LMIR – OCBC
Weakening IDR likely to affect NAV
- IDR has fallen 7.4% vs. SGD since end Jun
- Valuation of properties in SGD likely affected
- Raise discount rate; Reduce FV to S$0.44
Concern over FX movement
The IDR has weakened some 7.4% against the SGD since 28 Jun, with SGD1 buying IDR8558.25 as at 21 Aug, compared to IDR7922.96 on 28 Jun (Bloomberg). We understand that only ~65% of the cash flow from the properties for 2H13 are likely hedged for depreciation of IDR against SGD. In addition, the weakening of the IDR against the SGD does not bode well for the valuation of LMIRT’s properties in SGD terms, which means that NAV would likely be affected negatively.
No surprises in 2Q13
To recap, LMIRT posted 2Q13 gross rental income of S$40.1m, up 30.2% YoY. The increase was mainly due to the acquisition of the six new malls in 4Q12, and positive rental reversions of 15.5% for the existing malls. Total revenue (equivalent to gross rental income in 2Q13) fell 12.5% YoY due to the inclusion of service charge and utilities recovery income from the malls’ operational activities in 2Q12. Such activities have been outsourced to a third party operating company with effect from 1 May 2012 and there is also a related decrease in expenses registered in 2Q13. Distributable income increased by 19.5% YoY to S$20.5m and DPU climbed 17.7% YoY to 0.93 S cents. Results for the quarter were in line with our expectations and consensus’. 1H13 DPU of 1.82 S cents forms 50.6% of our FY13 estimate of 3.6 S cents, which we maintain for now.
Plans to acquire property this year
Gearing remains healthy at 24.2%. LMIRT may refinance the S$147.5m term loan due Jun 2014 as early as late 2013. Approximately 68% of LMIRT’s S$1.77b portfolio remains unencumbered, providing LMIRT with financial flexibility for future acquisitions. Management hopes to acquire at least one property this year.
Maintain HOLD
To reflect a higher risk profile for LMRT’s unit price, especially given the outflow of funds from emerging markets, we incorporate a higher cost of equity of 10.8%, versus 9.7% previously, and trim our DDM-based FV to S$0.44 from S$0.49. Maintain HOLD. We estimate a FY13F yield of 7.9%.
KepREIT – OSK DMG
Most Undervalued Office REIT
We initiate coverage on Keppel REIT with a BUY. Using DCF with terminal growth rate assumption of 3.0%, blended COE of 9.3% (with a 3% risk-free rate, 0.8x beta and 7.88% equity risk premium), we arrive at a SGD1.66 TP. We expect KREIT shares to re-rate over the mediumterm, as its portfolio will likely benefit from Singapore’s low incoming supply of new commercial assets and its high-yielding Australian assets.
Strong income stream. With a weighted average lease to expiry (WALE) of 6.6 years and long term lease (>five years) accounting for 40% of its portfolio, coupled with revenue hedge for its Australian exposure, KREIT’s earnings downside risks appear limited.
Improving stock liquidity, better acquisition currency. The restructuring of Keppel Group’s holdings and its subsequent stake reduction in KREIT has helped improved the latter’s liquidity, with its estimated free float now at 46% (below 25% during its initial years). Not only does this allow greater investor participation, but it also enables greater capital flexibility for potential acquisitions.
Recent sharp share price drop an overreaction. Amidst the volatility in the capital markets since May – whereby the STI index fell 7% and the FSSTREIT index dropped 17.8% – KREIT suffered a 23.6% correction. We see this as overdone, as it implies an 88% decline in KREIT’s forward rental cycle, coupled with a 25% correction in the AUD, all of which points to an overreaction. Hence, we see an excellent opportunity to accumulate a great value REIT with substantial upside.
TP of SGD1.66 provides 35% upside potential. K-REIT is currently trading at a compelling 6.8% FY13F yield, at a substantial 15% discount against its peers Suntec REIT (SUN, NEUTRAL, TP: SGD1.78) and CapitaCommercial Trust (CCT, NEUTRAL, TP: SGD1.45), both trading at 5.8%. We initiate coverage on KREIT with a SGD1.66 TP, which implies a potential upside of 35%.
MGCT – DBSV
A good showing
- Maiden numbers ahead of forecast by 8%
- Boosted by strong reversions at Festival Walk and Gateway Plaza
- Maintain Buy, TP revised to S$1.09
Highlights
Sterling set of maiden results. MAGIC reported its maiden set of results for the period 7 Mar – 30 June 2013. Income available for distribution for the period of S$46.1m was 8.3% higher than IPO prospectus forecast, translating to a DPU of 1.734Scts (vs forecast of 1.6Scts). This was achieved on revenue of S$73.8m (+3.4% ahead of forecast) while NPI came in at S$59.7m (+7.4% over forecast) on efficient cost management.
Robust leasing activities. Portfolio occupancy remained high at 98.3% (Festival Walk 99.1%, Gateway Plaza 97.8%). About 84% of expiring retail leases at Festival Walk this year were renewed at rates 21% higher than preceding levels, aided by higher tenant sales of 7.8% y-o-y with shopper traffic rising 1.5% y-o-y, while 90% of office leases due were renewed at 25% higher rates than previously. For Gateway Plaza, 43% of leases expiring this financial year have been renewed at rents 86% higher than previously, with a retention rate of >92% as it continued to enjoy expansion demand from tenants’ consolidation activities.
