Category: Suntec
REITs – DBS
Examining trough valuations
Going for high risk aversion. We re-iterate our view that the S-reit sector has been de-rated sufficiently for the prospects of slowing earnings growth momentum and possibility of capital value write-downs as well as refinancing concerns. The sector is trading at 7.6% FY08 yield or a 450bps above the current Singapore 10-year bond yield and a hefty 3.7% pt ahead of our projected peak bond yield of 3.9%. The 0.94x P/RNAV already reflects an average 20% cut in capital values across all property sub-segments. S-reits are also trading between 3.5-12% implied cap rates, as investors priced in a bear case scenario.
Office and hospitality sectors may lag: Granted that at this period of higher investor risk aversion, volatile capital value outlook and tight credit conditions, valuations are unlikely to approach previous highs in the short term, we believe that at the current level, much of the anticipated risks are factored in the S-reits lowered valuations. In terms of the various segments, the office and hospitality space poses the most downside risk given the former’s strong correlation to GDP growth and skewed supply/demand dynamics as well as limited earnings visibility in the short-stay accommodation segment.
Go for defensive: While we believe DCF-based measurements are still valid to give investors a longer term total return picture, we are ascribing a discount to these values to derive our price targets given current uncertain environment. Our strategy would be to prefer the more defensive S-reits, particularly those in the healthcare, industrial and retail space. Our top picks are Parkway Life Reit, which offers a highly defensive earnings model with minimal earnings downside risks and exposure into the growing aging population. While stock liquidity may be an issue, we believe this can likely be addressed progressively in the long term. Amongst the larger cap names, we maintain our buy rating on A-reit for its long lease expiry profile and CMT, Suntec and FCT as a suburban retail players with a diversified tenant base. Share prices of ART had been bashed down significantly and at the present level, we see value emerging given its steep discount to RNAVs.
Parkway Life Reit (PREIT SP, TP $1.35)
ParkwayLife REIT (PREIT) offers an exposure to the region’s growing need for healthcare facilities due to an aging population. It is currently trading at 0.8x of book NAV and offers a net dividend yield of 6.4% for FY08F and 6.8% for FY09F. Earnings downside risk is negligible thanks to its revenue model that is based on the higher of i) base rental of S$30m plus 3.8% of the adjusted hospital revenue; or, (ii) preceding year’s rental multiplied by [1+(1%+CPI of preceding year)]. Our DCF-derived target price of S$1.35 (6.3% WACC, 1% terminal growth) offers potential upside of 29%. In addition, refinancing risk is minimal with a low gearing of
10.2%. Maintain Buy.
CapitaMall Trust (CT SP, TP $2.96)
CMT remains one of our key picks due to its strong operational history with a proven expertise in optimizing asset yields through their various AEI activities. Moving forward, catalyst for growth will derive from I) rental reversion from the expiry of 69% of its portfolio income over FY09-10, ii) planned AEI activities amounting to $288m, largely from SSC and JEC, should boost bottomline in the medium term and iii) The Atrium purchase, which is pending completion, should grow NPI further when plans to re-position the asset is completed in 2010.
Ascendas REIT (AREIT SP, TP $2.33)
We like AREIT for its i) quality portfolio of industrial assets, which are enjoying occupancies in excess of 98%, ii) business and science parks exposure that is expected to remain robust on the back of over-spilling demand from office space crunch in the CBD. This segment makes up 25% of its total portfolio. iii) proven development capability which will are higher yielding compared to asset purchases. In this aspect, AREIT has S$309m worth of development assets in the pipeline. Iii) financial flexibility, AREIT management has adopted a prudent capital management strategy which is reflected in its gearing of 38.2%.
Frasers Centerpoint Trust (FCT SP, TP S$1.26)
Frasers Centerpoint Trust (FCT) offers exposure to Singapore’s suburban retail sector through its 3 sub-urban retail malls located in major population catchment areas in Singapore. Earnings should remain resilient given that it derives mainly from non-discretionary spending. In terms of portfolio growth, acquisition of Northpoint II scheduled to TOP by by 08/early 09 kickstarts its portfolio growth plans with other properties such as Yew Tee Mall and Bedok Mall to follow suit in 1H09 and 2010/11 respectively. FCT is expected to tap debt and capital markets for these purchases.
