KeppelREIT – DBSV
Riding through the trough
- 4Q14 DPU declines 23% y-o-y upon divestment of Prudential Tower
- Portfolio reversions of 17% supported by strong expansion in tech, media and telecoms (TMT) sector
- Full contribution from MBFC Phase 2 may not mitigate drop in rental support for OFC
- Maintain HOLD, TP S$1.29
Highlights
Results below due to later-than-expected acquisition completion
- Keppel REIT (K-REIT) reported 4Q14 revenue of S$42m (-11% y-o-y) and NPI of S$34m (-8%), largely attributable to lost income stemming from the divestment of Prudential Tower in 3Q14. DPU of 1.51 Scts was 23% lower y-o-y on the back of a dilution in share base post-placement and a delay in the completion of the MBFC Phase 2 acquisition.
Diversification of tenant base to include more from TMT sector
- K-REIT completed c.450k sqft of lease renewals, with average portfolio reversions of17%. This was driven by strong interest from new-to-market as well as relocating companies in the technology, media and telecommunications (TMT) industry. As a result, new leases signed in the Raffles Place/Marina Bay areas averaged S$12 psf pm.
Outlook
Positive rental outlook for 2015
- Close to 420k sqft of leases will be up for renewal or rent review, representing c.13% of portfolio NLA. We understand that the majority of spaces are located in the Raffles Place and Marina Bay areas, where new office space is not expected to be available until FY16. As such, we believe that these leases will continue to see upward reversions of 10-15%.
OFC income support to be fully drawn down by 1Q15
- According to the Manager, income support for Ocean Financial Centre is anticipated to run out by 1Q15, and we estimate that this will have a 6% impact on DPU.
- While full-year contribution from MBFC Phase 2 will more than cover lost income from the divestment of Prudential Tower, we do not expect additional income to cover the shortfall in rental support. As such, we have forecasted FY15 DPU to decline by 7%.
Valuation
Our target price of S$1.29 is based on the discounted cash flow (DCF) model; as K-REIT generates recurring rental income from its tenants. At its current price, K-REIT offers investors a dividend yield of 5.4% for FY15. We have a HOLD recommendation.
Risks
Interest rate risk
- Any increase in interest rate will result in higher interest payments that the REIT has to make annually to service their loans. This reduces the incomeavailable for distribution, which will result in lower distribution per unit (DPU) for unitholders.
Currency risk
- As income for S-REITs are distributed in Singapore dollars, any income derived in a foreign currency will have to be exchanged into SGD. As K-REIT earns rental income from its Australian assets in AUD, any depreciation in the AUD would result in relatively lower contributions from Australia to K-REIT’s total distributable income.
Economic risk
- A deterioration of the economic outlook could have a negative impact on office rents, which have a strong historical correlation with GDP growth.
CCT – AmFraser
Growth delivered, as expected. CCT’s FY14 results came in within expectations, as full-yearDPU rose by 3.9% YoY to 8.46 cents, led mainly by stronger contributions at Capital Tower and Six Battery Road. While we expect more growth ahead with CapitaGreen (CG) coming online, we believe CCT is fairly-valued and its FY15F DPU yield of 4.6%is relatively uncompelling. Maintain HOLD and TP of S$1.76.
Capitalising well on tight market. CCT’s portfolio occupancy was robust at 96.8% as at 4Q14. Excluding the recently completed CG, its office properties operate at occupancies in excess of 97%. Capital Tower and Six Battery Road saw their revenues increase by 8.8% and 12.8% YoY respectively, offsetting the 5.8% decline at One George Street due to the cessation of its yield protection in July 2013.
CapitaGreen leasing demand beat expectations. As at Dec 2014, CG achieved a commitment rate of 69.3%, exceeding management’s target of 50%. To minimize potential impact when the wave of new Grade A office supply hits the market in 2016, most tenants at CG have been signed on leases longer than three years, with 91% (by gross rental income) of the committed leases expiring only in 2019 and beyond. Management expects CG to contribute meaningfully to Distributable Income only in FY16, as tenants progressively move into the property.
Not if, but when. CCT has a call option to acquire the remaining 60% stake in CG from its JV partners, CapitaLand and Mitsubishi Estate. The option is valid for three years starting from Dec 2014 with the completion of the property and will be priced at market valuation. CCT has debt headroom of S$1.3b assuming 40% gearing, which will cover the cost of the potential acquisition. We reckon that CCT will trigger the option only when the property’s occupancy rate exceeds 95% to minimize the need for income support.
Fairly valued, maintain HOLD. We like CCT’s sound capital management, with a low gearing of 29.3% and 83% of its borrowings are on fixed rates which minimizes uncertainty when interest rates rise. However, valuations are no longer compelling with FY15F DPU yield expected to be merely 4.6%. Our DDMderived TP remains unchanged at S$1.76.
MIT – OCBC
Decent results, but valuations rich
- 3QFY15 DPU up 6.4% YoY\
- Positive rental reversions for renewals
- Leasing environment challenging
3QFY15 results within our expectations
Mapletree Industrial Trust (MIT) reported a decent set of 3QFY15 results which was inline with our expectations. Revenue rose 3.3% YoY to S$78.1m, while DPU growth of 6.4% to 2.67 S cents was underpinned by lower borrowing costs and an improved NPI margin (+1.5 ppt to 74.2%) as a result of lower utilities expenses. For 9MFY15, revenue increased 4.6% to S$234.5m, or 75.3% of our FY15 projection. DPU grew 5.0% to 7.78 S cents and constituted 76.0% of our full-year estimate. Average portfolio occupancy dipped slightly from 91.5% in 2QFY15 to 90.8% in 3QFY15 due to the continued relocation of tenants from the Telok Blangah Cluster (11% occupancy rate). Positive rental reversions of 5.9%, 4.8%, 3.2% and 6.9% were achieved for renewal leases for MIT’s Flatted Factories, Hi-Tech Buildings, Business Park Buildings and StackUp/Ramp-Up Buildings, respectively.