Our View
Benefiting from organic rental growth and AEIs. Looking ahead, we expect 2H to be better than 1H. There is a remaining 25% of leases at Festival Walk to be re-contracted in FY14 and another 5% at Gateway Plaza with an additional 18% and 10% of leases at both properties respectively due in FY15. We believe that Festival Walk will continue to deliver robust results, aided by steadily growing retail sales in HK. Planned AEIs including conversion of the office into semi-commercial space at Festival Walk will also likely contribute from end of 3QCY13 while ongoing tenant remixing should bear positive fruits in the medium term. Despite the overall
weaker Beijing office leasing market, Gateway Plaza continued to enjoy good demand in its micro-market with transacted rents still within the Rmb320-360psm/mth range. Demand drivers are expected to come from existing tenants’ expansion demand rather than new demand.
Healthy balance sheet. In terms of capital management, gearing is at 41.5% with two thirds of its debt swapped into fixed rate with all-in interest cost maintained at 2%. 100% and 90% of its HK$ distributable income for Year 1 and 2 have also been hedged respectively. This provides unitholders with certainty of distributions.
Recommendation
BUY, S$1.09 TP. We continue to like MAGIC for its earnings resilience backed by robust performance at Festival Walk as well as the growth aspects from organic positive rental reversions. With the adjustment of the latest risk free rates, we have revised our TP to S$1.09. The stock offers 5.8-6.4% FY14-15 DPU yields and a potential total return of 20-21%. Maintain Buy.
FirstREIT – OCBC
Contribution from new assets
- 2Q13 core DPU rises 16.4% YoY
- Aiming to reduce floating rate exposure
- Unchanged HOLD rating and S$1.20 FV
2Q13 results within our expectations
First REIT (FREIT) reported its 2Q13 results which were within our expectations. Gross revenue surged 43.4% YoY to S$20.1m due largely to contribution from its four newly acquired properties in Indonesia (two acquired in Nov 2012 and two in May 2013). Distributable amount to unitholders rose 4.0% YoY to S$12.7m but DPU fell 4.1% to 1.85 S cents. However, if we strip out an exceptional distribution in 2Q12, FREIT’s distributable amount to unitholders and DPU would instead have increased by 26.6% and 16.4%, respectively. As FREIT had already made an advance distribution of 0.99 S cents on 26 Jun 2013 (prior to the issuance of new units for part payment of its acquisitions), only the remaining 0.86 S cents will be paid to unitholders on 29 Aug 2013. For 1H13, gross revenue rose 34.2% to S$37.6m and constituted 45.2% of our full-year projection. DPU (after stripping out the special distribution highlighted earlier) increased 12.9% to 3.59 S cents, or 45.5% of our FY13 forecast. We expect 2H13 to be stronger on a HoH basis due to a full-quarter of contribution beginning 3Q13 from the two hospitals acquired in May this year.
Plans to refinance debt a positive
Management updated us that it is in the process of refinancing ~S$92m of its floating-rate debt to a 4-year fixed-rate unsecured bank loan. The all-in cost of debt for this loan is expected to be ~3.7% and will likely be finalised by Aug this year. Upon the completion of this refinancing exercise, FREIT’s next earliest refinancing need will come in 2016 (S$166m principal amount), while ~46% of its borrowings will be based on a floating rate structure (previously 72%), based on our estimates. We are positive on this as short-term interest rates in Singapore are likely to see an increase in late 2014 or early 2015, which would affect the cost of borrowing for floating rate loans.
Targeting AEI; maintain HOLD
Meanwhile, FREIT has plans to carry out asset enhancement initiatives on three of its Indonesian properties, although details have yet to be finalised. We retain our forecasts, HOLD rating and DDM-derived fair value estimate of S$1.20 on FREIT.
MIT – DBSV
Growing nicely
- DPU of 2.43 Scts in line
- Steady earnings growth backed by decent operational performance and completion of development projects
- BUY, TP revised to S$1.52
Highlights
1Q14 DPU of 2.43 Scts in line. Mapletree Industrial Trust (“MINT”) reported gross revenue and net property income of S$75.1m and S$52.5m respectively, which were higher by 12% and 9% y-o-y. The better performance was largely due to higher rental reversions achieved portfolio-wide (average portfolio rents increased by 1.7% to S$1.71 psf), supported by higher occupancy levels achieved in Flatted Factories, Business Parks and Hi-Tech Buildings. MINT’s portfolio occupancy continues to remain stable at c95.4%. Distributable income was 9% higher y-o-y at S$40.2m (DPU of 2.43 Scts). On a sequential basis, distributions grew by c3.3%.
Outlook
Manager expects operational outlook to remain stable. Looking ahead, the Manager is looking to improve portfolio WALE (currently at 2.4 years) and income certainty for the REIT through offering tenants longer-term leases, which offer lower-than-market starting rents and staggered rental escalations. Take-ups have been positive, resulting in the strong retention rates of c84% for the portfolio. In addition, the Manager has back-filled c10% of the space vacated by Credit Suisse (which contributed c.4.3% of income). While sequential performance might see a dip, the loss of income is expected to be partly offset by positive rental escalations of up to c10% given the positive spread between expiring and spot rents.
On track to deliver asset enhancements/developments. MINT is investing close to cS$233m in various asset enhancement initiatives (Woodlands Central, Toa Payoh North 1 and The Signature) and developments (Kullicke & Soffa and Equinx), which remain on track for completion by towards the end of 2013/2014. These properties should contribute positively to the trust’s performance in the medium term. In addition, management continues to look at acquisition opportunities and might look towards potential development projects in Malaysia (after the expiry of its Singapore mandate in Sept’13).
Recommendation
BUY, TP S$1.52. At FY14F-15F yields of 6.8%- 7.2%, MINT offers investors a steady growth profile which is visible and achievable. Upside surprise is expected to come from acquisitions which we have not factored in. Our TP is revised to S$1.52 as we raise our risk free assumption to 2.6% from 1.8%.