Suntec Reit (SUN SP, TP $1.55)
Suntec Reit offers investors exposure to a more defensive business model of office and retail assets through its portfolio of 1.9msf NLA. DPU growth over the next 2 years is derived from office lease reversions and higher retail rents. Plans to enhance Park Mall and add 67000sf of GFA could provide further upside to our projections in the medium term. Refinancing concerns have been largely allayed by putting in place a $420m club loan. Our price target offers total return of 15%.
Ascott Residence Trust (ART SP, TP S$0.94)
Ascott Residence Trust (ART), as the first Serviced Residence REIT, offers exposure to the Asean booming serviced residence industry. We believe ART presents the least earnings risks amongst the hospitality peers with a regional portfolio exposure that reduces country specific risks. In addition, its average portfolio lease of 8 months should delay an impact of a downside in spot rates. In addition, potential acquisition
Link – Table
Suntec – OCBC
Moderating our office outlook
Buys more strata space. Suntec REIT (Suntec) has acquired another 3498.3 square feet (sf) of strata-titled office space in Suntec City Office Tower One for about S$7.7m. This works out to a price of about S$2201.1 psf, in line with earlier transactions this year. The buy was funded with the proceeds from a Nov 2006 private placement earmarked for this purpose. With this latest buy, Suntec has now acquired about 61,538 sf of stratatitled office space in Suntec City. With almost 1m sf of third-party owned strata space remaining and more than S$66m in unused proceeds, we expect Suntec to continue making opportunistic buys going forward.
Office rentals facing macro headwinds… We continue to expect office rentals to peak by year end but now further moderate our outlook beyond 2008. The office sector is facing some formidable macro threats: a deteriorating economy at home and abroad; slowing GDP growth; and the continuing credit crunch. The rationale for office space growth in Singapore hinged on the expansion of the financial services sector. However, global banks are now likely to slow investment in a bid to control costs because of difficulties back home. Meanwhile, new supply continues as planned – about 10.2m sf of new space will be coming on-stream between 2008 and 2012. We believe this demand-supply mismatch will put downward pressure on rentals. We have priced in a 36% fall in office rentals from current levels by 2011 (versus a 20% decline previously). We think this is a fair base case.
… but Suntec buffered by tailwinds. We still think Suntec is defensively positioned – average monthly office rents at Suntec City Office of S$6.30 psf are a whopping 48-58% below recently secured leases at S$12-15 psf pm. Meanwhile, about 46% of Suntec’s office portfolio ex-One Raffles Quay is up for renewal over 4Q08 and FY09. With such a huge value gap, we expect reversionary growth to provide a cushion even in the face of rental declines. Also in the REIT’s favor is its relatively strong balance sheet with no near-term debt expiry and the strength of its core asset, which will benefit from the revitalization of the Marina area and the completion of the Circle Line. With our revised outlook, we adjust our fair value estimate down 10% to S$1.53 from S$1.71 previously. This gives investors a total return of about 12%. Maintain BUY.
Suntec – OCBC
Yet another strong quarter
Strong quarter, once again. Suntec REIT (Suntec) reported S$42m in 3Q distributable income, up 40.2% YoY and 11.8% QoQ. The REIT performed well on a QoQ basis – it recorded S$59.2m in gross revenue from its portfolio ex-One Raffles Quay (ORQ), up 5.8% from 2Q. NPI margin, which increased from 76.1% in 2Q to 77.6%, should actually have dipped slightly if not for a much lower provision for property tax in 3Q. Suntec will pay out 2.793 S cents to investors, up 10.9% from last quarter’s 2.52 S cents payout. This works out to an annualized yield of about 7.3%.
Portfolio is doing well. Gross revenue from Suntec City (both office and mall) rose 6.4% QoQ to S$51.3m, despite a slight dip in occupancy levels. The Park Mall and Chijmes assets also saw QoQ increases in revenue. Meanwhile, with 100% occupancy and no near-term expiries, contribution from ORQ (in the form of income support from the vendor; interest income; and dividend income) was relatively flat QoQ. These leases are at rates severely below market rates and reversionary growth from ORQ should start gaining traction in FY11.
Rent reversions still the focal point. Reversionary growth continued to drive Suntec’s performance in 3Q as the trust digested lease renewals and replacements secured on about 14% of its total portfolio NLA over 2Q and 3Q. Rentals are continuing to show strength at both Suntec’s office and retail properties – management disclosed that a recent lease at Suntec City’s Office Towers was secured in June at around S$15 psf/month – a first for the REIT. Suntec City Mall also saw a new high with committed average passing rent crossing S$11 psf/month for the first time.
