FCT – DBSV
Inching in on Changi City Point’s contribution
- Results in line, DPU rises 7% y-o-y to 2.88Scts
- Changi City Point (CCP) acquisition to be completed in May, expect S$120m of fundraising
- Maintain BUY, TP S$2.13
Highlights
Higher contributions from Causeway Point. FCT reported 2Q14 revenue of S$41m (+3% y-o-y), NPI of S$29m (+2%). The improvement in revenue was largely driven by Causeway Point (CWP), while the remaining malls, sans Bedok Point, returned a stable performance. However, this was dampened by higher operating costs stemming from higher maintenance expenses, property tax and property manager’s fees. DPU of 2.88Scts was 7% higher y-o-y, as the Trust distributed 100% of its income available for distribution in 2Q14 vs retention of c.5% in 2Q13.
Our View
Higher retail spending compensates for lower footfalls. Shopper traffic came in at 20.4m visitors, a decline of 8%, attributable to lower footfall at Bedok Point and competition from newer malls at Jurong East. However, the Manager has guided that tenant sales have increased 2.5% for FYTD Feb, and given that (i) FCT’s major tenants include supermarkets (Cold Storage, NTUC) and departmental stores (Metro) which have seen growing retail spending, and (ii) portfolio reversions remain healthy at 9.3%, we don’t think that the decline in traffic will have too much impact on rents from FCT’s portfolio at large.
Changi City Point (CCP) to be acquired soon; contribution from 4QFY14 onwards. As previously mentioned, we have forecasted one quarter of contribution from CCP for FY14, pending its EGM. We are positive on the impact of CCP on the REIT and see upside coming from the bulk of CCP’s leases expiring in 1QFY15, and given that the Manager is looking to refresh the tenant mix, we could potentially see double-digit rental uplifts at the mall, given passing first cycle rents of S$9.08 psf. In our numbers, we have assumed EFR of close to S$120m (c.40% of total acquisition cost of CCP), gearing to settle at c. 32% post acquisition.
Recommendation
Maintain BUY, TP S$2.13. We like FCT for its ability to sustain organic rental growth momentum at CWP and Northpoint post-AEI. Furthermore, income contribution from CCP in 4Q14 should be immediately accretive to earnings for FY14. The stock is currently trading at yields of 6.3-6.8%, or 1.0 P/BV. We maintain our BUY call
CLT – DBSV
DHL project a key earnings driver
- 1Q14 profit in line; DPU fell y-o-y due to larger share base
- High income visibility for rest of 2014 with only 2% of leases expiring
- Built-to-suit project for DHL, a key driver of inorganic growth; gearing to settle at c.36%
- Maintain BUY rating and S$1.29 TP (DCF metric)
Highlights
1Q14 results in line. Topline and net property income grew 8.2% y-o-y to S$20.7m and S$19.6m, respectively. This was led by contribution from an expanded portfolio (Precise Two warehouse), supported by higher rental income from annual step-ups. Interest cost was 2.7% lower y-o-y due to a lower all-in rate of 3.48%. As a result, distributable income grew 5.5% y-o-y to S$16.7m. However, DPU edged down 4.2% y-o-y to 2.14 Scts due to a larger share base. Operating performance was stable compared to the previous quarter.
High income visibility with minimal expiries in 2014; negotiating renewal of master leases due FY15/16. Cache has renewed the lease for Kim Heng Warehouse for another two years, which means minimal lease expiries (2% of rental income) for the rest of FY14. The bulk of its income will expire in FY15F/16F (mainly the master-leases for IPO properties) but the manager is actively engaging with the master lessees (CWT and C&P Limited) to renew the leases.
Our View
Built-to-suit DHL project to drive growth from FY15F. Supported by a portfolio of warehouses under master leases with annual step-ups that offer high income visibility, the manager has embarked on the Trust’s largest built-to-suit project (BTS) to date for DHL Singapore. Construction of this ramp-up warehouse facility is expected to start in the middle of 2014 and would be completed in phases from 2H15. We have assumed Cache would fund this acquisition with debt and expect gearing to settle at c.36% upon completion (vs 29% currently).
Recommendation
BUY, TP S$1.29. The stock is attractive, offering yields of close to 7.4%-7.7% and a total return of 16% to our TP.
Suntec – CIMB
The signs of strength
SUN kept its DPU unchanged yoy at 2.2 cts (25% of our full-year forecast) in 1Q14 despite strong revenue growth of 32.8% yoy. The strong growth, which was in line with our estimate, came mainly from the opening of Suntec Singapore following the completion of Phase 1 of the AEI. We stress that the DPU being paid comes entirely from organic contribution, i.e. there is no dipping into the capital pool. We maintain our Add rating with an unchanged
DDM-based (discount rate: 8.0%) target price of S$1.83 on the back of further income contribution from the upcoming Phase 2 of AEI at Suntec City.
