Cambridge – CIMB
Weaker underlying conditions
CIT’s 4Q14 results were in line with our forecast, with its FY14 DPU accounting for 101% of our full-year estimates. While we see continued topline growth, we expect NPI margins to stay weak in FY15 as another two properties await conversion into multi-tenanted buildings (MTBs). Given this and the slow FY15 outlook in the leasing market of the industrial sector, we fine-tune our FY15-16 earnings forecasts downwards by 0.9-1.7%. This lowers our DDM-based (discount rate: 8.3%) target price to S$0.68. Maintain Hold.
4Q14 results in line
Cambridge Industrial Trust’s (CIT) 4Q14 results were in line, with its DPU accounting for 25% of our FY14 estimate. For the full year, CIT renewed 1.9m sq ft of leases, representing 23.8% of the REIT’s portfolio, with a positive rental reversion of 4.6%. During the quarter, it completed the acquisition of 16 International Business Park and the AEI at 21B Senoko Loop (Phase II). Occupancy as at 31 Dec remained stable at 96.0% (unchanged from 3Q14).
Lower NPI margins
Though CIT’s topline increased by 3% yoy, DPU rose only 0.6% yoy. This was attributable to the continual softening in NPI margins (74.5% in 4Q14 vs. 81.4% in 4Q13) as management converts more buildings into MTBs while rental rate has yet to catch up. In 4Q14, DPU was in part supported by management taking on 100% of its management fees in units (rather than cash) to bridge the gap of lower income as a result of these conversions. If the same amount of distribution via capital in 4Q13 was paid out in 4Q14 and management fees were fully paid in cash, DPU in 4Q14 would have dipped by c.4.4% yoy, based on our estimation. With another two properties to be converted to MTB, coupled with a soft outlook for the industrial leasing sector, we expect CIT’s NPI margins to remain soft in 2015. Given its leverage ratio of 34.8%, the REIT is expected to grow via inorganic means in FY15; though that remains a challenging avenue in view of the current high asset valuations and tight acquisition market.
Maintain Hold
We see little reason to be excited over CIT given its still-weak NPI margin and limited room to expand inorganically. Currently, CIT offers a FY15 dividend yield of 7.4% – a level similar to its peers. Maintain Hold.
FirstREIT – AmFraser
Results broadly in-line. With locked-in master leases and revenue derived mostly from base rents, full year results came in well, with revenue (+12% YoY), NPI (+15% YoY) and DPU (+7% YoY) in-line with our forecasts. We like the continued DPU growth fuelled by acquisitions, though we keep our target price of S$1.38 unchanged. Full-year DPU of 8.05c translates to a yield of 6.3% – an attractive 4.5% spread over the 10-year risk free rate.
Sheltered from refinancing and interest rate risks. The bridge loan of S$26.5m will be refinanced to a fixed rate loan in 1H15 and come due only in 2019. After which, the earliest debt will come due only from 2017, with ~95% of the total debt hedged on fixed rates. Therefore, there is little interest rate risk in the next 2 years.
Strong potential for upward rerating remains. The potential for yield-accretive acquisitions remains given that First REIT owns only 11 out of 18 hospitals that Siloam currently operates. Management revealed that 29 hospitals remains in the pipeline, of which First REIT has the ROFR. First REIT has also highlighted the potential for asset enhancement at3 of its original IPO assets. With the distribution reinvestment plan in place, we believe that First REIT may utilize the reinvested capital for acquisition.
Maintain BUY with rerating catalysts in view. Although our target price implies only ~14% upside after including dividends, the fair value may be higher given potential yield accretion from the acquisition pipeline. We note that over the last 5 years, the total returns on First REIT is more than 200% (assuming reinvestment of dividends into the stock). This is in part contributed by 9 acquisitions that enlarged the portfolio size to 16 assets, and we believe that similar acquisitions may continue to propel growth. However, the accretion from each property will likely be at a lower rate than before as future acquisitions are likely to be partly funded by equity (and no longer solely by debt) as First REIT nears the gearing limit of 35%.
SPH REIT – OCBC
Stable performance
- 1QFY15 DPU grew 2.3% YoY
- Positive rental reversion of 12.4%
- Valuations not cheap
1QFY15 results came in within our expectations
SPH REIT reported its 1QFY15 results which were in-line with our expectations. Revenue inched up 1.8% YoY to S$50.6m on the back of higher rental income. This formed 24.6% of our FY15 forecast. Distribution to unitholders and DPU grew 2.9% and 2.3% to S$33.5m and 1.33 S cents, respectively, with the latter constituting 24.4% of our full-year projection.
Healthy rental reversions achieved
Both SPH REIT’s Paragon and The Clementi Mall remained fully leased. Overall rental reversions of 12.4% was achieved for its portfolio in 1QFY15, driven largely by Paragon (+12.5%) and marginally by The Clementi Mall (+2.3%), although the latter had only one lease renewal during the quarter. In terms of asset enhancement initiatives, the chiller decanting project at Paragon will create an additional 5,000 sq ft of NLA when it is completed by FY16.
