SPH REIT – OCBC
Maintaining its thrust ahead
- DPU exceeded prospectus forecast
- Rental reversion remained strong
- Keeping view for steady performance
2QFY14 results within expectations
SPH REIT turned in a sturdy set of 2QFY14 results last evening. NPI came in 8.6% higher than the pro forma figure in previous year at S$38.8m, while distributable income grew 9.4% YoY to S$34.9m. The positive variance was due to higher rental income from both Paragon and Clementi Mall, and lower utilities expenses. As a result, DPU for the quarter rose by a similar 8.6% YoY to 1.39 S cents, ahead of its prospectus forecast of 1.33 S cents by 4.5%. Together with 1Q distribution, 1HFY14 DPU amounted to 3.25 S cents (+5.5% YoY), 3.2% above prospectus forecast. This met 50.8% of our FY14F DPU, which we deem to be consistent with our expectations.
Robust operational performance
SPH REIT’s portfolio continued to exhibit resilience during the quarter. Both retail malls saw improvements in NPI YoY and remained fully leased. For 1HFY14, SPH REIT also achieved positive rental reversion of 10.8% for its portfolio, driven by rental uplift of 13.6% at Paragon and 5.1% at Clementi Mall. In addition, shopper traffic has held steady at Paragon, while that at Clementi Mall increased 2.7% YoY. The only slight disappointments for an otherwise robust performance were the 1) slight decline in recent tenant sales at Paragon in tandem with the softening of the luxury market; and 2) continued tight labour market which may hamper expansion plans by retailers. However, management shared that the situation is still far from worrying and that the strong lease commitment by its tenants is a strong testament to its quality portfolio properties.
Maintain HOLD on valuation grounds
Looking ahead, SPH REIT is keeping its view that it will continue to deliver steady performance. We understand that the development of its ROFR property, The Seletar Mall, is on track for completion in Dec 2014. Its balance sheet remains strong, with gearing at 26.9% and cost of debt at 2.33%. This gives SPH REIT ample debt headroom for growth. We are keeping our forecasts and S$0.99 fair value unchanged, as the results were in line with expectations. Maintain HOLD.
SREITs – CIMB
Who is the strongest of them all?
Given the strong fundamentals, we are of the view that the S-REIT market is well positioned against potential interest rate hikes. Though we maintain a Neutral view on the sector, we believe REIT such as FCT is more resilient than others and offer stable yields amid a rising interest rate environment.
Amid a rising interest rate environment, we examined the resilience of the S-REITs under our coverage through analysing their respective 1) gearing, 2) debt profile, 3) sensitivity of DPS to rising interest rates, and 4) current yield spreads. Our top pick remains FCT (TP: S$2.05) for its defensiveness and strong fundamentals. Our other favourites include AREIT and CDL-HT.
A well-positioned sector
Rising leverage ratios and interest rates are commonly deemed to be the key detrimental factors to the S-REIT market. Our interest rate sensitivity study revealed that the DPS for REITs could be negatively impacted by 1.8% in FY15 and 1.7% in FY16, if interest rates were to rise by 50bp p.a. over the next three years. On this basis, we are of the view that the DPS paid out by the S-REIT sector could still be sustainable amid a potential hike in interest rates going forward.
Stronger debt profile
Although the S-REIT sector leverage ratio at 33.4% is similar to the level before the global financial crisis of 2008, debt profiles are fundamentally stronger now in light of the 1) longer debt profile, 2) larger diversity of sources of funds, and 3) amount due to be renewed is less ‘lumpy’, accounting for less than 30% of the total debt (as a sector) due for refinancing in any one year – the risks for refinancing are relatively low, in our view.
Favour FCT
Although we remain Neutral on the S-REIT sector on the back of a rising interest rate environment, FCT remains our top pick for being the most defensive in terms of fundamentals. Similarly, AREIT has a strong defensive debt profile while CDL-HT currently offers the most attractive P/BV and biggest deviation from its historical yield spread.
MIT – DBSV
What a coup !
