Suntec – OCBC
Gaining strong traction
- 2Q14 DPU up 0.8% YoY
- Good progress on leasing efforts
- Expecting stronger performance
2Q14 results within expectations
Suntec REIT turned in a strong set of 2Q14 results, with NPI and distributable income rising 64.9% and 19.8% YoY to S$46.1m and S$51.6m respectively. The better performance was due to the opening of Suntec Singapore following the completion of Phase 1 asset enhancement initiative (AEI), and was achieved despite the concurrent closure of Phases 2 and 3 during the quarter. DPU came in marginally higher (+0.8% YoY) at 2.266 S cents. However, we note that only S$5.0m capital distribution was made in 2Q, as opposed to S$7.8m a year ago. Excluding the capital payout, DPU would have risen 8.5% YoY. For 1H14, DPU totalled 4.495 S cents, up 0.4% YoY. This constitutes 46.3% of our FY14F DPU, in line with our expectation.
Robust operational performance
Suntec REIT’s office segment continued to gain traction in 2Q, raking 4.7% growth in revenue on the back of positive rental reversions. The Suntec City Office occupancy also inched up 0.5ppt QoQ to 99.4%, while leases secured averaged S$8.98 psf pm versus S$8.97 in 1Q. Management disclosed that it has forward renewed ~94,000sqft of office leases expiring in 2014, leaving only a balance 5.6% of leases due for renewal in 2014. On the retail segment, we note that revenue also improved 19.1% YoY due to the opening of Suntec City Phase 1 retail space. Suntec REIT shared that Phase 2 has opened on 1 Jun, and that the aggregate committed occupancy and passing rent for Phases 1 and 2 stood at 97.6% and S$12.57 psf pm (1Q: S$12.59) respectively. While management is keeping mum on the marketing progress for Phase 3 retail space, it disclosed that it is targeting an entirely new tenant mix such as “accessible luxury brands”.
Maintain BUY
Looking ahead, Suntec REIT remains positive on its office portfolio performance. It also reiterated that the remaking of Suntec City is on track for completion by end-2014, and that the ROI projection of 10.1% remains
intact. We now tweak our assumptions to factor in stronger performance upon completion of Suntec City AEI. Consequently, our fair value is raised to S$1.96 from S$1.85 previously. Maintain BUY.
Suntec – CIMB
Looking forward to Phase 3
SUN’s 2Q14 results were in line with expectations, with 2Q DPU accounting for 25% and 1H14 forming 50% of our full-year forecasts. Though no details were revealed for Phase 3 of the AEI, which is scheduled to be completed in 4Q14, we remain confident of the company’s outlook. As the stock is trading at 5.6% FY15 yield vs. the average of 5.9% for its peers, we believe that SUN is fairly valued. As such, we downgrade it to Hold from Add with a slightly higher DDM-based (discount rate: 8.0%) target price. Our FY14-16 estimates rise by 1.5-2.0% as we fine-tune our occupancy and passing rent assumptions.
Results in line
2Q14 results were in line with our estimates, with revenue and distributable income accounting for 24% and 25% of our full-year estimates respectively. During this quarter, approximately 0.2Scts was distributed – an action within expectations as Phase 2 of Suntec City AEI contributed to the earnings for less than one month while Phase 3 was closed for renovation. As a result, 2Q14 DPU was largely flat (+0.8%) yoy.
No details for Phase 3 AEI
The portfolio remained stable with the occupancy rate for the Suntec office at 99.4% while the combined occupancy of Phase 1 and 2 of Suntec City AEI was reported at 97.6%, indicating that Phase 2 occupancy remained unchanged qoq. Although no further details were revealed on the occupancy of Phase 3, citing leasing activities as being still underway, the management guided that a clearer picture will be available in 3Q14. The passing rent for Phase 1 and 2 remained strong, at S$12.57 psf/month.
Downgrade to Hold
Assuming an overall occupancy rate of 95% and a passing rent of S$13.00 psf/mth, we have raised our earnings estimates for FY14-16 by 1.5-2.0%. Based on past history, we remain confident that the management will deliver Phase 3 with good commitment rates and higher rental rates than Phase 2 (c.S$12.15 psf/mth). However, with SUN currently offering an FY15 yield of 5.6%, compared to 6.0% and 5.8% for the office and retail REITs respectively, we are of the view that SUN is fairly valued. Hence, we downgrade the stock to Hold.
MLT – CIMB
The pros negate the cons
MLT’s 1QFY15 results are in line with our estimate, with DPU for the quarter accounting for 25% of our full-year estimate. Future rental reversion is expected to slow down for the Singapore portfolio as the industrial market here remains under pressure amid further tightening in leasing policies. MLT will continue to grow through acquisitions of quality assets from its sponsor. However, as it is currently trading at 1.2x P/BV while offering an FY15 yield of 6.8% (vs. its peers’ 7.3%), we deem MLT as fairly valued. Maintain Hold with a slightly higher DDM-based (discount rate: 8.1%) TP of S$1.20 as we factor in the acquisition of MZLP and S$25m of potential acquisition in FY16.
Another strong quarter
Higher revenue was mainly the result of i) stronger contribution from Mapletree Benoi Logistics Hub, ii) positive rental reversions of 12% mainly in Hong Kong and Singapore, iii) contribution from the Korea property acquired in 2QFY14, and iv) higher revenue from four Japan properties that completed the installation of solar panels last year.
