A-REIT – DMG
Stability comes at a price
3QFY13 DPU in line with expectations. Ascendas REIT (AREIT) reported 3QFY13 DPU of 3.62S¢ (+4.0% YoY), equivalent to 26.2% of our FY13 DPU estimate. Revenue and net property income came in at S$145.2m and S$104.7m respectively. The rise in NPI by 11.5% YoY was mainly due to additional contribution of full quarter rental income from completed development projects and newly acquired properties since September 2011. Going forward, we expect AREIT to register continual growth in DPU, mainly from 1) additional contribution from the new properties acquired; 2) further AEIs on its existing properties and 3) positive rental reversion contributed by low rates due for renewal in the coming quarters. Although both AREIT’s earnings and portfolio occupancy rate are expected to remain stable going forward, due to the lack of new potential acquisition targets, coupled with the high valuation it is currently trading at (1.31x P/B and FY13 forecasted dividend yield of 5.7%), we believe this counter is fairly priced at the moment. We maintain our NEUTRAL view on AREIT with a DDM based (COE: 7.3%; TGR: 1.0%) TP of S$2.67.
Consolidation of portfolio in the near term. As highlighted by management previously, given a relatively tight industrial property market in Singapore at the moment, acquisition of good quality industrial properties is becoming more challenging. Going forward, apart from the acquisitions previously announced, AREIT aims to consolidate its portfolio and grow through asset enhancements. Properties in the portfolio to undergo AEIs in the subsequent quarters include 31 International Business Park, Xilin Districentre Building D, Tech Block II, 1 Changi Business Park Ave 1 and 31 Ubi Road 1.
SSD may have limited impact on investors’ interest in industrial space. Singapore government recently introduced a Seller’s stamp duty (SSD) on industrial properties for the first time, as it tries to rein in market speculation that has resulted in doubling in prices over the last three years. However, as the market continues to be flooded by liquidity amid a prolonged low interest rate environment, we believe the capital value of industrial properties will continue to grow in 2013, albeit at a slower rate. In addition, as the jump in industrial capital value was in-part due to a spill-over effects of the ABSD introduced to the residential sector late last year. As more cooling-measures were released recently to control the residential market prices, the effects of this spill-over is likely to continue in 2013.
Fairly valued at this moment. Going forward, although we believe the stable dividend yield from AREIT remains attractive to investors, particularly on the back of high liquidity, prolonged low interest rate environment and a strong Singapore currency; we believe AREIT is currently fair valued at the moment and maintain NEUTRAL with a TP of S$2.67.
A-REIT – Kim Eng
Industrial Landlord – Best in class
3Q-9M FY3/13 results inline. 9MFY3/13 revenue at SGD430.5m, was 75% of ours and 78% of consensus estimate. 3QFY3/13 revenue at SGD145.2m, was 25% of ours and 26% of consensus estimate. 9MFY3/13 DPU at 10.68 SG-cts (+6.2% YoY) was 75% of ours and 76% of consensus estimates. 3QFY3/13 DPU at 3.62 SG-cts (+2.5% QoQ, +4.0% YoY) was 25% of ours and 26% of consensus estimates. Aggregate leverage inched up to 32.8% from 32.5% last quarter, following funding of committed investments. All-in-financing costs for 3QFY3/13 averaged 3.19% (2Q: 3.15%) with an average term of debt of 3.9 years (2Q: 4.2 years).
Stable portfolio continues to deliver. Occupancy rate (same-store basis) for the portfolio and multi-tenanted buildings (MTB) remains flat QoQ at to 96.6% and 93.4% respectively. 3QFY3/13 weighted average lease to expiry was 3.8 years, with only 2.1% of income due for renewal for the remaining FY3/13. Positive rental reversion on renewal range between 5.5%-25.3% throughout all segments of the portfolio boosting QoQ NPI margin (from 71.8% to 72.1%) and yields (from 6.6% to 6.7%). YTD rental reversion of 13.9% was achieved for the portfolio.
Business Park exposure not fatal. AREIT’s business/science park portfolio constitutes 38% of our FY3/14 GAV and gross revenue. We are heartened that A-REIT has secured commitment for about 31% of the lettable space (complete in 3Q12, 223k sqft) at Nexus@one-north last quarter, despite the onslaught of ~7m sqft of new known supply in 2012-2015. We noted that the majority of this supply (~81%) is in the central region (One North and Mapletree Business City), where AREIT has ten out of 23 existing properties. According to our estimates, the central region assets comprises ~40% of AREIT’s business park revenue and NLA. Predominantly, AREITs business park portfolio (~60%) is still concentrated in the east and west region, namely the International Business Park (IBP) and Changi Business Park (CBP). At 94% occupancy for business park with mostly MNC tenants, we think AREIT stands in good stead to weather the impending supply.
New Asset Enhancement Initiative. AREIT has also initiated enhancement work at 31 International Business Park, at a cost of SGD13.2m, to take advantage of prospective future demand in the area. The AEI will complete by 3Q13. We raise our FY3/13-3/15 DPU by 0-0.34% in view of the enhancement. We continue to like A-REIT for its stable DPU yield, healthy lease expiry (<25% of income expiring per annum) and debt maturity profile. Reiterate BUY with an unchanged DDM-derived TP of SGD2.60.
Saizen – Phillip
The forgotten child!
Company Overview
Saizen REIT is a Singapore-based REIT. Its mandate is to invest in a diversified portfolio of income-producing real estate which is primarily used for residential and/or residential-related purposes in Japan
- On a property tour to visit six residences in Fukuoka, Kumamoto and Hiroshima, Japan
- Residential property is good property asset class in Japan with stable and resilient cash flow
- Japan residential property prices are firming up No rating on the stock
What is the news?
