns have since been raised about the impact of the move on CapitaLand’s two listed retail property trusts – CapitaMall Trust (CMT) and CapitaRetail China Trust (CRCT). Both trusts might lose out if investor interest switches to the new CapitaMalls Asia (CMA).
CapitaLand, on the other hand, will benefit as it boosts its balance sheet.
CMA’s stakes in the malls under its umbrella have a total net asset value of $5.3 billion. Assuming that CapitaLand chooses to float 20-40 per cent of CMA, conservatively about $1.1 billion to $2.1 billion would be raised. This will increase CapitaLand’s cash position, lower its gearing and allow it to invest and grow its other core business.
‘We view the transaction positively and agree with CapitaLand that the capital raising will enable the group to foster growth in all its businesses – enabling its retail mall division’s growth to be accelerated while simultaneously maintaining relative balanced growth with its other business units,’ said Nomura analyst Tony Darwell.
But is the deal to the disadvantage of CMT’s and CRCT’s minority shareholders and retail investors?
The main issue, analysts said, is that CMA is a pure retail play, just like CMT and CRCT. Institutional investors in particular might want to re-allocate their funds.
‘Some of them might choose to transfer their shareholdings into CMA,’ observed an analyst at a brokerage here.
CapitaLand on Monday pointed out that CMA, which will undertake the development of properties, is a different kind of entity from the two real estate investment trusts (Reits), whose attraction is stable rental income from completed properties. About one-third of the malls under CMA are still under development.
However, institutional investors in search of an Asia-focused pure retail play might want to go with just CMA, which is larger with some 86 malls in its portfolio (compared to CMT’s 14 retail assets and CRCT’s eight). It is also more geographically diversified and comes with stakes in both CMT and CRCT. And CMA, backed by South-east Asia’s largest property group CapitaLand, is by no means a risky play either.
Investors of both Reits reacted to the news on Tuesday by sending CMT down 4.4 per cent and CRCT down 1.7 per cent. CRCT recovered one cent, or 0.9 per cent, to close at $1.18 yesterday, while CMT closed unchanged at $1.74.
So can minority shareholders and retail investors switch to CMA now if they wish? It’s debatable. CMT and CRCT are trading above their stock prices seen on March 6 this year, which is arguably when the current recovery in stock prices began. Then, CMT closed at $1.08, while CRCT closed at 60 cents, according to data from Bloomberg. So an exit from the Reits and an investment in CMA is possible – if one bought into those Reits during the downturn.
However, minority shareholders and retail investors who bought into both or either Reit near the boom period, when prices were substantially higher, cannot make an exit without booking losses. These investors don’t have the realistic option of making a switch to CMA.
Investors should, however, note that when it comes to day-to-day operations, it looks as if it will be business as usual for CMT and CRCT. The management companies of both Reits will be transferred to CMA, as will the right of first refusal for assets in the pipeline – that is, CMT will have the right of first refusal for CMA’s retail pipeline in Singapore while CRCT will have the right of first refusal for CMA’s retail real estate pipeline in China.