CCT – OCBC
Credit rating upgraded by S&P
- Upgraded to A- by S&P
- 40% gearing -> S$1.3b debt headroom
- Likely to buy remaining 60% of CapGreen ahead
Long-term corporate credit rating upgraded to A- (stable)
Earlier this week, Standard and Poor‟s Rating Service (S&P) announced that it had upgraded CCT‟s long-term corporate credit rating from “BBB+‟ to “A-” with a stable outlook. The rating agency had reassessed CCT‟s appetite for expansion and believes that the trust would likely “remain disciplined in using debt to fund new investments.” In addition, the trust‟s risk profile has been reinforced by its stable business performance, consistent cash flows, high occupancies and an expanded asset portfolio with CapitaGreen‟s anticipated completion by end-2014. We note that CCT currently enjoys one of the highest credit ratings in the S-REITs sector – only below that assigned to CapitaMall Trust (A2) by Moody‟s.
Significant debt headroom of S$1.3b to 40% gearing
CCT‟s gearing stood at a healthy 28.8% as at end 2Q14 – down 1.2 ppt QoQ from 30.0% as at end 1Q14 – which is the lowest amongst its peer group of office S-REITs (average gearing of 36.0%). Recall that MAS regulations stipulate S-REITs without a credit rating are required to cap their gearing below 35% while those with a rating are allowed to go as high as 60%. CCT has significant capital headroom for acquisitions ahead; by our estimates, the trust has a debt headroom of S$1.3b before it hits a 40% gearing level.
Likely to exercise call option on remaining 60% of CapGreen
Looking ahead to FY15, we believe that management will likely exercise its call option to purchase the remaining 60% of CapitaGreen that it does not already own (50% owned by CapitaLand and 10% by Mitsubishi Asia). Assuming a valuation of S$2.5k to S$2.8k psf NLA for CapitaGreen, this will cost S$1.0b – S$1.2b which CCT can wholly fund using debt and yet land under a 40% gearing ratio post-transaction. Maintain HOLD with unchanged fair value estimate of S$1.67.
Cambridge – CIMB
Acquisition amid a tight market
CREIT has just announced the proposed acquisition of 12 Ang Mo Kio Street 65 for a purchase consideration of S$39.8m. By funding this acquisition withdebt and cash on hand, the leverage ratio is expected to rise to 34.8% upon its completion. Consequently, DPU is expected to be boosted by c.2% in FY15. Onthe back of a tight acquisition market, we view this transaction positively, although the impact on earnings is expected to be limited. We maintain ourHold rating while our DDM-based (discount rate: 8.0%) target price rises slightly to S$0.78 as we price in the marginally higher earnings.
What Happened
Cambridge Industrial Trust (CREIT) has just announced that it has enteredinto a conditional sale and purchase agreement with Freshlane Pte Ltd in connection with the proposed acquisition of 12 Ang Mo Kio Street 65 for apurchase consideration of S$39.8m. The property is a 6-storey purpose-built light industrial building with a GFA of 16,762 sq m and a remaining tenure of36 years. Current occupancy stands at 85%, with two tenants, namely, Nepes Pte Ltd and Singapore Technologies Electronics Ltd.
What We Think
With a cap rate of 6.75% and an expected yield on cost of c.7% (at 100%occupancy), the valued paid for this property is in line with the weighted cap rate of CREIT’s recent valuation (6.5-6.9%). With this acquisition expected tobe fully funded via cash on hand and debt, we believe there will be no capital-raising. Consequently, we expect this acquisition to be yield-accretive, adding 2.1% to FY15 DPU and 2.2% to FY16 DPU, with a leverage ratio of 34.8% upon completion. Given this, together with the strong tenants currently on the property, we view the proposed acquisition positively, although given the value of this asset and the fact that the acquisition will only be completed in 3Q14, the impact on FY14 earnings should be minimal.
What You Should Do
CREIT is offering dividend yields of 7.0% for FY14 and 7.4% for FY15 vs. 7.2% and 7.4% for its peers. On this basis, together with its 1.05x P/BV compared to the sector average of 1.09x and limited impact on earnings from this acquisition, we maintain our Hold rating, with a slightly higher target price of S$0.78 as we factor in the marginally higher contributions from this acquisition to FY15 earnings.
CRT – CIMB
The sun is rising
We initiate coverage on CRT with an Add rating. CRT offers investors a pure play into the reflating Japan retail real estate sector through a capital-efficient platform that can provide earnings and NAV growth. Potential yield-accretive acquisitions could catalyse its share price while prospects of a cap rate compression should drive NAV uplift.
Our 4.6% revenue CAGR projection over FY14 (annualised) to FY16 is premised on positive rental reversions from Mallage Shobu renewals in FY15 as well as additional contributions from two new assets. Our DDM-based target price of S$1.16 implies a fair value FY15-16 DPU yield of 7.1-7.2%, attractive when viewed against retail J-REITs and other retail REITs in the region.
A pure play Japan retail real estate vehicle
Croesus Retail Trust’s (CRT) portfolio comprises six assets located in the Greater Tokyo and Osaka areas with high access to transportation. In addition, not only does the trust have a stable income profile with c.85% of its leases derived from base rent, 67% of its portfolio leases are fixed-term structures, allowing its Trustee-Manager flexibility and negotiating power to optimise occupancy and rents.
