Category: CMT
CMT – DBS
Still going strong
Story: CMT reported a 21% yoy (+4% sequentially) rise in Q2 revenue to $125.6m while net property income of $83.6m was 25% higher than a year ago. Distribution income grew 20% yoy to $58.6m (DPU: 3.52cts) and includes a $1m capital distribution from its stake in CRCT. CMT revalued its portfolio up by $281m (8%) to $6.2b (excl The Atrium), translating to a book NAV of $2.39.
Point: The better results were due to contributions from CapitaRetail Spore and 40% of Raffles City (bought in 2Q07 and 3Q07 respectively) and improved organic performance owing to higher rental rates and AEI initiatives at IMM, Plaza Singapura and Bugis Junction. On the average, leases were renewed at 9.9% higher than preceeding levels. This was partially moderated by a higher interest expense of $22.2m (+36.8% yoy) due to a larger asset base as well as higher cost of funds of 3.5% vs 3.4% a year ago. Looking ahead, organic growth will be
supported by the reversion of 69% of its portfolio income over FY09-10. Rollout of its planned $288m capex, largely from SSC and JEC, should boost bottomline. For The Atrium purchase, which is pending completion, it plans to spend $31m to decant office space and add more retail
area, bringing the overall retail component to 172ksf (48% of NLA) from the present 16k (4%). This will likely raise the yield of the building when completed by 2010.
Relevance: We have lowered our FY08 and FY09 DPU to 14.4cts and 15.3cts to adjust for higher funding costs. Correspondingly, DCF-backed price target is lowered to $3.55 to reflect a higher risk free rate and lower terminal growth rate to 1%. CMT is currently trading at FY08 and FY09 yields of 4.7% and 5% and offers potential upside of 16% to its price target. We continue to like CMT for its multi-pronged growth strategies with drivers from both organic and acquisition fronts, that would help maintain its pole position in the retail S-reit space. Maintain Buy.
CMT – CIMB
Not time yet
• First and largest S-REIT. Listed on the Singapore Exchange in 2002, CMT is the largest REIT in Singapore, and the only REIT to be tracked by the STI. CMT has 13 retail assets under management with a value of S$5.8bn as at Mar 08.
• Balanced portfolio of suburban and prime retail assets. CMT’s portfolio of retail properties are spread across Singapore, balanced between suburban and prime assets and located close to major transportation nodes, with ready population catchments.
• Market leader in retail management. CMT is the market leader in retail management from its continuous asset-enhancement efforts and reconfiguration of malls since listing.
• Asset enhancements and acquisitions to drive growth. CMT is poised for growth via asset enhancements and acquisitions, supported by its parent CapitaLand. We expect CMT to acquire S$2.9bn of properties over 2008-11.
• Initiate with Neutral and DDM-derived target price of S$3.64. We have a target price of S$3.64, using DDM valuation (discount rate 9.7%, terminal growth rate 5%). This offers a total prospective return of 23.8% from potential price upside of 19.3% and a forward yield of 4.5%. We like CMT for its strong management, quality portfolio and high credit rating. However, the relatively pricey acquisition of Atrium@Orchard, with its moderate rental reversions from a
high base, could weigh on its share price in the near term.
CMT – UOBKH
Better Value After Share Price Correction
CapitaMall Trust (CMT) has corrected by 7.4% the two days after we downgraded our recommendation from BUY to HOLD. The correction has brought valuation to a more realistic level.
Value creation through asset enhancement initiative. CMT is expected to complete the acquisition of The Atrium in Aug 08. The Atrium will be amalgamated with Plaza Singapura to create an integrated development with 170m of prime retail frontage along Orchard Road and net lettable area (NLA) of over 900,000sf. State land between the two buildings will be covered by shelters to create an open plaza. The asset enhancement initiative (AEI) will also improve traffic flows from the Dhoby Ghaut MRT station.
About 100,000sf of prime retail NLA on Levels 1 and 2 of The Atrium will be created by decanting lower-yielding spaces. Management plans to use some of the additional retail space for duplex flagship stores fronting Orchard Road. Renovation works will be carried out in phases from 2009 to 2010. We have estimated construction cost at S$400psf and have factored in contribution from the new retail space starting 3Q10.
Upgrade to BUY. CMT owns and operates 13 retail malls strategically located in suburban areas and downtown core. It is the largest retail REIT in Singapore with a market share of 13% for private retail stock. CMT has revised its local target asset size from S$8b to S$9b by 2010. We have raised our target price from S$3.72 to S$3.76 after factoring in contribution from 100,000sf of retail space at The Atrium converted from office space starting 3Q10. Upgraded from HOLD to BUY as the stock provides upside of 13.6%.