We visited six residences under the portfolio of Saizen REIT in Fukuoka, Kumamoto and Hiroshima, Japan in December. These properties are conveniently situated in major commercial and entertainment areas, or towns near transportation networks connecting to major business and commercial centres or close to educational institutions. The building age of these residences range from 6-month to 23-year old and thus provided us a good sense of the condition of the newer and older buildings.
How do we view this?
The condition of the properties from the interior to exterior of the building was well-maintained and some of the rental unit is fully-furnished and equipped with electrical appliances and other fittings which can command a premium. Having said that, we believe the rental units will be highly sought after among tenants given the tip-top condition and easily accessible to places for work, play and learn.
Investment Actions?
Japan residential property seemed to hit the rock-bottom with limited downside. Cap rate is tightening marginally for some cities. This is evidenced by the modest increase of 0.8% for the valuation of 130 portfolio properties in FY12. We opine the worse could be over for Japan residential market. Saizen REIT’s borrowing cost and loan tenure are improving over time since global financial crisis. The management will continue to deepen the relationship with existing lenders and forging new ones to achieve lower interest cost and establish new loans for future acquisitions. Furthermore, the warrant proceeds can be used to perform share buyback which is DPU accretive. For investors who want to have exposure in Japan residential market, they can consider Saizen REIT over Japan Rental Housing Investments Incorporation (listed on TSE) on the thesis of yield compression. Weakening Japanese yen may not be favorable to Saizen REIT but Forex lines could be employed to hedge the depreciation.
S-REITs – Kim Eng
Go Selective On REITs
Year in Review. The S-REITs has been one of the best performers in 2012 (39% price return in FY12). Last year, we have seen many pension, insurance and income funds switching into REITs to pursue higher returns for the sheer fact that the yield-curve is almost flat. This is further aggravated by the almost “zero-bound yields” which meant that yields have no more room to fall, erasing any prospects of fixed income capital gains for investors. In the quest for returns, many such funds had to turn to slightly riskier asset classes such as REITs, Infrastructure Trusts and Master Limited Partnerships (MLPs) etc for stable recurring distributions.
S-REITs 2013 forecast. In the absence of real sustainable global economic growth, we believe that continuing rounds of QE Infinity, ECB’s unlimited bond-purchase program and BoJ’s yen-asset-purchase program will persist to keep interest rates low and liquidity high. This, in turn, will sustain property prices moving forward. Nonetheless, we DO NOT think that S-REITs will be able to repeat its stellar performance in 2012. In our view, S-REITs will find it challenging to complete yield-accretive acquisitions in 2013, given that property prices in most segments are already past their 2008 peak levels. We also see limited opportunities for further positive rental reversions (3-8% DPU upside per annum) as rentals face more downward pressure in 2013, following looming supply and softening of business sentiments.
Year of consolidation. 2013 is probably a year of consolidation for S-REITs, that will warrant further yield compression of at most 30-40bps, translating to a maximum of 6-8% upside. Given the high price-to-book of S-REITs (1.15x sector-wise), we downgrade S-REITs to NEUTRAL from OVERWEIGHT. For greater upside, we see more prevailing opportunities in developers (especially local high-end and diversified big caps) than landlords. We also see heightened risk of equity fund raising for S-REITs in asset enhancements, redevelopment projects or/and sponsor injections.
Stock picks. Selectively, our TOP picks remain with the more defensible Retail and Industrial REITs, namely Starhill Global (SGREIT SP, BUY, TP SDG0.85), Capitamall Trust (CT SP, BUY, TP SGD2.29) and Ascendas REIT (AREIT SP, BUY, TP SDG2.60), that can expect to benefit from near-term DPU upside with asset enhancements and ongoing redevelopment projects. We will advise investors to shun the more cyclical Office and Hospitality REITs.
FCOT – CIMB
What next after CPPU redemption?
After a series of yield-enhancing activities and portfolio restructuring in FY12, FCOT is in an enviable position asDPUgrowth is built-in through FY15 andasset leverageof 31% providesit withthe financial flexibility to do more.
We adjust FY13-15 DPUs by between -5% and +2% for the changes to NPI margins, timing of CPPU redemption in FY13, and upside from Alexandra Technopark in FY15. We maintain Outperform with a higher DDM-based target price (discount rate: 7.7%). We see catalysts from more yield-enhancing actions.
FY13 growth locked in; in-built growth till FY15
2012 marked a turning point for FCOT when management successfully restructured its asset portfolio and engaged in yield-enhancing activities. With the recent completion of a 48% CPPU redemption, management has locked in a nice 12% DPU uplift for FY13. Ongoing back-filling and positive rental reversions on its under-rented local office assets should extend DPU growth into FY14. Meanwhile, underlying NPI on Alexandra Technopark has already surpassed that provided by its master lease, which could provide another layer of uplift come FY15 when the master lease lapses.
Ammunition to do more
Asset leverage at 31% after its recent CPPU redemption leaves FCOT with the financial flexibility to do more. We expect FCOT to relook at hotel redevelopment plans over the next year, where it could sell the site and redeploy proceeds into accretive CPPU redemption. Management is also on the lookout for acquisitions, failing which it still retains the financial flexibility to redeem all its remaining CPPUs for ~10% DPU accretion while keeping asset leverage at levels of 40%.
Maintain Outperform
With DPU growth of 6-12% over FY13-15, FCOT‟s growth visibility is one of the strongest among S-REITs. This is further backed by undemanding valuations (0.9x P/BV and forward yields of 6-7%). We maintain Outperform and see upside from a gearing-up for acquisitions, CPPU redemption, and asset enhancements.