Category: FCT
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.
FCT – DMG
Hunt for accretive acquisitions
Maintain BUY for its defensive strengths. FCT will be reporting 4QFY09 results on 22 Oct and we expect annualised DPU of 7.07¢, a 3.1% decline over FY08. Since July, FCT has been one of the best S-REIT performers with yields compressing by 100bps. We believe the major reason is that FCT is one of the most defensive plays among other REITs. Apart from its low stock beta (0.7x), FCT’s well-positioned portfolio of suburban retail assets offer a high degree of stability in terms of occupancies and cash flows. Its anchors are primarily dominated by non-discretionary retailers with an eclectic mix concentrated towards F&B and mass-market merchandising. Maintain BUY, TP: S$1.53.
New asset injection will raise AUM by 28%. We believe FCT is actively looking for acquisition opportunities and we expect Northpoint 2 and YewTee Point to be acquired within the next 12 months. We value both assets at ~S$300m, with NPI yields between 5.7-6.1%, above its WACC cost of 5.2%. With the acquisitions, FCT’s AUM will grow by 28% to S$1.4b by end-2010.
FCT has a robust balance sheet with no debt due for refinancing until Jul 2011 when its S$260m CMBS matures. Its S$58m RCF will be paid down using its MTN proceeds, bringing overall gearing to 29.5%. With a current equity cost of 6.2%, we believe acquisitions will likely be funded using both debt and equity. We understand that secured debt has an interest cost of ~3.8%. We estimate a 50:50 equity/debt combination will improve DPU yield by 40-60bp, whilst lifting gearing to only 32.4%.
Expanded AUM may address liquidity and compress yields further. The acquisition of these malls is expected to be accretive and will strengthen FCT’s retail oligopoly status in the northern region of Singapore. With an expanded AUM and equity base, concerns over FCT’s poor stock liquidity will be addressed. We expect a further re-rating on the stock as yields could compress closer to its 5% heyday levels seen in 2006-08. Our TP accounts for the two acquisitions based on the above assumptions. At our TP, FCT trades at 5% FY10 yield, a reasonable peg, in our view. Stock traded at 4.6% during heydays of 2006 and 2007.
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
FCT – DBS
Paving the way for the next quantum leap
• Resilient suburban portfolio
• Two pronged re-rating catalyst from improving size and liquidity to drive growth
• Potential for upside earnings surprise
• Reiterate Buy with TP of $1.25
Resilient portfolio to withstand economic downturn. FCT’s well-positioned portfolio of suburban retail assets, within huge population catchment areas, offers investors DPU and portfolio value resilience in the current moderated economic environment. Rents are still reverting positively with occupancy remaining close to full.
Twin growth drivers. FCT holds significant potential for organic and inorganic growth. Within its current portfolio, enhancement works at Northpoint I has resulted in a 20% hike in average rents, which should impact earnings positively from FY10. New contribution potential from unlocking value at Causeway Point, which should be significant, has not been included into our existing forecast, thus raising the possibility of further earnings upside surprise in the longer run. Planned injection of its pipeline assets; namely Northpoint II and YewTee Point, are expected to expand asset base significantly, in view of the low base effect, while the current lower cost of capital would mean accretive additions even through using equity as currency.
BUY for sustained yields, TP S$1.25. The investment case for FCT lies in its portfolio resilience, good long-term earnings, valuation growth potential and potential rerating from expanding its asset size and improving liquidity and free float. Our target price of $1.25 based on an adjusted WACC of 6.5% and beta of 0.7x offers potential 17% absolute return over the next 12 months.