Locked-in earnings growth
CRT’s key asset is Mallage Shobu, which accounts for 37% of portfolio NPI. 50% of this asset’s leases (148 of 242 tenants) are due to be re-contracted in Nov 14. Tenant remixing, by replacing the bulk of existing tenants with higher profile brands or new names to draw shopper traffic, as well as higher rental terms and positive rental reversions (over the previous post GFC low base) for the remaining leases should drive earnings growth. In addition, income from the two recent acquisitions should provide another earnings booster.
Acquisition train chugs on
The trust has a visible acquisition pipeline in Japan, and in the medium term, China. It has two Japan assets under right of first refusal (ROFR) – Mallage Saga and Forecast Kyoto Kawaramachi; together these could expand its current portfolio NLA by c.25%. This have not been factored into our current numbers and would provide further upside potential. With a gearing of 53.5% (vs. its self-imposed ceiling of a 60%) and
potential NAV uplift through rising capital values and cap rate compression, CRT’s balance sheet is robust and is well placed to drive this wing of growth.
SB REIT – DBSV
Grinding out stable income
- 2Q14 results beat IPO prospectus forecasts, in line with our estimate
- Slight dip in occupancies; 85% of NLA expiring in FY14 have been renewed
- Low gearing implies headroom for acquisition
- BUY, TPS$0.89
Highlights
2Q14 results beat forecasts. Gross revenues and net property income grew 0.9% and 3.4% to S$16.7m and S$14.0m, respectively. The stronger performance was driven by (i) additional rental income from Tellus Marine which was acquired in May, (ii) rental escalation at master-leased properties (Solaris / Beng Kuang Marine ) and higher rents at Eightrium@ Changi Business Trust, West Park Biz Central. These offset weaker occupancy at Tuas Connection. Interest costs were 3.7%higher than forecasts because the REIT drew down an additional S$15m debt for the Tellus Marine acquisition. But as the loan is on floating rate, average cost of debt edged down to 3.08%. Distributable income beat our estimate by 6.1%, at S$12.6m (DPU 1.50 Scts), and was 1.3% above prospectus forecast.
Our View
Dip in occupancies; minimal lease expiry in 2014. The nonrenewal of a lease at Tuas Connection reduced occupancy to 93.2% by end 30 Jun’14 vs 100% upon IPO. But the manager is actively seeking new tenants to take up the vacated space quickly. The weaker occupancy was partially offset by improved take-up at Eightrium @ CBP and West Park Biz Central. Looking ahead, SBREIT has renewed, forward leased and pre-committed 85% of leases expiring in 2014, implying strong earnings visibility going forward. Rental reversions for renewals and new leases for its factory space in were strong in 2Q14 at 22%-32% because of low expiring rents.
Focus on renewals in FY15F. With most of its leasable area taken up in FY14, we would focus on the forward renewal of c29% of NLA in FY15, the bulk of which is in West Park BizCentral and Tuas Connection. We take comfort that expiring rents are >15% below current transacted market rents, suggesting renewals should remain stable.
Recommendation
BUY, TP S$0.89. We like SBREIT’s higher-than-average industrial REIT yields of 7.5%-8.1%, which are relatively secured. Gearing is at c.30% currently, implying sufficient headroom to fund selected (future) acquisitions.
OUE C-REIT – OCBC
A firm set of 2Q14 results
- 2Q14 numbers ahead of IPO forecast
- Positive rental reversions
- Maintain BUY at S$0.88 FV
2Q14 numbers looking firm
2Q14 distributable income and DPU came in at S$12.5m and 1.43 S-cent, respectively, which is 5.5% and 5.1% higher than forecasted in its IPO Prospectus and in line with our expectations. 2Q14 gross revenues were S$18.7m, marginally lower (-0.3%) versus the forecast, while NPI of S$14.3m is 4.6% ahead of the forecast. The trust pays its distributions on a semi-annual basis, and the book closure for its first distribution of 2.43 S-cents per unit will be on 7 Aug-14.
Positive rental reversions seen at both assets
Overall portfolio occupancy remained fairly healthy at 96.8% as at end Jun-14, and management indicates that only 2.9% of the portfolio, by gross rental income, is up for renewal over 2H14. OUE Bayfront remains 100% occupied as at 2Q14, with average passing rents for the office component increasing to S$10.66 psf from S$10.61 psf last quarter. Management reports that newly committed rents over the quarter for OUE Bayfront ranged from S$11.50 to S$15.20 psf which is, on average, 6.1% higher than preceding rentals. Lippo Plaza saw its occupancy rate dip QoQ to 92.9% as at end Jun-14 from 95.9% due to some tenants not renewing their leases, though renewal rents in 2Q14 still showed a 4.3% increase versus preceding rents.
Maintain BUY
OUE-CT’s aggregate leverage dipped slightly to 39.5% (versus 40.8% as at end Mar-14) while average cost of debt edged up to 2.59%. Management has indicated that they are focused on executing and stabilizing existing portfolio assets in FY14 and will only expect their first acquisition to come in FY15 and after. We continue to believe that OUE-CT shows attractive relative value versus peers. Despite providing one of largest exposure to the premium office space in Singapore, OUE-CT offers a consensus forward yield of 6.7% – the second highest in its peer group (average: 6.0%). Its price-to-book ratio of 0.77 is also lowest amongst peers. Maintain BUY with an unchanged fair value estimate of S$0.88.