SREITs – OCBC
Performing a reality check
- Expecting rise in interest rates
- Focus on fundamentals and growth
- Suntec, SGREIT and FCT as top picks
Selecting the winners
The S-REITs sector has rallied 7.3% and outperformed STI by 4ppt YTD on US Fed Chair Janet Yellen’s forward guidance that interest rates are likely to stay low “for a considerable time”. However, against this backdrop, we note that the Fed will continue to cut the bond purchases meant to suppress the long-term borrowing costs low, keeping it on track to end the stimulus programme late this year. Even the recent forecasts by the Fed officials point to a possibility that the interest rates may rise faster than previously expected. Given these developments, we now make a conscious effort to select the S-REITs that are likely able to withstand any potential correction better and outperform the rest.
Fundamentals still sound
Our findings show that the fundamentals of S-REITs have generally remained sound, and S-REITs continue to benefit from their past investments and higher secured rentals within their existing portfolios. On a relative basis, the office REIT subsector outlook looks the rosiest, as the uptrend in office rents is likely to be sustained amid strong leasing activity, low vacancy and limited supply in the near term. This is followed by retail REITs, which are poised to reap the returns of their AEIs and the positive operating landscape. For FY15, we note that Suntec REIT and CapitaCommercial Trust are expected to experience one of the fastest increases in DPU, according to Bloomberg consensus forecasts.
Assessing impact from interest rate hike
On the capital management front, S-REITs have again stepped up their efforts to repay/refinance their borrowings ahead of their maturities and over a longer term, as well as hedge their interest rate exposure in anticipation of the potential hike in interest rates. This has resulted in an improvement in gearing, debt duration and hedge ratio. In fact, for a 1ppt growth in interest rate, we estimate the greatest fall in DPU among the S-REITs is contained within 10%, while
several S-REITs such as Starhill Global REIT are likely to be unscathed as a result of fixing 100% of their rates via hedges or fixed-rate notes.
Our sector picks
In view of all this, we retain Suntec REIT [BUY, S$1.85 FV] and Starhill Global REIT [BUY, S$0.90 FV] as our sector picks. CapitaCommercial Trust, our third preferred pick, has performed very well YTD, clocking a 15.9% increase in unit price. At current level, we believe most of the positives have been priced in. As such, we replace CapitaCommercial Trust with Frasers Centrepoint Trust [BUY, S$2.08 FV] as our preferred pick. The latter has a strong financial position, trades at an attractive yield of 6.1% and P/B of 1.06x and is expected to see relatively robust earnings growth over the next year. Retain NEUTRAL on broader S-REITs sector.
SPHREIT – CIMB
Right dose of class and stability
SPH REIT is a retail REIT with two quality and well-located assets in Singapore (Paragon and Clementi Mall). We believe that the portfolio offers a unique combination of prime Orchard Road and suburban retail, and an alternative play on rising medical tourism in Singapore.
Using DDM-based (discount rate of 7.7%), we arrive at a target price of S$1.06, translating to implied CY14 yields of 5.4% for unitholders. We deem this fair against listed peers such as CMT, FCT and MCT, which trade at CY14 yields of c.5.6-5.7%.
Dose of class and stability
SPH REIT is a retail REIT with two quality and well-located assets in Singapore valued at a total of S$3.2bn. They are: 1) Paragon, a premier upscale mall and medical suites/office property in the heart of Orchard Road, and 2) Clementi Mall, a mid-market suburban mall located in the centre of Clementi town. We believe that the portfolio offers a unique combination of prime Orchard Road and stable suburban retail, and an alternative play on rising medical tourism in Singapore.
Paragon is the main draw
The main attraction for SPH REIT is Paragon. We like Paragon‟s 1) clear luxury positioning, 2) strategic location near Mount Elizabeth Hospital, 3) unbeatable track record of 100% occupancy and annual rental growth over the past 10 years, and 4) synergies between the mall and the medical tower. We expect Paragon to benefit from the government‟s positioning of Singapore as a top luxury lifestyle destination and from the nation‟s expanding medical tourism. We see growth from positive rental reversions (as its current passing rent of S$21psf is at the lower end of its peers‟ S$21-24psf, based on our estimates), rental step-ups, healthy occupancy cost of 15.7% (estimated by Urbis), and potential rise in medical suite rents. Meanwhile, Clementi Mall offers stable suburban retail exposure, further enhanced by a five-year income support.
Further growth potential through acquisition
With an asset leverage of 26.9%, SPH REIT has a debt headroom of c.S$415m to 40% asset leverage for acquisitions. Key pipeline asset includes The Seletar Mall, which is slated for completion by end-2014. Given its good mix of stability and room for growth, we initiate coverage on SPH REIT with an Add rating and TP of S$1.06.
MLT – OCBC
Acquires new Korea warehouse
- Initial NPI yield at 8.3%
- Expected to be DPU-accretive
- Looking at higher growth markets
Expanding footprint in South Korea
Mapletree Logistics Trust (MLT) recently proposed to acquire Daehwa Logistics Centre from vendor Daehwa Logistics Co Ltd. This represents MLT’s investment of the ninth property in South Korea. At a purchase consideration of KRW25.5b (~S$31.2m), the asset is expected to generate an initial NPI yield of 8.3%. MLT intends to fund the acquisition by debt, and expects the transaction to be completed by Jul 2014. Based on our projections, the new addition could add an annualized 0.05 S cents to MLT’s DPU. On the other hand, MLT’s gearing is likely to increase marginally from 33.3% as at 31 Mar to 33.8%.
