Category: CMT
SREIT – DB
Exuberance fades, value endures
Attractive valuations; deep discounts to NAV unsustainable medium term
Recent 4Q results show still firm organic rental growth and resilient income, which should shift focus from slowing acquisitions. With a few exceptions, balance sheets are sound and refinancing risk manageable. Following a 30% decline since mid 2007, 3/4 of the REITs are trading below book (which could drive M&A or capital mgt) and we find valuations compelling at an avg FY08 yield of 6.4% (a 400bps spread above the 10-year gov bond), a level not seen since mid-2003.
Acquisitions not the only DPU growth driver; organic growth still firm
While weak equity markets have made the acquisition growth model difficult, organic growth remains intact as reflected by robust DPU growth in the recent quarter. Passing office rents still lag market rents, retail rents continue to firm, and industrial rents are 40% below the peak. Cash flows are defensive with secured leases (min 3 years) and rental deposits (in the event of tenant default).
Balance sheets resilient, refinancing risk manageable
Average gearing for the sector is 30% with a few exceptions such as K-REIT, MLT, and Allco which have above-average gearing. Refinancing costs have not risen substantially despite weak credit markets as a significant widening of spreads has been offset by 30-110bp decline in swap offer rates. Most REITs can sustain more than 15% decline in asset values without breaching the statutory gearing limit.
NAV discounts unsustainable once capital markets stabilise
Equity issuance is likely to be moderate until discounts to NAV narrow, and M&A or value unlocking exercises (REITs have started share buy backs) could help narrow discounts to NAV. Similar to Australia and US, SREITs could be takeover targets if discounts remain. Private equity real estate funds raised US$79bn last year with a US$21.6bn focusing on Asia/ROW. Despite the uncertainty, two S$0.8- 1bn physical market transactions have been completed in the last month.
Valuations attractive – transparency, strong balance sheets a premium
The SREIT index has declined by nearly 30% since June 07, underperforming both the STI and the developers. Valuations are generally attractive at 5.5% FY07 and 6.4% FY08 yield representing a 400bps FY08 spread on the LT bond and 12% average discount to NAV. Amid uncertainty over acquisition growth, we focus on REITs with stronger organic growth profiles and/or discounts to NAV, with transparent structures and sound balance sheets without funding risk. REITs which have mismatch in overseas assets and S$ denominated liabilities may face NAV erosion given the appreciation in the S$.
Top picks for REIT sector – CapitaMall Trust, A-REIT and Suntec REIT
We continue to recommend CMT for its strong retail franchise and its track record in extracting value from assets through asset enhancements (even during SARs), A-REIT for its leverage on the rising business & science park and hi-tech industrial segments and Suntec REIT for a high yield and discounts to NAV. Risks: protracted economic slowdown affecting leasing demand, further deterioration in credit markets and the inability to refinance.
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CMT – BT
CMT Q4 income rises to $62m
CAPITAMALL Trust (CMT) yesterday posted distributable income of $62.27 million for the fourth quarter of last year, 19 per cent higher than the preceding corresponding quarter’s $52.33 million. Full-year distributable income rose 24.7 per cent to $211.19 million.
And the trust’s manager is forecasting a 9.5 per cent growth in distributable income for this year to $231.3 million.
The trust committed $168.6 million total capital expenditure for asset enhancements across eight retail properties last year, and is projecting further capex of $153.2 million this year and $112.3 million next year.
The higher distributable income for the year ended Dec 31, 2007, was on the back of a 30.2 per cent increase in gross revenue to $431.86 million – due mainly to a full-year’s contribution from CMT’s 40 per cent stake in Raffles City acquired on Sept 1, 2006, as well as contributions from the three malls in the CapitaRetail Singapore portfolio. Other malls also accounted for higher revenue due mainly to new and renewed leases at higher rates as well as higher revenue from major asset enhancement initiatives at IMM Building.
As CMT completed an equity fund raising exercise on Nov 6 last year, its latest payout to unit holders will be for the period of Nov 7 to Dec 31 of 2007. The distribution per unit (DPU) of 2.34 cents works out to an annualised figure of 15.53 cents, translating to a 5.8 per cent distribution yield based on CMT’s closing price of $2.66 yesterday.
The counter ended one cent higher yesterday after plunging to a 52-week low of $2.50 in early morning trade. CMT’s unit price has lost 38.4 per cent from its 52-week high of $4.32 reached in May last year on the back of the stock market slide. Nonetheless, since its inception in 2002, CMT has achieved an average annual DPU growth of 12.8 per cent.
CMT’s portfolio valuation increased $200 million within eight months to $5.8 billion, resulting in net asset value per unit rising from $1.87 as at Dec 31, 2006 to $2.21 as at Dec 31, 2007.
‘Going forward, with a a strong capital structure and relatively low gearing of 34.7 per cent, we are well-positioned to capture yield-accretive opportunities presented in the market and are on track to achieve our local target asset size of $8 billion by 2010,’ said CapitaMall Trust Management Ltd’s CEO Pua Seck Guan.
The $8 billion target size is based on a secured pipeline of malls in parent CapitaLand’s portfolio – ION Orchard (50 per cent stake), Clarke Quay and the mall in the one north precinct.
Mr Pua is also optimistic about growth prospects for Singapore retail rents, pointing out that unlike residential and office rents, they have yet to surpass the last high in 1996/1997.
