Category: FCT
SREITs – OCBC
1Q10 results preview
In 1Q10, YoY DPU improvements for most... The majority of the S-REIT universe will report 1Q CY10 results over the next two weeks, with CapitaCommercial Trust (CCT) kicking off the season on 16 Apr. Within our coverage universe, we expect Ascott Residence Trust (ART) to show a YoY improvement in DPU on the back of stronger occupancy rates and RevPAU1 . Based on our estimates, Mapletree Logistics Trust and Frasers Centrepoint Trust (FCT) could also see a YoY pick-up in DPU for the quarter due to a boost from recent acquisitions. FCT’s earnings in the preceding year were also impacted by asset works. CapitaMall Trust may also post a YoY increase in DPU as the REIT retained part of its distributable income in 1Q09. We expect Ascendas REIT to report stable operating performance, with this quarter’s DPU up 2.8% YoY.
…but not all. On the other hand, we expect Suntec REIT to report a YoY decline in DPU due primarily to a larger unit base (roughly 1.8b units now versus 1.6b units a year ago). We also estimate that CCT may record a YoY fall in DPU due to dilution from its 2009 rights issue. Meanwhile the Indonesian Rupiah continues to re-rate strongly (6596 IDR/SGD on average in 1Q10 versus 7701 IDR/SGD in 1Q09). The IDR’s ascent over the hedged rate employed by LMIR Trust could impact YoY DPU performance despite a stronger portfolio that has seen steady improvements in occupancy.
Leaping or waiting? Our primary focus this season is on the tone of manager guidance. REIT managers have been fairly aggressive and opportunistic in 2010 so far, with a sizeable S$1,218m worth of acquisitions announced year-to-date. The equity market was also active with FCT’s S$182.2m placement and the listing of Cache Logistics Trust [NOT RATED], whose S$417.3m IPO was 7.8x subscribed. The question is what happens next – market worries about how the second half of this year pans out have been well-documented and the consensus view is for a rather benign economic recovery. How this corresponds to/deviates from REIT managers’ guidance of individual earnings performance will be important to watch. Additionally, the delicate balance between 2H10 uncertainties and market appetite may prompt REIT managers to launch acquisition/fund raising plans sooner rather than later. How managers lay out acquisition and debt re-financing plans will also be worth tracking, in our view. We maintain our OVERWEIGHT stance on the sector. Top picks are ART and Suntec.
SREITs – DBS
Upside for Industrial REITS
• Room for earnings upgrade for industrial reits
• Hospitality reits to lead earnings growth in 1Q10
• Prefer industrial, retail and hospitality reits
• Top picks – ART, CDL HT, MLT, FCT, AiT
1Q earnings growth driven by economic recovery and acquisitions. We expect Sreits earnings momentum to continue into 1Q10, led by hospitality reits. Hospitality Reits should grow by at least 10% qoq in 1Q10, owing to a secular sector recovery while industrial reits should enjoy sequential mid single digit earnings uplift from new acquisitions. Retail reits are likely to show modest growth on the back of improving retail sales and office reits are likely to see marginal qoq increase, given the previous high base in rents.
Raising our earnings projection for the industrial Sreits. Looking ahead, we see 3 catalysts for Sreits – organic growth, acquisitions and refinancing into current lower interest cost environment. We have raised our earnings estimates for industrial Sreits by 1.5-4% to factor in potential new acquisitions in FY10. On the operating front, the pick up in economic activity has resulted in increased leasing enquiries, particularly for logistics warehouse, light and hi-tech industrial space. Rental hikes in 1H are likely to remain modest, although we anticipate this trend will be more evident in 2H10. Suburban retail rents have benefited from rising retail sales and a nascent recovery in rental pricing power.
Interest burden to reduce on refinancing options. The present window of opportunity for refinancing exercises at competitive rates have brought our attention to the possible uplifting impact of reduced interest burden on earnings. Potential beneficiaries would include reits with debt refinancing due this year and next such as CCT, CMT, Suntec, K-reit and Starhill Global. This has not been factored into our existing forecast.
Going for alpha. Sreits have outperformed developers YTD and are currently trading at DPU yields of 7.4%. Our 12-month price target translates to a projected yield of 6.5%, or 13% upside from here. Our strategy for Sreits would be to look for alpha, given the outperformance to date. We continue to favour the hospitality, retail and industrial segments, that offers the greatest upside based on our price objectives. Our top picks include CDL HT, ART, FCT, Ascendas India and MLT. The risk to our view is the prospect of rising long bond yields, which could drag on share price performance.
Singapore Retail REITS – Daiwa
The laggard stands out
Summary
- The recovery in retail sales has just started to gain pace, while the rental decline from 2Q08 might soon be over, but we believe expectations of a gradual retail-sector recovery have already been discounted fully.
