SPH REIT – DBSV
Steady ship in the inaugural year
- 4Q14 DPU of 1.39 Scts exceeded forecast by 6.1%
- Positive rental reversions; NAV up 4.4%
- Maintain HOLD, TP revised to S$1.03
Highlights
DPU of 1.39 Scts exceeded IPO forecast by 6.1%.
- Revenue and net property income of S$51.1m and S$38.0m were 2.6% and 5.6% higher against forecast. Portfolio rental reversions remained strong – Paragon achieved rental uplifts of 10.5% YTD, while Clementi Mall secured 5.5% higher rents YTD. However, we note that tenant sales for Paragon and Clementi mall were down 4.5% and 3.3% y-o-y, respectively, while foot traffic remained stable. The property portfolio was revalued up by c.3.4% to S$3.05bn, lifting NAV per share by 4.4% to S$0.93. Gearing headed lower to 26.0% as a result.
Investment Thesis
Stable Earnings Outlook
- With rentals already at market rates and retailers outlook still fairly weak due to the decline in tourist arrivals and poor retail sales, further rental hikes at both Paragon and Clementi Mall going forward appear modest. Limited acquisition prospects in the near term
- Seletar Mall (its ROFR asset from its sponsor, SPH) is expected to complete in Dec’14 and is the next main growth catalyst for the SPH REIT. However, we believe an acquistion timeline for this mall to come only in 2016 onwards after stabalization. Till thn, we see limited scope for acquistions.
Valuation
HOLD. Target Price S$1.03. Our revised target price of S$1.03 is based on DCF after accounting for lower units/debt levels. At current price, the stock appears fairly valued at a forward yield of 5.4%. We maintain our HOLD call given its premium valuations vs peers.
Risks
Interest rate risk
- SPH REIT will be negatively impacted when its loans are refinanced in an environment of rising interest rates. This risk is mitigated through having a staggered debt maturity profile with nil refinancing till 2016. Reported average interest cost of 2.33% is slightly lower than IPO forecast of 2.35%.
PCRT – CIMB
Limited downside
Two key pieces of information in the PREHL circular warrant a relook at PCRT 1) the value within PREHL, and 2) the plan for strata sales of up to 50% of PREHL’s China assets, which will reduce funding risks. We upgrade PCRT from reduce to Hold, with a slightly higher target price (still at 30% discount to RNAV) as we adjust our rental estimates.
We cut FY15-16 DPS by 11-15% for the delayed opening of Chengdu Dongzhan Mall and potentially higher pre-opening expenses.
Cheaper entry via PCRT
Our preliminary estimates show that PREHL could be valued at an RNAV of $2.11-2.25/share assuming a 50.1-100% acceptance level for its voluntary offer for PCRT. This RNAV is supported by growth and value creation in its development assets in China, which make up almost 70% of PREHL’s GAV. These assets will be purchased by PREHL at a 25% discount to their residual land value and development margin is estimated at 20-25% on completion. While peer comparison studies show that PREHL could trade up to a fair 40% discount to RNAV, entry via PCRT (and subsequent acceptance of VO of PREHL shares) implies an entry point at 53-56% discount to PREHL’s RNAV, indicating that any downside has been fully priced into the trust.
Potential 3-step re-rating for PREHL
In the longer run, by swapping PCRT units for PREHL shares, investors can look forward to a re-rating of PREHL when i) strata sales of up to 50% of units in Chengdu and Beijing are realised in 2015, ii) China assets in are completed in 2016/17, where recurring rental income for the remaining 50% of the assets will commence and PREHL should record significant revaluation gains, and iii) stabilisation of investment properties in 2019/2020.
Upgrade to Hold
We raise PCRT from reduce to Hold. PCRT’s share price is 5.5% below the level prior to the PREHL-related announcement and is trading at an implied 53-56% discount to PREHL’s RNAV. Post the VO, investors in PCRT will have exposure to a larger portfolio of Singapore and China investment and development properties, which will enable them to benefit from both recurrent income in Singapore and development and revaluation upside from China projects. In the meantime, while downside risk is limited, near-term upside for PCRT may be capped by higher perceived risks for development exposure and income vacuum from the cessation of earn-out support in 2015.
MLT – CIMB
Expect one but ended with two
MLT announced that the acquisition of MZLP was completed today.Surprisingly, the acquisition of the previously speculated MYBLP was also completed today at a purchase consideration of S$42.8m. Given the 100% occupancy in both properties, the acquisitions of which were funded via debt, they are expected to boost DPU cumulatively by c.1.4%. Consequently, we upgrade MLT from Hold to Add, with a slightly higher DDM-based (discount rate: 8.0%) TP of S$1.24, as we tweak our FY15-16 DPS estimates upward by c.1.9% while anticipating more acquisitions to come through in the mid-term.
What Happened
Mapletree Logistics Trusts (MLT) today announced that it has entered into two separate sale and purchase agreements with its sponsor for the acquisitions of: 1) Mapletree Yangshan Bonded Logistics Park (MYBLP) for a purchase consideration of Rmb197.2m (S$41.1m), and 2) Mapletree Zhengzhou Logistics Park (MZLP) for a purchase consideration of Rmb205.6m (S$42.8m).
