Category: Suntec
Suntec – OCBC
Bond rate volatility continues
Dilution, yes, but reflected in our estimates. Suntec REIT (Suntec) issued the first of six installments of deferred units last week. These deferred units formed part of the payment for Suntec’s original portfolio at its IPO, allowing Suntec to offer a higher yield at listing. The 34.5m units are not entitled to distributable income from the current quarter but will then be aggregated with Suntec’s existing units. The other five installments will be issued at half-yearly intervals over FY09-10. All in, the 207m shares imply about 14% dilution to unitholders. We emphasize that both our fair value and DPU estimates have always taken this dilution into account.
Bond rate volatility will continue. Last week, the 10-year Singapore government bond (SGB) yield hit 3.94%, a 152 bps spike since our last report on Suntec dated 2 May. Now at 3.6%, such high rates have not been seen since 2006. We expect interest rate volatility to persist as inflation concerns shape central bank policy and the prospects for a US rate hike increase. We also expect spreads to be impacted as credit market woes persist.
Suntec trading below its historical average spread. This month, Suntec has been trading as low as 200 basis points over the 10-year SGB yield. Historically, its average spread over the benchmark has been 269 bps. This has been a tumultuous few months for Suntec – in March this year, it was trading at a 441 bps spread, a record high. It last traded below its historic average in 2007, where at one point Suntec was trading at only 123 bps over the 10-year SGB yield (see Chart 1). Those were far more benevolent circumstances however.
Still worth a look. Suntec had hit S$1.68 since our last report but rising bond rates and a negative trending consensus has driven its price back to S$1.51, or 13% below our S$1.71 fair value. It is currently trading at 249 bps over the 10-year SGB yield. We believe Suntec still merits a look and feel its near-term growth will be driven by rent reversions – about 44% of the office portfolio ex-ORQ is up for renewal in FY09 and significant upside remains for its properties earning less than S$5-S$6 psf pm. We maintain our BUY rating but will continue to monitor the volatility in bond rates and how it plays out.
Suntec – SGX
ISSUE OF 34,500,362 NEW UNITS IN SUNTEC REAL ESTATE INVESTMENT TRUST
The Board of Directors of ARA Trust Management (Suntec) Limited, as manager of Suntec REIT (the “Manager”), wishes to announce that the Manager has today (9 June 2008) issued 34,500,362 units in Suntec REIT (the “New Units”), the first of six instalments of deferred units in part satisfaction of the purchase consideration for Suntec REIT’s initial portfolio of properties.
With this issue of New Units, the total number of units in Suntec REIT (“Units”) in issue is 1,527,998,838. The New Units will commence trading on the Main Board of Singapore Exchange Securities Trading Limited (the “SGX-ST”) at 2.00 p.m. today.
The New Units will be traded under a separate temporary stock counter which will be maintained for the period commencing from today to the last day of “cum-distribution” trading for the current distribution period, which is expected to be in early August 2008. Thereafter, both the New Units and the existing Units will be aggregated and traded under the existing Suntec REIT stock counter on the Main Board of the SGX-ST on the next market day.
The separate temporary stock counter is necessary to differentiate the entitlement of existing Units to the distributable income of Suntec REIT for the period from 1 April 2008 to 30 June 2008 versus the entitlement of the New Units to distributable income of Suntec REIT for the period commencing from today to 30 June 2008, in line with current market practices.
Other than in respect of entitlement to the distributable income of Suntec REIT, the New Units will otherwise rank pari passu in all respects with the existing Units.
Source : SGX
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.
Office REITs – UOBKH
Positive news from MBFC
There are several positive developments for the office market. Just last month, Commerz Real, subsidiary of Germany-based Commerzbank, bought 71 Robinson Road for a record S$743.8m or S$3,125psf. The latest positive news relates to the new downtown and Marina Bay Financial Centre (MBFC).
Office space at MBFC is well taken up. The strength of the office leasing market can be seen from healthy take-ups at MBFC. Phase 1 with 1.6m sf and Phase 2 with 1.3m sf of office space will be completed in 2010 and 2012 respectively. Both phases are more than 50% pre-committed by major financial institutions. Standard Chartered has signed a 12-year lease for 508,300sf at MBFC Tower 1 with an option to extend for another eight years. DBS Bank has signed a 12-year lease for 700,000sf occupying 22 floors at MBFC Tower 3 (Phase 2). Other notable financial institutions include Wellington Investment Management, American Express, Barclays and Pictet.