As well, prime Singapore retail rents are about 20-30 per cent of New York’s and 40-50 per cent of Hong Kong’s.
New attractions like the Integrated Resorts and F1, as well as population growth have been resulting in an influx of new international retailers into Singapore, which will provide depth to the local retail market, he noted.
CMTML’s 13.90-cent DPU forecast for full-year 2008 compares with 13.34 cents for full-year 2007.
CMT – DBS
Stability amid turmoil
Comment on Results
• CMT reported FY07 results in line with estimates. Revenue and NPI grew by 30.2% and 32.2% y-o-y to S$431.9m and S$287.8m respectively. This was mainly due to full
contributions from the Raffles City acquisition as well as buyback of CRS assets from 1 June 07. As an indication of organic growth, comparison of 4Q06 asset base into 4Q07 reflects revenue increase of 5.2%.
• FY07 DPU of 13.34 cents was registered, translating to 5% yield. This includes S$4.6m capital
distribution which was previously retained in 1Q07 to manage cashflows for AEI initiatives.
• CMT’s gearing has reached 34%. Interest cover remains healthy at 5.3x, and average cost of debt remains stable at 3.2%.
Recommendation
• Despite strong sponsorship from CapitaLand and consistently delivering value through AEI initiatives which backs our Buy recommendation for CMT; we believe concerns over a lack of
liquidity from debt and equity markets to fund acquisitions (which could lead to possible muted AUM growth) has led to negative sentiment for the S-REIT sector and CMT.
• However with current c.34% leverage, CMT is still able to achieve its targeted S$7bn AUM by 2009 (S$8bn by 2010) by funding acquisitions fully by debt while maintaining leverage levels
around targeted 45%. Sponsor pipeline remains visible with the line of ION Orchard, Clarke Quay and One North assets.
• We derive our DCF-based target price of S$4.05 for CMT after paring down acquisition assumptions.
SREIT – Goldman Sachs
Strong Singapore; initiate coverage of 3 REITs, raise CDLHT to Buy
Looking beyond equity offering indigestion
We think a spate of equity offerings plus expectations of more to come in the Singapore REIT space has caused share prices to retreat. As it has become more expensive for REITs to issue equity, we are reducing our projections of contributions from potential acquisitions. But we note that rents across property segments remain strong and are raising our growth projections for hotels. We think SREITs still offer a compelling proposition of defensive characteristics overlaid with growth, organic and through acquisitions.
Focus on Singapore hotels and retail reits
While equity markets are choppy and sentiment in the Singapore residential market has been dampened by withdrawal of the deferred payment scheme, we believe the strong Singapore structural story remains intact. We like organic growth prospects for office, retail and hotel properties. We favor 1) hotels, given strong near- and longer-term prospects we see; and 2) retail, which we view as underappreciated and where rental growth could surprise on the upside. We like acquisition growth prospects of overseas REITs CRCT and AiTrust, but we think much is priced in and favor Singapore-centric REITs.
Initiating three new REITs, upgrading CDLHT to Buy
We initiate on CapitaRetail China Trust (Sell, TP S$2.18); Ascendas India Trust (Neutral, TP S$1.66); and Macquarie Prime REIT (Neutral, TP S$1.24). We upgrade CDLHT to Buy from Neutral on higher FY08/09 RevPAR yoy growth assumptions. We like CDLHT’s leverage to rising Singapore hotel room rates and potential for acquisition growth regionally and in Singapore, where sponsor City Developments has a pipeline of over 1,800 rooms. We are transferring coverage of AREIT, MLT, CDLHT, and ART from Leslie Yee to Paul Lian.
Adjusting target prices for REITs under coverage; focus on quality
We adjust 12-mo. TPs for 9 currently covered REITs by -8% and +20%. We reiterate our Buys on CMT, Suntec, and K-REIT. CMT and Suntec are exposed to Singapore retail and have size and liquidity, which we like in a flight-to-quality environment. Given the rising number of small-cap REITs of varying quality, we would focus on larger REITs with quality assets, good track records, and strong management. Risks: A fall in business and consumer confidence may impact rental reversions.
CMT – JPMorgan
Safer than houses, plus a better return
• Low-risk stock unfairly penalized: The stock has dropped 15% over the last month, and underperformed the STI by 5% over that timeframe. CapitaMall Trust’s (CMT) S$350million placement raised funds to pay down expensive debt, reducing its gearing to 35%. The placement should remove fears of a funding overhang.
• Asset enhancement value-add to become the most significant growth driver: CMT’s manager is undertaking asset enhancement works on 8 out of the 13 malls in the portfolio, and we anticipate the incremental returns should accelerate DPU growth to a three year CAGR of 9.5% to FY Dec 09E. We have adjusted our DPU estimates for the placement, and set a S$4.00 end Dec 08E target price (based on DDM), implying 25% upside from current levels.
• Market is mis-pricing CMT’s cost of capital: Our valuation sensitivity analysis indicates the market is imputing a cost of equity capital more than 100bps above our 5.96% estimate, as
well as a reduction in long-term growth assumption. The trust has the ability to pass through inflationary pressures having fixed almost all of its cost of debt whilst having the pricing power to raise rents through its asset enhancement and active leasing initiatives.
• Key risks to our price target and rating include management’s inability to execute on asset enhancement initiatives, an unexpected slowdown in retail rental growth, and a sudden change in interest rate expectations.