We expect more reversionary growth. We believe near-term growth will be driven by rent reversions – about 46% of Suntec’s office portfolio ex- ORQ is up for renewal over 4Q08 and FY09. Current rentals being secured by the REIT are between S$12 and S$15 psf per month – we expect office rentals to peak by year end and hold – and even if rents slide back a little, there is still plenty of upside potential for its properties earning less than S$6 psf/month. The weak appetite for S-REITs has gifted investors with a great yield opportunity – we continue to like Suntec for its assets, its consistently strong performance, and its high distribution yield. We reiterate our BUY rating and S$1.71 fair value estimate.
Suntec – DBS
Still trending up
Story: Suntec Reit reported a Q3 bottomline growth of 40% yoy and 9% qoq to $42m on a 27% improvement in topline to $59.2m. The better showing was due to higher operating performance, lower expense ratio of 22.5% and inclusion of associate income from ORQ. Q3 DPU came in at 2.793cts, translating to an annualized yield of 7.3%.
Point: Rental reversions from Suntec Office remained strong. The group renewed about 89,000sf of NLA during the quarter at between $12-15psf, higher than the $11.50-13.50psf transacted in 2Q. This helped lift average portfolio office rents to $6.30psf/mth. Looking forward, we believe the pace of office rental growth should decelerate given the softer economic outlook and increasing supply. Nevertheless, with another 644,789sf (45.8%) of NLA to be renewed in 4QFY08 and FY09, Suntec is well placed to benefit from the wide spreads between the passing and new office rents. The retail component also did well with average rents at Suntec Mall surpassing $11psf/mth, or c15% over previous levels. Plans for Park Mall asset enhancement activities are likely to be announced by end FY08. This is likely to provide further
upside surprise to earnings when completed. Refinancing concerns have abated as the group recently completed a $400m debt refinancing due Oct 08, through a club loan. Beyond this, it has a further $125m (MTN programme) due in FY09 and $700m (CMBS issue) maturing in FY10.
Relevance: We have tweaked our FY08 and FY09 DPU to 9.0cts and 10.2cts to adjust for the better than expected office rentals. The stock is offering 5.9% and 6.7% FY08/09 yields. Maintain Buy with a DCF-backed price target of $1.75, reflecting a higher risk free rate
assumption of 3.9% and lower terminal growth of 0.5%.
Suntec – UOBKH
3QFY08: Record distribution with boost from office portfolio
Suntec REIT reported gross revenue of S$59.2m in 3QFY08, an increase of 26.9% yoy. It benefited from positive rental reversion from office space at Suntec City and Park Mall. Revenue contribution from office space increased 41% yoy to S$25.2m. Suntec Office Towers achieved committed occupancy of 99.5% in Jun 08. New leases were signed at between S$12 to S$15psf pm compared to S$11.50 to S$13.50psf pm last quarter. One Raffles Quay (ORQ) provided earnings contribution of S$11.9m. Revenue from retail space increased 18.2% yoy to S$34m. 79,439sf of retail space was renewed at Suntec City Mall at 14.8% above preceding rental rates.
Distributable income gained 40.2% yoy to S$42m. Suntec REIT announced record DPU of 2.793 cents for 3QFY08, an increase of 24.9% yoy.
Benefitting from improved connectivity to Suntec City. Accessibility to Suntec City will improve as it will be served by the Esplanade and Promenade MRT stations when the new Circle line is ready in 2010. Suntec REIT will also benefit from increased MICE (meetings, incentive travel, conventions and exhibitions) activities due to increased shopper traffic at Suntec City Mall, which is linked to Suntec Singapore International Convention and Exhibition Centre.
No refinancing risk. Suntec REIT has refinanced bridging loan of S$400m due in Oct 08 with a 3-year unsecured loan facility from a panel of banks. According to management, the interest rate for the new loan facility is slightly lower than current average cost of borrowings of 3.36%. Having completed the refinancing for outstanding bridging loan related to the acquisition of ORQ, Suntec REIT does not have any major requirement for refinancing in FY08 and FY09.
Reiterate BUY. Suntec REIT has a balanced portfolio of quality retail and office properties. Suntec REIT provides FY09 distribution yield of 7.4%, an attractive spread of 4% over the 10-year Singapore government bond yield at 3.4%. We have increased our target price from S$1.90 to S$2.10 based on dividend discount model (required rate of return: 8.5%, terminal growth: 2.8%) as we roll over to FY09 financial performance.