Tenancies for the new space have already
been committed and are expected to contribute an incremental rental income of close to S$1m per annum. Management is also carrying out planning works to create another NLA of 5,000 sq ft at Paragon. This would be phased in from FY16.
Maintain HOLD
Looking ahead, headwinds facing the retail sector will continue to pose challenges to the operating landscape. Nevertheless, average prime retail rents in Orchard Road still managed to increase marginally by 1% on a YoY and QoQ basis to S$34.55 psf pm in 4QCY14, according to CBRE. This highlights the attractiveness and value of assets which are strategically located in good catchment areas. We maintain our HOLD rating and S$0.99 fair value estimate on SPH REIT, as we believe its current valuations look fully priced. The stock is trading at FY15F P/B of 1.1x and distribution yield of 5.2%, versus its retail peers’ forward P/B of 1.0x and distribution yield of 6.1%.
SPH REIT – CIMB
2015 to be stable
SPH REIT’s 1QFY15 DPU was up 2.3% yoy and broadly in line by meeting 22% of our FY15 forecast. Improvements came from higher rental income and margins. We expect FY15 to be a stable year, with 100% occupancy and only 11-13% of the leases set to expire. 2016-17 should be more exciting, with more lease expiry, AEI completion, and potential stabilisation and acquisition of The Seletar Mall. We trim our DPS estimates slightly (leading to a lower DDM-based TP) and keep our Hold call as we think that the positives of its stable portfolio have been priced in at 5.8% FY15 dividend yield and 1.12x P/BV. We prefer to wait for cheaper valuation or greater clarity on future leasing demand.
Results highlights
1QFY15 DPU was up 2.3% yoy, and would have been 4.8% up yoy if not for the S$0.5m retained in the quarter. Improvements came from both higher rental income and margins stemming from savings in utilities, marketing and maintenance costs. During the quarter, 4.9% of the leases by NLA expired and a healthy rental reversion of 12.9% was recorded.
2015: expect stable portfolio and balance sheet
With 100% occupancy and only 11-13% of the leases set to expire in FY2015, we expect SPH REIT to see stability as supply of retail spaces along Orchard Road is limited. Its balance sheet remains strong, with gearing at 26%. Management has hedged ~55% of its debt with no refinancing required until 2016. Its average cost of debt is at 2.35%, up slightly from 2.33% in the previous quarter.
Maintain hold, wait for cheaper valuation or 2016-17
We maintain our Hold rating as we believe that the positives of SPH REIT have been priced in at 5.8% FY15 dividend yield and 1.12x P/BV (vs. 5.6% and 1.07x for its retail S-REIT peers respectively). We expect 2016-17 to be more exciting years for SPH REIT, given 1) AEI will create ~10,000 sq ft of NLA at Paragon, with 5,000 sq ft expected to be completed by FY16 and generate ~S$1m of rental income annually, and another 5,000 sq ft to be phased in from FY16; 2) ~26% and 35% of leases by NLA to expire in FY16 and FY17 respectively; and 3) potential stabilisation and acquisition of The Seletar Mall, which has opened on 28 Nov 2014 with 99.6% committed occupancy. We will wait for cheaper valuation or greater clarity on future leasing demand before accumulating.
FirstREIT – AmFraser
We initiate coverage on First Real Estate Investment Trust (First REIT) with a BUY rating and a fair value of S$1.380 based on a dividend discount model. First REIT’s 6.4% FY15F yield is anchored by long master leases, with ~95% of the rental income from Indonesia’s healthcare sector backed by Lippo Karawaci and Siloam Hospitals. First REIT stands to benefit from its sponsor’s huge asset pipeline which may continue to offer very attractive yield.
Distribution underpinned by long master leases. First REIT boasts of a long portfolio WALE of10.7 years, with the first renewal coming due only on 2017. As~98% of the rents are priced and paid in SGD with rental growth rates at twice Singapore CPI growth, subject to a cap of 2% and a floor of 0%, the long master leases offers a partial hedge against inflation.
A huge asset pipeline ahead. After acquiring 12 properties and enlarging the portfolio nearly fourfold to S$1.2b since IPO in 2006, we estimate that 28 more assets remain in the pipeline. Typically acquired at high 9% to high 10% rental yield with at least 9% discount to valuation, the acquisitions have been highly accretive to DPU and NAV.
Asset sustainability with long lifespan. The Indonesia assets, which constitute ~96% of property valuation, are on Hak Guna Bangunan (Right to Build), which is essentially leasehold tenure. Nevertheless, there is a possibility for renewal after the expiration of the initial lease period of 30 years and an additional term of 20 years. Meanwhile, First REIT is poised to benefit from the developments in the Indonesia healthcare market.
Initiate BUY with target of S$1.38 with more upside on acquisitions. We see a 15% upside (incl dividends) with our DDM -derived price target. The target price could prove to be conservative, given that it is based only on the current portfolio of assets. If we assume that First REIT acquires another 6 properties with purchase and lease details (e.g. size of asset and NPI yield) that is similar to the average of the most recent 6 acquisitions, our target price rises to S$1.49 (23.0% upside).