- New built-to suit facility contract at S$250m to yield myriad of positives for portfolio
- Gearing to edge higher to c. 41% in medium term
- Maintain BUY, TP raised to S$1.50
New built-to-suit (BTS) facility for HP at S$250m.
MINT announced that it has secured a contract to develop a new BTS facility for Hewlett Packard for a total consideration of S$250m. Upon completion in FY18, HP will sign a long term lease of 10.5 years, with two 5-year extension options, providing strong income visibility for MINT.
Positive in many aspects. The proposed development is estimated to yield 9.0% on total cost and is positive for MINT in many ways. Upon completion in FY18F, MINT will benefit from (i) higher property specifications with the property repositioned as a hi-tech property, (ii) higher revenues through maximising unutilized plot ratio (1.3x to 2.5x) resulting in c. 89% increase in GFA, (iii) stronger income visibility through a longer WALE backed by a strong tenant. To facilitate the relocation of existing tenants, the Manager will offer attractive packages, with the aim to move affected tenants to other clusters within its portfolio.
Financial capacity to undertake development. At c. 9% NPI yield, this development project is expected to be yield enhancing to earnings upon completion. Gearing is estimated to hit c. 41% upon completion. Given the phased investment, we believe there is no urging need to raise new equity.
Maintain BUY. We believe that the positives from this deal will far outweigh the limited impact on earnings in the immediate term. Maintain BUY, TP raised to S$1.50.
CDL H-Trust – AmyBank Kim Eng
FY14 a better year for hospitality
- Expect hotel room supply to register 5.7% CAGR over 2013-2015, in line with demand growth.
- Expect corporate bookings to be more favourable in 2014 as the USD strengthens against the SGD.
- Brace for a tactical recovery this year with the hospitality outlook turning more positive.
Tourism growth slows but supply can be absorbed
A total of 8,096 new rooms from known hotel projects will come on-stream between 2014 and 2016, according to commercial real estate services company CBRE. This constitutes ~15% of available stock (2013: 54,962 rooms). Nonetheless, we expect the balance between supply (measured in terms of available room nights) and demand (measured in terms of paid lettings) to stay on an even keel over 2013-2015, growing at 5.7% CAGR. RevPAR growth is projected to shrug off the 2% decline in 2013 to rise 3% this year before sliding by 1% in 2015 and 2% in 2016. We keep our forecast visitor arrivals intact at 16.4m (+6%) in 2014 and 17m (+3.7%) in 2015, the latter in line with Singapore Tourism Board’s target as well.
Better performance in store in FY14
Compared with last year, the biennial events to be held this year include crowd-pullers such as the Singapore Airshow last month, Food & Hotel Asia exhibition next month and the WTA Championships in October. With the USD strengthening against the SGD, we expect corporate bookings to also turn favourable. In addition, there will be a reprieve from new room supply this year – 2,037 vs 3,766 last year. CDL Hospitality Trusts currently trades at a 1% discount to its book value, which we believe is due to earlier concerns over hotel room glut and falling RevPAR. With the outlook for the hospitality industry turning more positive this year, we think investors can position themselves for a tactical recovery. Maintain BUY with our DDM-based TP unchanged at SGD1.75 (discount rate of 7.1%, terminal growth rate of 1%).
KGT – AmFraser
K‐GREEN TRUST SEEKS WIDER INVESTMENT MANDATE
Keppel Infrastructure Fund Management Pte Ltd (KIFM), as trusteemanagerof K‐Green Trust (KGT), has proposed an expansion of its investment mandate to cover a wider range of infrastructure assets. It is also proposing a change in sponsor to Keppel Infrastructure (KI) following a group reorganisation last year.
Currently, KGT owns Senoko Waste‐to‐Energy Plant, Keppel Seghers Tuas Waste‐to‐Energy Plant and Keppel Seghers Ulu Pandan NEWater Plant.
Yesterday, KIFM explained that when the trust was listed in 2010, it had focused on “green” infrastructure assets, which reflected the business focus of its sponsor, Keppel Integrated Engineering (KIE), at the time of listing.
However, in May 2013, KIE was reorganised under KI. KI has three core business platforms in Gas‐to‐Power, Waste‐to‐Energy and X‐to‐Energy, the la