Starhill Global – DBSV
Further savings from MTN issue
- Refinancing RM330m senior bonds results in interest savings of S$0.7m p.a.
- Diversified income stream and large proportion of master leased income offers resilience amid uncertainty in Singapore’s retail outlook
- Upgrade to BUY, TP raised to S$0.90
Prudent capital management amid interest rate uncertainty. SGREIT announced that it has refinanced its outstanding MYR debt that was previously used to fund the acquisitions of Lot 10 and Starhill Gallery. A five year senior MTN was issued at a lower effective interest rate of 4.75% p.a. (vs. 5.35% previously), thereby extending the REIT’s debt expiry profile to 3.8 years from 3.2 years. We estimate that this will generate interest savings of c.S$0.7m p.a., or 0.4Scts per unit. As it stands, 100% of SGREIT’s total borrowings have been hedged into fixed rate debt, thereby providing investors with visibility and certainty about interest expense during a period of interest rate uncertainty.
Income resilience despite headwinds in Singapore’s retail sector. In our earlier report titled “Diving deep into the nuances of the retail sector” (17 Sep 14), we highlighted SGREIT as having one of the most resilient income streams among the Singapore-based retail and commercial SREITs, due to its geographic and asset class diversification, as well as sizeable base of income derived from master leases. We estimate that only c.30% of the REIT’s total revenue is directly exposed to Singapore’s retail sector, through Wisma Atria and level 5 of Ngee Ann City. As both assets are located in the prime Orchard Road area, we believe that they will be beneficiaries of the improvement in visitor arrivals in 2H14 and hence remain resilient.
Upgrade to BUY, TP raised to S$0.90. We like SGREIT for its resilience amid concerns about interest rate volatility and retail sector headwinds. At current prices, the stock offers dividend yields of 6.3-6.5% for FY14/15F, which is attractive, in our view. We upgrade the stock to BUY, with a higher TP of S$0.90.
KepREIT – CIMB
Acquisition of MBFC Tower 3
KREIT just announced the highly anticipated acquisition of MBFC Tower 3. Although this iconic office building could strengthen the REIT’s portfolio and diversify its tenant base, the resulting yield dilution is disappointing. As a result of the estimated DPU dilution of 3.6% in FY15 and 3.8% in FY16, we maintain our Hold rating with a lower DDM-based (discount rate: 8.4%) target price of S$1.21, as we factor this weakness into our model.
What Happened
Keppel REIT (KREIT) said it has entered into a conditional share purchase agreement with Bayfront Development Pte Ltd. for the acquisition of a one-third stake in Marina Bay Financial Centre Tower 3 (MBFC Tower 3) for a purchase consideration of S$1,248m. This property is a 46-storey premium grade A commercial building with ancillary retail space situated in the heart of Marina Bay, with an attributed NLA of c.447,000 sq ft and an occupancy of 94%. After the adjustments for net liabilities, total purchase consideration is S$710.1m and will be satisfied by way of issuance of S$185m worth of units to the vendor and cash payment for the balance. The cash will originate from i) 195m of new KREIT units to be issued via a placement at an issue price of S$1.17/unit (4.88% discount to the last traded price); ii) part of the proceeds (S$185.2m) from the Prudential Tower divestment; and iii) borrowings of S$120.7m.
What We Think
The value of S$1,248m translates to a value of S$2,790psf – c.9% higher than what DBS paid for its 30% stake in late 2012. Including the five-year rental support of S$10.40-10.80 psf/month, the initial yield is estimated at c.3.5%. Taking into consideration the expiry profile, coupled with an expected growth in rental spot rate by 10% and 5% in FY15 and FY16 respectively, we estimate the passing rent to surpass the supported level by FY18, by which time the majority of the leases in the property would have been renewed. However, on the back of new units being issued, coupled with a resultant leverage ratio of 43.8%, we estimate KREIT’s DPU to be diluted by 3.6% in FY15 and 3.8% in FY16 as a result of this acquisition. Having said that, this weakness could potentially be mitigated if KREIT is able to obtain the Limited Liability Partnership tax transparency status as per MBFC Tower 1 & 2.
What You Should Do
Factoring in the lower DPU over the next few years as a result of this acquisition, we have maintained our Hold rating on KREIT with a lower target price of S$1.21.
REITs – CIMB
Engines started
The Singapore Tourism Board (STB) recently released the Jul 2014 visitor arrival and hotel RevPAR data. Although the numbers did not appear exciting at first glance, the mom growth figures in Jul 2014 were the strongest in the last five years. This trend was in line with our expectations of a stronger tourism/hospitality sector in 2H14 and could mark its turnaround. We maintain our sector Overweight rating, with CDL-HT and OUE-HT as our top picks in the hospitality REITs sector.
What Happened
STB's recently published Jul 2014 tourism numbers showed that tourist arrivals dipped 0.9% yoy, while hotel RevPAR was flattish in 7M14.