Phase 2 of Suntec AEI
Phase 2 of the AEI (scheduled to open before the end of 2Q14) registered a strong 95.0% pre-committed occupancy as at 31 March though we speculate that it is closer to full occupancy at the moment. During the results briefing, management indicated that the AEI remains on track for a 10.1% ROI, securing an average rental rate of S$12.69 psf/mth for Phases 1 and 2. Based on our calculations, this translates into an average passing rent of c.S$12.15 psf/mth for Phase 2, a level which we deem fair given that the majority of Phase 2 tenants are non-fashion tenants who usually pay lower rental rates.
No financing requirements until 2016
In terms of its financing needs, SUN has fully refinanced all the debts in FY14 and FY15 via a recently secured S$800m, 5-year loan facility together with the proceeds from the recent S$350m placement. With no further risks in financing, together with a low all-in financing cost of 2.49% and 65% of total debt subject to a fixed rate, we believe that SUN is well-shielded from any upcoming hike in interest rates. Furthermore, barring any future potential acquisitions, we believe that capital raising is unlikely.
Maintain Add on bright prospects
Looking ahead, Phase 2 AEI will begin to contribute in 3Q14. Marketing for Phase 3 (scheduled to complete in 4Q14) has also commenced and, based on our background checks, is relatively well received by potential tenants. In addition, with further room for positive rental reversion in its office portfolio, coupled with the commencement of coupon payment from Leighton Tower, we maintain an Add rating with an unchanged target price of S$1.83.
CLT – CIMB
Post-results luncheon feedback
Key issues discussed during the post-1Q14 results investor luncheon we recently hosted for Cache were 1) the BTS project for DHL, 2) the leases due for renewal in FY15, 3) the outlook for the warehouse rental market, and 4) Cache’s financing needs. We came away with our positive view on the stock intact.
What Happened
We recently hosted a post-1Q14 results investor luncheon for Cache.
What We Think
The discussion reaffirms our belief that Cache will benefit from the upcoming BTS project. Upon completion, this property will be used as the Asian headquarters of DHL and will be fully committed by the said tenant within two years of the completion of construction. This project is well-timed given a slower market sentiment on the warehousing industry on the back of a short-term oversupply, particularly from the shadow spaces that will be released into the market in the coming quarters.
Cache’s portfolio has historically been very stable, mainly due to the master leases undertaken by its sponsors. However, looking ahead, with 34% of leases due to expire in FY15, there is a risk that some of these upcoming leases may not be renewed by the sponsor. Having said that, we find comfort in management’s confidence that it will continue to achieve high occupancy even if the leases are not renewed. This confidence is underpinned by the strong geographical positioning of the properties and the costs involved for the tenants to move out, thus significantly limiting the number of choices. In addition, even though the rental market remains soft at the moment, management is confident of getting positive rental reversions for these upcoming leases if they are not renewed as the underlying rental rate is still below the market spot rent despite an annual step-up rental rate of 1.5-2.5% p.a. since 2010. According to URA data, the rental rate for warehouses has jumped by c.50% from S$1.50 psf/mth in 1Q10.
What You Should Do
Although some execution risks may arise if the master leases are not renewed, the potential upside to rental rates could mitigate any probable downside in the event of a dip in occupancy. We maintain our Add rating.
AscottREIT – CIMB
A seasonally weaker first quarter
1Q14 DPU formed 20% of our and 22% of consensus full-year forecast, slightly below from a seasonally-weak quarter. We note rising staff cost and slightly lower operating margins, but expect higher contributions from recent acquisitions in the coming quarters. ART’s strategy of stability through the extended-stay model and growth through AEI and acquisitions remains unchanged. However, its gearing of 35.9% is the highest among its hospitality peers, while FY14-15 dividend yields are slightly below peers. We reduce our FY14-16 DPU by 3-5% to adjust for slightly higher operating costs and our DDM-based target price (discount rate: 8.5%) falls accordingly. We maintain our Hold rating.
Operational highlights
Same-store revenue per available unit (RevPAU) rose yoy for most countries with management contracts as its properties recovered from a weak 2013. The bright spots were Japan, UK, and Belgium, which saw RevPAU in local currencies rising by 18%, 13% and 11%, respectively on stronger demand from corporate and leisure travellers. Philippines, accounting for 9% of revenue and 6% of gross profit in 1Q14, remained weak due to lower corporate accommodation budgets, higher staff cost and property tax. Foreign exchange risk is mitigated as ART has hedged c.60-70% of the distribution income derived in €, £ and ¥.
Growth from AEI and potential acquisitions
S$26m of asset enhancement initiatives (AEI) was completed in 1Q14 for selected properties, lifting renovated room rates by 17-25%. Further growth is expected from the S$29.3m of ongoing AEIs that are expected to complete in 2014 and 2015. To date, the Dalian and Japan acquisitions after the rights issue have utilised 77.7% of the S$253.7m that was raised last December. Additional yield-accretive acquisitions, possibly in China, Japan, Malaysia, Australia and Europe can provide further inorganic growth for ART.
Maintain Hold
While valuations appears attractive at 0.9x P/BV, we maintain our Hold rating as ART’s gearing is higher than most hospitality peers and FY14-15 dividend yields are slightly lower.