MLT – OCBC
BUILDING SCALE THROUGH INVESTMENTS
- Performance to stay firm
- Weaker JPY to have limited impact
- Strong growth potential
Strength from diversification
Mapletree Logistics Trust (MLT) has one of the most diversified portfolios in the industrial REIT space, with 110 logistics assets located across seven countries in Asia. This allows MLT to capitalise on the robust demand for warehouse space from retailers and third-party logistics companies as a result of the region’s strong underlying fundamentals and robust domestic consumption, as well as to maintain a sturdy financial performance. Operational metrics have also proven its resilience thus far, as evidenced by the positive rental reversions of 8% and continued improvement in the portfolio occupancy in 2Q.
Likely limited impact from depreciating yen
For 3QFY13, we expect the positive trend to continue, driven by healthy rental and take-up rates and contributions from MLT’s past acquisitions. While the recent weakness in JPY against SGD (depreciated ~11.6% since start of Oct 2012 and 6.3% a month ago) may have an impact on its distributable income given that ~27% of its revenue was contributed by Japan historically, we note that ~90% of amount distributable in FY13 is hedged/ derived in SGD. Hence, we believe any impact from a depreciating yen is likely to be limited.
Multiple avenues for growth
We also like MLT’s growth potential. MLT has been able to pursue inorganic growth at a time when the cap rates in Singapore have become relatively competitive, thanks to its strong pipeline of overseas assets from its sponsor. We highlight that MLT has the right of first refusal to over S$400m worth of pipeline assets which are nearing completion/ completed. Such assets usually have comparatively higher yields than those in its existing portfolio, which would enhance its DPU. On top of this, MLT will also focus on capital recycling and asset enhancement/redevelopment. These initiatives are likely to boost MLT’s income and yield going forward. We maintain our BUY rating and S$1.25 fair value on MLT. At current price level, its current DPU yield of 6.1% is also higher than the S-REIT average yield of 5.9%.
CDL H-Trust – Kim Eng
Maiden Foray into Maldives
Sale-and-leaseback of Angsana Velavaru. CDLHT announced that it has entered into a conditional sale and purchase agreement with Banyan Tree Holdings (BTH) on 4 Jan for the acquisition of Angsana Velavaru (79 beach villas, 34 water villas) at a purchase price of USD71m (USD628k per key), at a pro forma annualised NPI yield of 9.6% for the nine months ended 30 September. Including the USD0.71m acquisition fee and USD0.68m professional fees, total cost of acquisition is USD72.4m. This will be fully funded through debt financing, which will increase CDLHT’s gearing from 25.5% to 28.6%. Upon completion, CDLHT will leaseback the property to BTH for 10 years.
Lease agreement. Under the lease, CDLHT will receive rent payments equivalent to GOP less management fees. BTH is entitled to a tiered management fee, representing a share of the GOP, only if the GOP for the year exceeds USD4.5m. BTH will also pay a top-up amount to make up for any shortfall in rent below USD6m (the “Minimum Rent”). On the other hand, CDLHT has to set aside an amount equivalent to 3% of gross revenue as FF&E reserve every year and has to fund any capital expenditure required.
Rationale for acquisition. CDLHT’s first resort acquisition positions it as a beneficiary of the growing visitor arrival trends in Maldives, particularly from China. This also marks the beginning of a new lessee relationship with BTH (apart from existing ones with M&C, Accor and Rendezvous Group). CDLHT also believes that the asset presents asset enhancement opportunities. The Ministry of Tourism, Arts and Culture of the Republic of Maldives previously increased the allowable built-up area for tourist facilities as a percentage of the total land area from 20% to 30% in Apr 2012. Moreover, this acquisition also has the additional benefit of reducing CDLHT’s reliance on any single property such that the maximum contribution in gross rental revenue from Orchard Hotel will fall from 18.7% to 17.5%.
Our estimates. We expect the acquisition to complete by Feb 2013, with NPI yield-on-cost of ~8% (Incremental NPI of USD5.7m per annum) and GOP margin of 50%. According to CDLHT, RevPar (YTD Sep 2012) is around USD279 and occupancy ~70%. Room revenue makes up ~73% of total revenue while F&B constitutes the rest. At a cost of debt (USD) of slightly north of 2% (100% debt-funded), we think this acquisition should be yield-accretive for CDLHT.
Reiterate HOLD. We are mildly positive on this acquisition. Nonetheless, with more hospitality trusts onboard (At FY13P/B of 1.2x, scarcity premium likely to compress) and more hotel rooms coming onstream, we would advise investors to stay cautious. The stock has run up 22% in FY12 has limited upside ahead in our view. Reiterate HOLD
CLT – OCBC
FY12 TO END ON POSITIVE NOTE
- 4Q results likely to be firm
- Strong pipeline of assets
- Portfolio to stay resilient
Likely to maintain firm performance
Cache Logistics Trust (CACHE) announced that it will release its 4Q12 results after the market close on 21 Jan 2013. We expect CACHE to meet our 4Q NPI forecast of S$18.5m (+11.1% YoY) and distributable income projection of S$14.7m (+9.5%) comfortably, thanks to the contribution from its newly-acquired Pan Asia Logistics Centre and Pandan Logistics Hub. On the DPU level, we anticipate CACHE to maintain its distribution at ~2.1 S cents, not withstanding an enlarged unit base from the private placement in Mar 2012. This translates to robust 10.9% growth in its full-year NPI to S$68.7m and 0.9% growth in DPU to 8.29 S cents.