- We have not changed our preference for using the Daiwa RNG valuation method (a finite-life Gordon Growth model) as our primary tool for valuing Singapore real-estate investment trusts (S-REITs), but we have modified this valuation approach slightly to improve the comparability of its results.
- In contrast to its peers, which we see as fully-valued, we believe Starhill Global is a standout on valuations and distribution-per-unit (DPU) yield, even if we ignore the proposed acquisitions in Malaysia. We maintain our 2 (Outperform) rating for Starhill Global, with an RNG valuation-derived six-month target price of S$0.65.
- We have downgraded our rating for Frasers Centrepoint Trust (FCT) to 3 (Hold) from 2 (Outperform), after lowering our RNG valuation-derived six-month target price to S$1.44 (from S$1.54).
- We maintain our 3 (Hold) rating for CapitaMall Trust (CapitaMall), which looks fully-valued (in our opinion) for a dominant market leader that faces low single-digit-percentage DPU growth (based on our revised DPU forecasts) for FY10 and FY11.
FCT – Diawa
Mission accomplished
Rating downgraded to 3 (Hold) from 2 (Outperform)
• We have downgraded our rating for FCT to 3 (Hold) from 2 (Outperform). Trading at a DPU yield of 6.1% on our revised FY10 forecasts, in line with the sector average, and a 12% premium to NAV (as at the end of December 2009), we believe any further unit-price appreciation will be limited for its Singapore suburban retail-mall portfolio at a time when risk premiums for defensiveness could be diminishing.
• For FY11, FCT could possibly acquire the sponsor's 81,000 sq ft Bedok Mall, a suburban mall in the vicinity of the Bedok MRT station, and similar in scale to its two most recent acquisitions, Northpoint 2 and YewTee Point. Due to the uncertainties over valuations, capital-market conditions, and the exact timing of the deal, we have not factored in any contribution from Bedok Mall.
• We have also not made any forecast assumptions for NPI improvements from its next major AEI for Causeway Point, FCT's largest property asset. Considering that Causeway Point's passing rents were just over S$10 psf for FY09, compared with over S$13 psf for Northpoint (after its recent asset enhancement), the NPI accretion from the AEI could be significant.
S$1.44 target, assuming a 5.25% effective cap rate
• We set our FCT target price of S$1.44 at parity to our RNG valuation (a finite-life Gordon Growth model). We have applied an effective cap-rate assumption of 5.25%, compared with the weighted-average cap rate of 5.76% for its portfolio, based on the most recent (September and November 2009) valuations.
FCT – OCBC
Opportunities to create value
Official opening of NP last week. Frasers Centrepoint Trust (FCT)'s recently renovated Northpoint (NP) and recently acquired Northpoint 2 (NP2) were officially opened last week. In recent interviews in connection with the opening, the manager explained that the tenant mix has changed to incorporate more shops targeting youth and more family attractions (the library and new rooftop water playground, for instance)1 . The total NLA of the combined mall is approximately 235k square feet.
Acquisition strategy remains intact. FCT completed the S$290m acquisitions of NP2 and YewTee Point (YP) in Feb. The manager reiterated its intention to focus on the sponsor pipeline in the short to medium term. This includes Bedok Point (construction is 55% completed) and Centrepoint. The acquisition of the latter mall would mark a shift in asset mix away from FCT's current suburban focus. It is unlikely to be acquired in the near term, in our view, as the Somerset micromarket is still in flux with recent news articles reporting new mall Orchard Central is struggling with traffic issues2. The manager also told us that it will look for acquisition opportunities outside Singapore in the medium to long term. FCT currently has an exposure to Malaysia through its 31% stake in Bursa Malaysia-listed Hektar REIT.
Asset enhancement on the cards. FCT's already completed asset works have raised average rent post-enhancement by 41% to S$7.50 per square foot per month for Anchorpoint and by 20% to S$13.20 psf pm for NP (based on guidance). Next on the cards is FCT's biggest mall – Causeway Point (CP), which contributed 63% of 1Q10 revenue. In an interview last week, FCT's new CEO Chew Tuan Chiong said that asset works on CP have a good chance of starting this year3 . We believe the works may not be as income disruptive as NP as the work is likely to be done in stages, but this depends on the enhancement plans proposed by the manager. Revenue will also be supported by contributions from the new acquisitions.
Opportunities to create value. We have adjusted our earnings estimates to reflect the 05 Feb completion of the acquisitions (we had assumed a 01 Apr completion earlier). The acquisitions and the related S$182m private placement have increased portfolio size by 25% to S$1.46b, diversification, and increased free float and potentially also institutional interest. FCT can continue to create value for unitholders through rent increases, asset works and further acquisitions, in our view. Maintain BUY rating and S$1.50 fair value (19% total return).