What We Think
Although visitor arrivals in Jul 2014 were weaker than in Jul 2013, they were stronger than in Jun 2014. Although Jul is a seasonally strong month for tourism, we think it noteworthy that visitor arrivals rose 19.2% mom in Jul 2014 compared to the historical average of 13.5% (since 2010). Similarly, Chinese and Indonesian tourist arrival rates rose 97.4% and 6.7% mom in Jul 2014, respectively, above the historical average of 65.5% and -1.7%, respectively. Although this growth could partly be due to the low base from 1H14, we think that it marks a turnaround in the tourism sector, thanks to the easing political tension in Thailand and slight recovery from the negative impact of the MH370 disappearance earlier this year. The recovery is supported by the gradual recovery in Chinese visitor arrivals growth in Singapore during the past two months (vs. arrival rates in Jun-Jul 2013) from the trough of -51.7% yoy in May 2014. In Jul, we note that hotel occupancy growth of 5.1% mom was the strongest in the past five years, despite the flattish yoy hotel RevPAR. Among the various classes of hotels, luxury and upscale hotels continued to deliver strong performances, posting RevPAR gains of 11.2% and 2.8% yoy, respectively. Economy hotels posted a surprisingly strong RevPAR increase of 7.5% yoy. As highlighted in our previous report titled 'Impending turnaround', we continue to believe that Singapore's hospitality market will deliver stronger performance in 2H14 than 1H14, barring any unforeseen circumstances. Our view is based on the following positive factors: 1) the stabilisation of the Indonesian Rupiah, 2) delays in the delivery of several hotel projects, which will halve the estimated new supply of hotel rooms in FY14, 3) the slightly stronger tourist arrivals in 2H14 (+2.8% hoh, based on our estimates), and 4) the stronger corporate spending expectations in 2H14.
What You Should Do
We believe that CDL-HT (Add, TP:S$1.88) and OUE-HT (Add, TP: S$0.96), which are REITs with upscale hotels in their Singapore portfolio, will be prime key beneficiaries of the anticipated recovery in the hospitality sector in 2H14. Currently, CDL-HT is trading at 1.0x FY14 P/BV, with 6.5% FY14 dividend yield and 7.1% FY15 dividend yield, while OUE-HT trades at 1.0x FY14 P/BV, with 7.8% FY14 dividend yield and 8.0% FY15 dividend yield. These valuation levels are undemanding in our view when compared against CDL-HT's trading range of 5-6% yield and 1.4x P/BV in 2010/11.
FCOT – OCBC
Another milestone attained
- Secured refinancing for all debts
- Positive growth prospects intact
- Still attractively priced
Refinancing of all loan facilities
Frasers Commercial Trust (FCOT) announced earlier this week that it has entered into agreements with a club of banks for transferable term loan facilities of S$545m and A$135m to refinance its entire existing borrowings. While the interest rates are likely to be comparable, we view this as a major positive move given that all the new facilities will be unsecured and that the debt maturity profile will be significantly enhanced. Specifically, we expect FCOT’s unencumbered asset ratio to improve from c. 20% to 100% and its average debt duration to be extended to 4.3 years from c. 1.4 years as at 30 Jun following the drawdown of the new facilities (expected before 30 Sep).
Expecting robust rental growth
For the year ahead, we remain positive on FCOT’s performance. Apart from benefitting from the recovery in the Singapore office market, we note that the master lease at Alexandra Technopark (ATC) has expired last month and that FCOT is poised for strong rental uplift with the direct management of the property. Based on our projections, there may be 24% gap between the underlying passing rent and master lease rent. As ATC contributed a significant 23.3% to FCOT’s 3QFY14 NPI, we believe the rental growth in FY15 is likely to be material. This, we note, is in addition to the improved performance at China Square Central, which enjoyed higher leasing demand after its asset enhancement initiatives and the opening of Telok Ayer MRT station.
Maintain BUY
FCOT is currently trading at 0.88x P/B, lower than the S-REITs sector average of 1.01x P/B. We believe FCOT is likely to see a net revaluation gain for its portfolio assets when it reports its FY14 results in Oct, thus making it more attractive relative to its listed peers. Forward yield is also compelling at 7.2% in our opinion. We maintain BUY with unchanged fair value of S$1.48 on FCOT.
IREIT Global – DBSV
Riding on the German upswing
- Tapping into the upturn in German office rents
- Organic growth driven by CPI adjustments in its lease structure
- Exposure to blue chip tenants including Allianz, Deutsche Telekom and ST Microelectronics
- Initiate with BUY call, TP of S$0.95
Exposure to recovering German real estate market.
With an initial portfolio of four German office properties located in key cities of Bonn, Darmstadt, Münster and Munich, IREIT offers investors exposure to the most robust economy in the Eurozone and a market that is on the cusp of recovery. With an improvement in business activities, moving forward we expect an upturn in rents with the potential for further cap rate compression.
Inbuilt growth pegged to CPI. More than 95% of IREIT's leases (by gross rental income for March-2014) have rental adjustment clauses that are pegged to German CPI. We estimate that 25% of portfolio NLA is likely to be re-indexed to the CPI in FY14 and a further 33% could hit the watermark in FY15, translating to a steady 2.9% CAGR in distributions over FYP14F – 16F.
Visibility over the group's income base is also underpinned by a long WALE of 7.6 years and a tenant base consisting of blue chip firms as Allianz, Deutsche Telekom and ST Microelectronics. Furthermore, execution of IREIT's 'ABBA' investment strategy, which is to invest in 'A' assets in second tier cities and to invest in 'B' assets in first tier cities, should deliver additional upside to DPU.
Initiate with BUY, TP of S$0.95. We initiate with a BUY recommendation with a DCF-based TP of S$0.95 (implied target yield of 7.1%). We believe IREIT offers a cyclical recovery story with German office rents and property values at the start of an upcycle. Key risks include a global economic slowdow and depreciation of the Euro.