Acquisition of MZLP
MLT also announced the acquisition of Mapletree Zhengzhou Logistics Park (MZLP) for Rmb205.6m (S$41.1m). This property consists of 4 blocks of single-storey warehouses with 79,000 sq m GFA and is currently 99.2% occupied, with a WALE of 3.3 years. NPI yield for this property (estimated to be acquired by 3QFY15) is expected at 8.0%. Based on our estimates, this acquisition, fully funded via debt with an interest cost of 2.1%, will be mildly yield accretive, boosting DPU by c.0.8%, while the leverage ratio will remain a healthy 34.5%.
More acquisitions
During the analyst briefing, management guided that the Singapore industrial market could undergo short-term pressure, with future positive rental reversion limited to a high single-digit in FY15. Given a strong pipeline of assets from its sponsor, MLT could continue to grow via future acquisitions, with the next target most likely the Yangshan Bonded Logistic Park (45,900 sq m GFA) given the stabilised nature of the asset (86% occupied). Maintain Hold as we wait for more substantial acquisitions to come through.
FCT – CIMB
Operationally strong
FCT’s 3QFY9/14 results were largely in line, with 9M distributable profit at 75% of our full-year forecast. Gross revenue and net property income were up 2-3%, as the better performance at key malls had more than offset the weak performance at Bedok Point. FCT remains our top pick in the retail REITs space as we believe it is strong operationally with growth expected from both rental reversions and CCP contributions. We maintain our Add rating and raise our target price slightly to S$2.18 as we roll forward our estimates. We lift our FY14-15 EPS by 0.6-1% as we factor in lower interest costs.
Results and operations highlights
FCT continued to grow operationally during the quarter. Portfolio occupancy grew to 98.5% from 96.8% in the previous quarter, as occupancy at Bedok Point improved to 99.3% from 77% with the lease commencement of several tenants. There was an average 7.8% rental reversion in the quarter. Tenant sales and occupancy cost remained flat yoy.
Healthy balance sheet, potential interest savings
FCT’s gearing increased to 30.2% post the Changi City Point (CCP) acquisition, but it was still well within the S-REITs’ peer average of 32.9%. In the results conference call, management said it believes interest rates are likely to stay low, and hedged 75% of the company’s debt, instead of 94% previously. This resulted in a lower interest cost of 2.50% as opposed to 2.85% as of end-FY2013, and is likely to lead to interest savings and slightly higher distributions in the coming quarters.
Outlook
We expect FY2015’s revenue to grow by 14% yoy, largely from the CCP acquisition. Additionally, we believe organic growth will be driven by the 39% and 27% of leases (by gross rental income) expiring in FY2015 and FY2016, with the majority of the expiring leases emanating from Causeway Point, Northpoint and CCP. We believe CCP will experience a 20-30% positive rental reversion being its first rental cycle, and low passing rent of ~S$9 psf. FCT remains our top pick in the retail space as we like the resilience of its suburban mall offerings and growth profile from both the CCP acquisition and positive rental reversions.
CRT – OSK DMG
High-Yield Proxy To Japan's Retail Scene
With Japan being the 3rd biggest retail market in the world with 127m consumers contributing an average of USD54k per household, Croesus Retail Trust, with a 8% dividend yield and close to 100% occupancy rate, is the first Asia-Pacific retail business trust and only proxy in SGX into the Japanese retail scene with 6 Japanese retail mall assets. Initiate coverage with a BUY and a DDM-backed TP of SGD1.15, with a 7.9% cost of equity (COE) and a distribution yield of >7%.
- Proxy to Japanese retail mall scene. With Abenomics monetary policies in place to create inflation and boost the Japanese economy, Croesus Retail Trust is poised to be one of the key beneficiaries as traffic flow at its malls has been increasing while capitalisation rates for its existing malls and other malls in Japan have been decreasing. It is the only business trust in the SGX that provides a proxy for investors who are interested to enter the Japanese retail mall scene.
- Long WALE of 10.2 years and highly resilient. Its portfolio has a weighted average lease expiry (WALE) (by NLA) of 10.2 years, which ensures long-term stability. Moreover, all its six retail malls are conveniently accessible via major highways, rail stations, and arterial roads or in suburban regions with high population density. This helps its malls to attract steady traffic flow and maintain demand for its properties, which reached approximately 100% occupancy as at 31 March 2014.
- Superior dividend yield of >8% far surpasses its peers'. Compared to its peers, particularly Japanese REITs in Japan, Croesus Retail Trust offers a far superior dividend yield of >8% at the current share price vs 3- 5% for the majority of its Japanese peers.
- Initiate coverage with a DDM-backed TP of SGD1.15, 7.9% COE. Our SGD1.15 TP represents a 20% potential upside from the current price of SGD0.96. At our TP, its distribution yield should stay at an attractive 7%. We like Croesus Retail Trust for its: i) stability, ii) attractive dividend yield, iii) transparent structure, iv) experienced management team, and v) potential positive rental revisions from the Mallage Shobu mall and asset revaluations. Initiate coverage with a dividend discount model (DDM)-backed TP of SGD1.15, with a 7.9% COE.