SREITs – DB
Returning to a virtuous cycle
Re-rating based on organic growth, acquisitions and availability of funding
We expect the re-rating of Singapore REITs to continue, based on: 1) firm trading performance, 2) the availability of funding allowing the return of acquisitions to the sector, and 3) steady physical asset markets. We see a return to a virtuous cycle for the larger REITs, which have demonstrated their ability to raise capital and acquire assets. The valuations for CMT and Suntec REIT are attractive (as CMT has been weak since the Atrium acquisition, and Suntec has lagged its peers).
Better-than-expected 1Q08 earnings; reversion cycle supportive
The REITs delivered 1Q08 DPU growth ahead of expectations (avg 19.1% YoY), based on reversionary rental growth and full occupancy rates. The near-term outlook remains positive, as office and industrial passing rents still trail market rents and retail rents are firming up due to asset enhancements and the entry of new retailers.
Raising capital, a pick-up in acquisitions; majors gaining market share
Singapore REITs have announced S$2.9bn of acquisitions YTD as activity from opportunistic funds have slowed. AREIT’s acquisitions have gained momentum at the expense of competitors who face funding constraints. The REITs have been able to raise funds for acquisitions and debt refinancing, and the completion of KREIT’s S$552m rights issue helps to address concerns over refinancing. Funding costs have been largely contained, as declining swap rates offset a rise in spreads.
Physical market steady as REITs and core funds stepped up to acquire
More than 2/3 of the REITs are trading below book NAV. Recent investment transactions, such as 71 Robinson (S$3,125psf), One George Street (S$2,600psf), and the Serangoon White Site (est. breakeven S$2,000psf), suggest firm asset pricing due to REITs and core funds being more active. Book NAVs for commercial REITs are typically conservative and are at discounts to recent open market transactions.
Focus on large, quality names; smaller REITs likely takeout plays
Yield spreads remain well above average at yields of 5.0% for CY07 and 6.1% for CY08E, representing a 342bps spread over the 10-year gov’t bond and avg. 9.1% discount to book NAV. Inflows into real estate funds have improved in recent weeks, supporting global REIT markets. We prefer the larger REITs which are able to deliver organic growth, mobilize funding, and potentially gain market share. We view the smaller REITs as likely takeover targets if deep NAV discounts persist.
Top picks for REIT sector: CMT, Suntec REIT and AREIT
CMT is attractive after the pullback following the CB issue for the Atrium deal. We believe that CMT has the right platform to extract value and synergies from that asset. Suntec REIT continues to benefit from robust demand in both the office and retail segments. We also like AREIT for its leverage on the rising business park segment. Risks include any protracted economic slowdown affecting demand, further deterioration in credit markets, and inability to refinance.
CMT – UOBKH
On An Acquisition Spree
CapitaMall Trust (CMT) has entered into a sale and purchase agreement with the Singapore government to acquire The Atrium@Orchard at S$839.8m, or S$2,249psf. The Atrium comprises two Grade A office towers of seven and 10 storeys with ground floor retail space. It is zoned as a commercial development. It is located above the Dhoby Ghaut MRT interchange station and adjacent to Plaza Singapura, which is part of CMT’s portfolio. Dhoby Ghaut MRT station is served by the North South Line, North East Line and Circle Line (ready in 2010). The acquisition is expected to be completed by end-Aug 08.
High gearing a concern. CMT has grown its asset size from S$6.0b to S$6.9b via this acquisition and has revised its local target asset size from S$8b to S$9b by 2010. Gearing has increased from 35.3% to 45.0%. Management appears eager to move on to acquire Clarke Quay (NLA: 262,230sf) and Orchard Ion (NLA: 660,000sf). CapitaLand is likely to monetise its investment in Orchard Ion once it is able to demonstrate stability of rental income. The injection of the two abovementioned assets will likely put a strain on CMT’s financial resources as the aggregate price tag exceeds S$3b.
We have revised our 2009 DPU forecast by 5.1% to 16.5 cents. We have factored in contribution from The Atrium as an office building and the impact of positive rental reversion. We are unable to assess the impact of asset enhancement initiative as management did not provide guidance on construction costs. The conversion of office space into retail space may require government approval.
CMT provides 2009 distribution yield of 4.71%. We have fine-tuned our dividend discount model to reflect the risk of more fund-raising exercises for the pipeline of acquisitions when both the equity and debt markets are fairly weak. Our new fair price is S$3.72. Downgrade from BUY to HOLD due to limited upside. Our entry price is S$3.10, which provides upside of 20%.