What We Think
The acquisition of MZLP has been highlighted previously on 21 July 14 and as such, this transaction has already been factored into our model. However, the acquisition of MYBLP, though previously speculated, was only confirmed today. MYBLP is a grade-A logistics facility with a GFA of 46,000 sq m comprising two blocks of single-storey warehouses with mezzanine offices. Currently, this facility is fully leased to two international 3PLs – Ocean East Logistics of the Maersk group and Air Sea Transport, with a weighted average lease term to expiry of 2.1 years. Both acquisitions were completed today. MYBLP is expected to achieve an NPI yield of 7.5% (slightly lower than the 8.0% yield projected for MZLP). Based on our estimates, MYBLP will be mildly yield accretive, boosting DPU by c.0.6%. With the two acquisitions, DPU is expected to rise by c.1.4% while leverage ratio will rise to c.35.3% (from 34.5%).
What You Should Do
Despite the tight market for good quality assets, we believe MLT will continue to expand via future acquisitions. After all, its sponsor still has sizeable logistics developments yet to be injected into the trust. On this basis, coupled with a slightly higher DPU forecast as a result of these acquisitions, we upgrade our rating to Add, with a slightly higher TP of S$1.24. Currently, MLT offers a FY15/FY16 dividend yield of 6.9%/7.1% – a level we do not consider demanding.
FE-HTrust – CIMB
First development project
FEHT has announced its first JV with FEOC – development of an upscale/mid-tier hotel project in Sentosa. While viewed as a positive, the project’s end-FY18 slated completion is expected to have minimal impact to the
company’s DPU in the near term. As such, with the stock having corrected by c.6.0% recently, coupled with the long-term positive impact from this project, we upgrade FEHT to Hold from Reduce, with a slightly higher DDM-based (discount rate: 9.0%) TP of S$0.83.
What Happened
Far East Hospitality Trust (FEHT) announced that it has entered into a joint venture (JV) agreement with Far East Organisation Centre Pte Ltd (FEOC) to develop a new S$443.8m hotel in Sentosa, Singapore. FEHT will contribute c.S$133.1m and hold a 30% stake in the JV. This project, with a 60-year leasehold, is an integrated development comprising two hotels: 1) ‘Outpost’ – 230 rooms targeting the upscale market, and 2) ‘Village’ – 620 rooms targeting the mid-tier segment. The project is targeted to be completed by end-FY18.
What We Think
Given that FEHT’s contribution to the proposed JV will be fully funded via debt (leverage ratio expected to rise to 34.4% post completion of the project), we view it positively as no equity dilution is expected consequently. In addition, this project is uniquely positioned to fill the mid-tier accommodation gap in Sentosa. Mid-tier rooms currently account for 8.1% (245 rooms) of total available hotel rooms in the vicinity. With an estimated average occupancy of c.80%+ in Sentosa and an average rate of low to mid S$200 per room/night for the mid-tier hotel rooms, we believe this is an underserved segment that FEHT can tap via the JV. Furthermore, by entering into the JV at this stage, FEHT is able to lock in lower cost of investment as compared to acquiring the development post-completion (development cost is c.38% lower than the average transacted price of hotels across Singapore). FEHT holds the ROFR to acquire the balance 70% stake of the hotel once the hotel stabilised.
What You Should Do
Given that this asset will only be completed at end-FY18, while the higher incurred interest payment, as highlighted by management, will be treated as non-capex expenditure, we project DPU to be minimally affected in the near term. With the recent correction to share price by c.6.0% and in view of its long-term prospect tapping an underserved market, we upgrade FEHT to a Hold with a slightly higher target price of S$0.83
KepREIT – DBSV
Acquiring MBFC Tower 3 finally
- Acquires MBFC Tower 3 at c. 3.6% initial yield
- Lower risk profile due to drop in average age of portfolio and better cashflow visibility
- HOLD, TP maintained at S$1.29
Purchases MBFC Tower 3 for S$1,248m. K-REIT announced the acquisition of a one-third stake in MBFC Tower 3 from sponsor, Keppel Land, for S$1,248m or S$2,790 psf. This represents a 2-3% discount to independent market valuations and within the S$2,181-2,830psf range of recently transacted CBD properties which we think is fair considering MBFC Tower 3’s premium location. Including income support, the initial yield stands at c. 3.6%.
Strengthens exposure to tight Singapore office market. By recycling the proceeds from the sale of the older Prudential Tower, an equity fund raising of c.S$413m and additional debt raised, the purchase of MBFC Tower 3 further strengthens K-REIT’s exposure to the tight premium grade office market. In addition, KREIT’s risk profile has been reduced, as the average age of its portfolio has dropped from 6.2 years to 5.5 years, lowering the need for extensive AEI’s. Furthermore, cash flow visibility has improved with the WALE for its top 10 tenants (46% of NLA) lengthening to 9.2 years from 8.5 years. Post acquisition, our FY15/16F DPU is lifted by a marginal c.0.1% with FY15 gearing increasing to c. 42%. Our DCF-based TP is maintained at S$1.29.
Near term re-rating; medium term earnings risks in FY15/16F; maintain HOLD. With the purchase of MBFC Tower 3 and equity fund raising “overhang” removed, we expect a near term re-rating of the stock. However, we see medium term risks coming from the fall-off of rental support from Ocean Financial Center, which is fairly significant (FY15 to see a c.11% drop in DPU). As such, forward yields of c.5.6%-5.7% (ex –OFC income support) are fair in our view, and we maintain our HOLD call.