More leases likely to be signed soon. According to industry sources, Standard Chartered and DBS signed at S$8 to S$10psf pm. This is a discounted rental rate due to the huge space taken and the long duration of lease terms exceeding 10 years. Most other tenants signed at between S$12 to S$15psf pm for 3-year leases. Smaller plots were even signed at S$18psf pm. According to industry source, an additional 15% of space at MBFC is in advance stage of negotiation. We see this as an important development. If successfully closed, this will bring the level of commitment at MBFC above 70%, bringing a boost to confidence in the office market. We estimate MBFC accounts for 34% of office supply coming on stream over the next four years.
CapitaCommercial Trust (BUY/S$2.39/Target: S$2.63)
• CCT is well positioned to benefit from positive rental reversion with 29.4% of its leases for office space up for renewal in 2008 and 2009.
• We estimate that the lease for HSBC Building was renewed at an average rental of S$8.50psf pm in early May, much higher than existing passing rent of S$3.63psf pm.
• CCT is the largest office REIT and provides a diversified exposure to the Singapore office market. It provides FY09 distribution yield of 5.66%.
K-REIT Asia (BUY/S$1.45/Target: S$1.81)
• K-REIT achieved average gross rent increase of 14% qoq to S$6.86psf pm in 1Q08 due to positive rental reversion from existing properties and full-quarter contribution from ORQ. It is well positioned to ride the upswing in office rentals with 24.2% of net lettable area (NLA) due for expiry and another 15.5% of NLA due for rent review in 2008 and 2009.
• K-REIT provides attractive 2009 distribution yield of 6.05%. This assumes that the balance of the bridging loan from Kephinance Investment is refinanced at a steep interest rate of 4.2%.
Suntec REIT (BUY/S$1.64/Target: S$2.10)
• Suntec Office Towers achieved committed occupancy of 100% with recent new leases signed at between S$11.50 and S$13.50psf pm. It is well positioned to benefit from positive rental reversion with 9.5% and 44.1% of its leases for office space up for renewal in 2HFY08 and FY09.
• Suntec REIT provides FY09 distribution yield of 6.16%.
Suntec – OCBC
A solid second quarter
Solid second quarter. Suntec REIT (Suntec) reported a 34.2% YoY increase in 2Q distributable income to S$37.6m. The REIT will pay out 2.5185 cents DPU, up 28.2% YoY and more than 10% higher QoQ. The strong DPU exceeded both Suntec’s own forecasts and our estimates. We have now increased our expectations for full-year DPU by 5% to 9.6 S cents. Our 2H08 and 1H09 estimates together imply an attractive 6.5% distribution yield for the next 12 months.
Growth drivers. The biggest highlight of the story was the significant control on expenses in 2Q. NPI margins increased from 68.8% in 1Q08 to a staggering 76% in 2Q08. This was primarily due to a 47% decline in property taxes QoQ. Revenue, meanwhile, was boosted by the Suntec City office towers. About 152,000 sf of office space came up for renewal in 2Q, and this accounted for the bulk of the total estimated leases up for renewal in FY08. Renewal rates for these spaces rose meteorically from below S$5 psf pm to S$11-13.50 psf pm. The REIT’s office strata shopping spree – it has acquired about 28,000 sf over December and January – added another boost. About 5% of Suntec’s retail portfolio also enjoyed positive rental reversions. One Raffles Quay (ORQ) made its first full-quarter contribution as well, earning S$2m in net profit.
What next? Suntec is nearing peak performance on its current portfolio. Occupancy, its first avenue for organic growth, is maxed out at 99.8% (office) and 99.4% (retail). Growth will be driven by rent reversions – about 44% of the office portfolio ex-ORQ is up for renewal in FY09. We expect office rentals to peak by 1H09 and hold, but there is still significant upside for its properties earning less than S$5 psf pm. ORQ rent reversions will start gaining traction only in FY11. In our view, the next wave of mediumterm growth will be external, including more office strata buybacks in Suntec City and the planned addition to Park Mall.
Compelling yield. While Suntec is consistently outperforming as a business, it is operating in a far more muted S-REIT environment. The property market on the whole remains spooked by questions about the health and prospects of both the local and global economy. This caution and skepticism have filtered down to S-REIT prices, presenting a great yield opportunity. We continue to like Suntec for repeatedly bringing home the bacon with a quality 6.5% yield. Maintain BUY with a S$1.71 fair value.