Details on the new property
Daehwa Logistics Centre is a three-storey Grade A dry warehouse with a GFA of 25,600 sqm located in the prime logistics hub in Seoul. It was completed in Dec 2013, and boasts modern specifications such as a floor-to-ceiling height of 10m, floor loading capacity of 2.7 ton/sqm and direct ramp access to all three floors. At present, the warehouse facility is fully occupied by three quality tenants, namely eBay (one of world’s largest e-commerce companies), Acushnet (global golf equipment company) and vendor Daehwa (fast growing local logistics operator). The leases have a weighted average lease to expiry of 3.5 years with built-in annual rental escalations for 70% of the leased area.
Maintain HOLD
We note that the acquisition is consistent with management’s guidance in Apr that it was performing the due diligence for a potential purchase of a Korea-based property. It is also in line with MLT’s strategy to rebalance its portfolio towards South Korea and other higher growth markets. Looking ahead, we believe MLT may turn to the China assets from its sponsor’s pipeline for further growth. However, pending any new development, we only factor in the acquisition of Daehwa Logistics Centre for now. Our fair value remains unchanged at S$1.10. Maintain HOLD on valuation grounds
FHT – AmFraser
FRASERS HOSPITALITY TRUST IPO SET TO RAKE IN $365M
FRASERS Hospitality Trust (FHT) is slated to raise $365.2 million from its initial public offering (IPO) and from cornerstone investors. Its offer price of 88 cents translates into a yield of 7 per cent for the projection year from October 2014, said its prospectus lodged yesterday.
FHT is selling 182 million stapled securities in its IPO at 88 cents apiece. This will consist of a placement tranche of 136.6 million stapled securities and a public tranche of 45.5 million stapled securities.
Its sponsor Frasers Centrepoint Limited (FCL) is injecting six serviced residences into FHT; FCL's major shareholder TCC Group is injecting the other six hotels that include InterContinental Singapore and The Westin Kuala Lumpur.
With an initial $1.66 billion portfolio of 1,928 hotel rooms and 842 serviced residence units, FHT will be the largest global hospitality portfolio listed here in terms of the number of rooms, the company said.
Post‐listing, FCL and the TCC Group will hold respective 22 per cent and 43 per cent stakes in FHT before the over‐allotment option is exercised. FHT is expected to have a market value of $1.77 billion, based on its offer price.
FHT has a policy to distribute 100 per cent of its distributable income in the forecast period of 2014 and 2015 and at least 90 per cent of its distributable income thereafter.
The offer will open on July 1 and close on July 10. Trading of FHT securities will begin on July 14.
Hotel REITs – CIMB
Quantity lower, quality higher
Visitor arrival to Singapore was flat yoy in 1Q14. This was largely due to lower Chinese visitor arrivals in Feb and Mar, which we attribute to: 1) a new tourism law in China, and 2) the MH370 incident. Although the number of visitors from China has dwindled, we believe the average Chinese spending in Singapore has strengthened, benefitting the luxury and upscale hotels. We maintain our Add rating on OUE-HT (TP: S$0.96) and CDL-HT (TP: S$1.97), and our Reduce rating on FEHT (TP: S$0.80).
What Happened
Recent data from the Singapore Tourism Board (STB) revealed that visitor arrivals to Singapore remained flat yoy in 1Q14. During this period, higher visitor arrival from South East Asia (+4.1% yoy), on the back of stronger arrivals from Indonesia (+5.5% yoy), was offset by weaker visitor arrivals from China (-14.0% yoy). On the other hand, it was noted that RevPAR for Singapore hotels during the first four months rose by 2.1% yoy, despite a 0.7% yoy drop in occupancy. The growth was attributed to the upscale and luxury hotel segments, where RevPAR expanded by 10.1% and 3.1% yoy, respectively, vs. -4.4% in the mid-tier and +0.2% in economy segments.
What We Think
The slowdown in visitor arrivals from China could mainly be attributed to 1) the new tourism law in China which took effect in Oct 2013, and to a lesser extent 2) the MH370 incident. During Feb 14 and Mar 14, Chinese visitor arrivals dropped by an average of 19.5% yoy. During this period, although fewer Chinese came on multi-country package tours, more are travelling here on their own – and this group of visitors tend to spend more. As highlighted by data released by STB earlier this year, total Chinese tourism receipt in 4Q13 grew by 1% despite visitor arrival from China dipping by 31% over the same period. During 2013, Chinese spending was also noted to reach c.S$3.0bn, exceeding the Indonesians (at S$2.3bn) for the first time since 2007. Furthermore, tourism shopping tax refund company Global Blue recently pointed out that Singapore remains the second most favoured shopping destination for the Chinese after Paris. This trend is expected to strengthen further as the government aims to position Singapore as a top luxury lifestyle destination through various partnerships with Chinese tourism providers. Besides the patronage from big Chinese spenders, the upscale and luxury hotel segments are expected to benefit from 1) stronger Indonesian visitor arrivals, 2) packed calendar of events in 2014, and 3) a potentially stronger corporate spending trend as the global economy continues to recover in 2014.
What You Should Do
With the luxury and upscale hotel segments’ RevPARs expected to be strong in 2H14, we maintain our Add rating on OUE-HT (TP: S$0.96) as the company has the ability to boost RevPAR through the sponsor-funded AEI of its Mandarin Orchard hotel. Similarly, we remain positive on CDL-HT (Add; TP: S$1.97) and expect continual good performance from its Singapore and Maldives portfolios. On the other hand, we are negative on FEHT (Reduce; TP: S$0.80) as we expect its portfolio of mid-tier hotels, particularly those located along Orchard Road, to come under pressure amid intensifying competition in the coming months.