FCT – OCBC
New mall to propel growth
- Initial NPI yield at 5.43%
- Funded partially by placement
- Gearing to increase slightly to 30.3%
New addition to portfolio
Frasers Centrepoint Trust (FCT) announced that it has completed the acquisition of Changi City Point (CCP) from its sponsor’s joint venture Ascendas Frasers Pte Ltd on Mon. Recall that FCT first proposed to acquire the retail mall for a purchase consideration of S$305.0m (or S$1,472 psf NLA) on 8 Apr. According to the circular for unitholders, CCP is expected to generate an NPI yield of 5.43% and to contribute positively to DPU, assuming that the transaction is funded via a combination of debt and equity.
Strong interest for private placement
FCT has since launched a private placement of 88m new units at an issue price of between S$1.79 and S$1.835 per unit, upon getting unitholders’ approval for the related-party transaction. We note that the issue price was later fixed at the top range of S$1.835, backed by strong demand from new and existing Asian and European institutional investors. This represents a slight 3.6% discount to the VWAP for the full market day prior to the placement announcement. The total net proceeds of S$158.7m raised from the placement exercise was used to part finance the acquisition, while the remaining balance of the purchase price was funded by borrowings and internal resources. Based on our projections, the CCP deal is expected to add an annualised 0.12 S cents to FCT’s DPU. FCT’s gearing ratio, on the other hand, is likely to increase from 27.7% as at 31 Mar to 30.3%.
Maintain BUY
In connection with the placement, FCT has also declared an advance distribution of 2.288 S cents per unit for the period of 1 Apr to 9 Jun 2014, payable on/around 17 Jul. This translates to a respectable yield of 6.4%. We now incorporate the private placement and acquisition into our forecasts. Consequently, our fair value is raised from S$2.02 to S$2.08. Given that upside potential remains attractive, we maintain our BUY rating on FCT.
PLife – CIMB
More reasonable valuations
PREIT has de-rated 5% to more reasonable valuations since our downgrade. Fundamentally, it remains one of the most stable REITs with long leases, downside protection and CPI-linked rental reviews. There is further room for acquisitions given a healthy balance sheet at 35% gearing and debt headroom of S$131m-287m at 40%-45% gearing. We maintain our DDM-based target price (discount rate: 7%) and upgrade PREIT on valuation grounds. We have yet to factor in any acquisitions but estimate that a S$100m acquisition at NPI yield of 7% could lift our target price by 5% to S$2.53. Re-rating catalyst will be yield-accretive acquisitions.
What Happened
PREIT has de-rated 5% since our downgrade on 2 May 14, which was largely premised on expensive valuations.
What We Think
Fundamentally attractive. Aside from being in a resilient industry, PREIT benefits from favourable lease structures such as a long-lease term to expiry (>10 years), downside protection for 91% of its revenue and CPI-linked rental review for 67% of its portfolio. The Singapore hospitals alone should drive organic growth of 2.7% over the next two years assuming a CPI of 3%.
Further room for acquisitions. PREIT’s exposure in Japan (>30%) positions it as a proxy for Japanese reflation. More importantly, its early entry and good working relationship with Japanese nursing home operators allow PREIT to consistently make yield-accretive acquisitions despite rising competition. We expect more acquisitions given its healthy gearing of 35% and debt headroom of S$131m-287m. Aside from Japan, Australia and Malaysia are potential markets.
More reasonable valuations. The yield spread for PREIT against 10-year government bond yields has widened from 175bps (during our downgrade) to 275bps. While this remains below the S-REITs simple average of 3.8%, we believe this is a more reasonable level given PREIT’s stability.
What You Should Do
Hold for a stable REIT with c.5% dividend yield. We have only factored in organic growth, but estimate that a S$100m acquisition at NPI yield of 7% could raise our target price by 5% to S$2.53.
MLT – Maybank Kim Eng
MLT expands in South Korea
- MLT acquires Daehwa Logistics Centre, its ninth property in South Korea, for SGD31.2m which is to be fully debt funded.
- At an initial NPI yield of 8.3%, it is a DPU-accretive acquisition.
- A positive move but too small to ‘move the needle’ for MLT. Reiterate SELL with a higher TP of SGD1.01.
What’s New
MLT announced last evening that it has entered into a sale and purchase agreement for the acquisition of Daehwa Logistics Centre in South Korea for KRW25.5b (SGD31.2m). We believe this asset was highlighted by management during the FY3/14 briefing on which MLT had previously signed an MOU. The new property is fully occupied by three quality tenants: eBay, Acushnet and Daehwa. The leases have a weighted average lease term to expiry of 3.5 years with built-in annual rental escalations for 70% of the leased area. The acquisition will be fully debt funded with completion expected by July. MLT’s aggregate leverage ratio is expected to increase marginally to 33.8% from 33.3% as of 31 Mar 2014.