Strong financial position
MIT’s balance sheet remains healthy, with an aggregate leverage ratio of 32.8%, as at 31 Dec 2014 (-0.3 ppt QoQ). Management also increased its interest rate hedge ratio from 77% to 86%, thus putting it in a strong position to weather any possible spikes in interest rates in the foreseeable future.
Maintain HOLD
We are keeping our forecasts intact given this set of in-line results. Looking ahead, we expect the leasing environment to remain challenging due to competitive pressures and the soft macroeconomic landscape. Rental reversions are likely to continue to moderate as the gap between MIT’s passing rents and market rents are narrowing. Maintain HOLD on MIT with an unchanged fair value estimate of S$1.43. MIT’s share price has already risen 6.4% YTD, and the stock is now trading at FY15F P/B ratio of 1.3x, which we deem as rich. This is approximately one standard deviation above its average forward P/B ratio since its IPO.
MLT – OCBC
Drag from lease conversions
- 3QFY15 DPU inched up 1.6% YoY
- Positive rental reversions of 9%
- Outlook still muted
3QFY15 results within expectations
Mapletree Logistics Trust (MLT) reported a mild 1.6% YoY growth in its 3QFY15 DPU to 1.87 S cents on the back of a 6.2% increase in its gross revenue to S$82.9m. Topline growth was driven by contributions from six acquisitions in China, Singapore, Malaysia and Korea, the Mapletree Benoi Logistics Hub redevelopment project, and higher revenue from existing assets in Singapore, Malaysia and Hong Kong. These were partially offset by lower occupancy at several of its newly converted multi-tenanted buildings (MTBs) in Singapore. For 9MFY15, revenue grew 6.4% to S$245.4m and DPU rose 3.5% to 5.65 S cents. The former and latter constituted 74.6% and 74.1% of our FY15 forecasts, respectively. This was within our expectations.
Some pressure on occupancy rates
MLT’s portfolio occupancy eased 0.3 ppt QoQ to 96.9% (as at end 3QFY15), its fifth consecutive quarter of sequential decline. The drag came largely from its Singapore assets, which experienced downtime due to the conversion of single-user assets (SUAs) to MTBs. Management would focus on tenant retention during this challenging period. As at 31 Dec 2014, MLT’s leverage ratio stood at 34.7%, while ~76% of its total debt have been hedged or are on a fixed rate basis.
Headwinds to persist in the near-term
MLT managed to achieve positive average rental reversions of 9% for leases renewed in 3QFY15, but we believe the outlook remains challenging, especially in Singapore. We see headwinds ahead as 16 of its SUAs have leases which are expiring in FY16 (9.5% of NLA and 9%-10% of gross revenue). Approximately half of these leases are expected to be converted into MTBs, which would result in further downtime and pressure on margins and occupancy rates. Management is seeking to mitigate this by exploring acquisition and divestment opportunities, with net gains from divestments to be distributed back to unitholders. Maintain HOLD on MLT, with an unchanged fair value estimate of S$1.12. We believe valuations are rich, with the stock trading at FY15F P/B of 1.3x, following a 4.2% appreciation in its share price YTD
FirstREIT – OCBC
Safe haven amid macro volatility
- 4Q14 DPU +3.6% YoY
- Organic and inorganic growth
- Defensive attributes stand out
4Q14 results matched our expectations
First REIT’s (FREIT) 4Q14 results came in within our expectations. DPU of 2.04 S cents (ex-dividend on 22 Jan) represented a 3.6% YoY increase on the back of a 4.6% growth in gross revenue. The latter was in turn driven by contribution from Siloam Hospitals Purwakarta which was acquired in May 2014 as well as organic growth. For FY14, gross revenue rose 12.0% to S$93.3m, while DPU gained 7.0% to 8.05 S cents. This matched our forecast of S$93.3m and 8.07 S cents, respectively.
Balance sheet healthy; interest rate risks hedged
FREIT’s debt-to-asset ratio stood at a healthy 32.7%, as at 31 Dec 2014. Moreover, ~95% of its debt is currently on a fixed/hedged basis, thus mitigating the impact of fluctuations in interest rates and providing stability to unitholders. FREIT also has no refinancing requirements until 2017.
Structural reforms to enhance FREIT’s operating landscape
Looking ahead, management remains optimistic on the long-term potential of new Indonesian president Joko Widodo’s reform agenda. Hence, Indonesia would continue to be FREIT’s key focal market for future growth. OCBC Treasury Research expects Indonesia’s growth to remain firm and its current account deficit to become less of an issue. We also believe Indonesia’s manageable fiscal deficits, efforts to carry out structural reforms and infrastructure spending boost would enhance the stability and economic viability of the nation, thus leading to lower risks for FREIT. We thus lower our discount rate on FREIT from 8.3% to 7.0%. Rolling forward our valuations, our fair value estimate is bumped up from S$1.18 to S$1.40. We believe FREIT’s solid defensive attributes and minimal exposure to both interest rates and FX volatility make it as a good investment proposition for investors amid the current macro uncertainties. In light of the aforementioned factors, we upgrade FREIT from Hold to BUY.