What’s Our View
The property’s initial NPI yield of 8.3% compares favourably to MLT’s cost of borrowing of 1.9% and overall portfolio NPI yield of 6.5%. While it is a DPU-accretive acquisition, it would only raise FY3/15E-FY3/17E EPS by up to 0.8%. Post transaction, revenue contribution from South Korea will increase from 8.7% to 9.4%.
Nonetheless, the size of the acquisition is too small to ‘move the needle’ for MLT and we look forward to more sponsor injections and third-party acquisitions in FY3/15E. We remain downbeat on industrial warehouse properties, as this segment is the most at risk of a sharp physical price correction. Maintain SELL on MLT with a slightly higher TP of SGD1.01 (previously SGD1.00) after factoring in this acquisition.
AscottREIT – OCBC
Expecting better 2H14
- Seasonally softer 1Q14
- Portfolio RevPAU flat at S$124
- AEIs and acquisitions to propel growth
1Q14 results within view
Ascott Residence Trust’s (ART) recent 1Q14 results were within our expectations. Both revenue and gross profit grew by 16% YoY to S$80.4m and S$39.2m, respectively. The growth was bolstered by contributions from the properties acquired in 2013 and improved performance at its existing properties, particularly from United Kingdom, France, Germany and Vietnam. Distributable income was down 3% to S$26.7m due to a one-off realized forex gain of S$8.1m in 1Q13. Together with the rights issue in Dec 2013, DPU eased 22% to 1.75 S cents. While this only meets 22% of our FY14F DPU, we view the results to be in line considering that this is a seasonally softer quarter and performance is expected to improve with new income streams from its announced acquisitions YTD.
Operating metrics mostly positive
For the quarter, RevPAU has remained stable both YoY and QoQ at S$124. However, we note that RevPAU for Japan, United Kingdom and Belgium saw a 18%, 13% and 11% increase respectively, driven by strong demand from corporate and leisure travelers. In Singapore and Vietnam, higher demand from executives on project assignments were also seen, and this has helped to push RevPAU up 6% in both countries. Only Australia and The Philippines were impacted by weaker marker demand and unfavourable forex movements. Nonetheless, as forward contracts to hedge 60%-70% of its estimated income derived in EUR, GBP and JPY were entered, we expect limited volatility in ART’s distribution.
Maintain BUY; fair value unchanged
We also understand that 17%-25% uplift in average daily rates was registered upon completion of the asset enhancement initiatives (AEIs) in 1Q. Looking ahead, management disclosed that it will continue to undertake AEIs to enhance customer experience and maximize returns (S$29.3m costs from 2Q14-2Q15). Coupled with the revenue from its Dalian property (acquired in Mar), Fukuoka property (to complete by Jul)
and possibly new acquisitions in the key gateway cities, we believe 2H14 to be stronger. Maintain BUY with unchanged fair value of S$1.33 on ART.
KepREIT – CIMB
Divest to invest
KREIT has just announced that Prudential Tower will be divested for S$512m, or 6.3% above its book value. While the price is attractive and the divestment could pave the way for KREIT’s potential acquisition of MBFC Tower 3, we estimate that income support may be required to make any such acquisition yield-accretive. We slightly lower our DPU estimates and DDM-based (discount rate 8.5%) target price after adjusting for the divestment. We
maintain our Hold rating while awaiting more news on the acquisition.
What Happened
KREIT has entered into an agreement with a JV under KOP for the divestment of its 92.8% stake in Prudential Tower for S$512m. Completion of the sale is expected on 26 Sep 14.
What We Think
Attractive divestment price. The price of S$2,288 psf is 6.3% above book value, which implies that Prudential Tower will be sold at a low NPI yield of 2.3% (based on FY13 NPI and 100% occupancy), an attractive divestment price, in our view. KREIT is expected to book a net divestment gain of S$9.0m, which could pave the way for its acquisition of MBFC Tower 3. Although Prudential Tower accounts for 8.4% of KREIT’s FY13 NPI, interest savings is expected to mitigated the net drop in DPU by 3.4% and 1.6% in FY14/15 respectively.
Potential acquisition of MBFC Tower 3. Although no details have been divulged, our estimation suggests that if MBFC Tower 3 is acquired at S$2,555 psf (similar to what DBS paid last year for 30% of the tower), it can potentially add 0.9% to KREIT’s DPU yield, if: i) rental rates are supported at S$11 psf/month; and ii) 80% of the remaining S$651m (valuation of Tower 3 at S$1,150m minus S$499m) is financed through debt at an interest rate of 2.15%; resulting in a gearing of 44.2%. Having said that since S$2,555 was paid before the upturn of the office market, the income support can potentially be higher if the acquisition is executed at a higher price. The attractiveness of this potential acquisition rests largely on KREIT’s ability to lift passing rents for the property to the level of income support; considering that DBS is also the anchor tenant of the property.
What You Should Do
Continue to Hold at a slightly lower target price of S$1.21, while we await for more clarity on the potential acquisition.