Acquisition may provide further catalyst
In the coming year, we believe CACHE’s financial performance will remain sturdy, as it continues to benefit from upward rental adjustments and full-year contribution from its past acquisitions. A few industrial properties from its sponsor’s pipeline assets are also ready for acquisition and may boost its income if CACHE injects any of these properties into its portfolio. Based on its last reported financial position, we estimate that CACHE has ~S$42.9m additional debt headroom before it reaches the regulatory aggregate leverage ceiling of 35% (currently at 32.6%). Hence, we believe CACHE may finance any upcoming acquisition using a combination of debt and equity if the transaction size is considerable.
Maintain BUY
We also continue to favour CACHE for its resilient portfolio. While the Singapore Purchasing Managers’ Index (PMI) indicated that the manufacturing sector contracted for the fifth month in Nov, we expect CACHE’s portfolio occupancy to maintain at 100% as the bulk of its leases are based on triple-net master lease structures. Moreover, eight out of 12 of its warehouses have ramp-features, where supply of such space is tight since it requires specialised planning and design specifications to develop. Hence, we expect its portfolio demand to remain strong despite the impending supply (10% of total stock) of warehouse space in 2013. Maintain BUY and S$1.30 fair value.
SREITs – DBSV
Refocusing on growth
• S-REIT valuations fair but ample liquidity should sustain interest
• Acquisitions a likely theme for 2013; up to S$5.7bn in assets could be purchased
• Focus on S-REITs with acquisition drivers. Picks are MCT, MLT and FEHT
S-REIT valuations fair and not compelling, however abundant liquidity should sustain interest in the sector. After a year of yield-compression led outperformance in share prices, the S-REITs sector now trades at a weighted average FY13F yield of 5.8% and a P/BV of 1.13x. While we believe the S-REITs are fairly valued at these levels, interest in the sector is likely to remain firm. This is because of the strong S$, a sustained low interest rate environment, and sector yields supported by yield spreads of 450bps above long bonds, which are still fairly decent. This could mean that capital allocations within the S-REITs sector are likely to remain high.
Acquisitions a likely key theme in 2013; potential S$5.7bn of assets might be on offer. To combat inflationary pressures which are expected to remain high in 2013, we believe investors are likely to turn from being “yield-hungry” to “growth-focused”. With organic growth prospects looking modest and most S-REITs trading above their respective NAVs, we believe that acquisitions will be a key theme in 2013. We prefer S-REITs with the ability to make accretive acquisitions (adjusted for leverage ratios remaining stable) and see possibilities coming from the sponsored REITs given their visible pipelines and REITs with regional mandates. Based on announced and potential pipelines, assuming all potentials are executed upon, we could see up to a total of S$5.7bn of asset transactions in 2013.
Our key calls. We advocate a selective stance in the SREITs with a preference towards those offering superior total returns compared to peers with potential acquisitions as an added upside to forecasts. Our picks are MCT, MLT and FEHT.
Potential downside risks.
Heightened risks to occupancy rates (which we believe to be minimal at this juncture); lower-than-expected rental reversions, earlier than expected interest rate hikes (base case early 2015).
Hospitality – OCBC
Muted outlook for 1H13
- More stores to come
- Price competition won’t return
- Fair value raised; maintain BUY
Cautious about 1H13
We note that after an outstanding 1Q12, with RevPAR and visitor arrivals growing YoY by 14% and 14.7%, respectively, growth in RevPAR and visitor arrivals decelerated through 2Q12 and 3Q12. Our channel check indicates that hotel bookings up to Chinese New Year in 2013 are still weak, with limited visibility beyond that. We note that 2013, an odd-numbered year, will likely see fewer MICE events, as biennial events are generally held in even-numbered years. Hoteliers have also expressed concern over the upcoming competition that will result from the growth in hotel room supply; new hotels typically provide substantial room rate discounts in the first few months of operation. With no immediate catalysts in sight, and an uncertain global economic environment, we see a muted outlook for tourism in 1H13.
Continued growth expected over 2012-2014
For 2012-2014, we forecast that hotel demand will grow at 6.4% p.a., outstripping the projected 4.8% p.a. increase in room supply. Supporting the positive longer-term outlook, the top four places of origin for Singapore’s visitor arrivals are projected to have real GDP growth rates of at least 4.8% in 2013 (Indonesia +6.3%, China +8.1%, Malaysia +4.8% and India +6.6% for FY ending Mar 2014).
Supply situation is manageable, and better for high-end hotels
Breaking down the projected growth in hotel room supply for 2012-2014, we note that the lower the tier, the higher the expected supply growth: Luxury (+1.6% p.a.), Upscale (+3.4% p.a.), Mid-tier (+7.0% p.a.) and Economy (+7.2% p.a.). For the first 10 months of 2012, higher hotel tiers showed stronger YoY growth in Average Room Rate (ARR) and RevPAR than lower tiers. We think that this is attributable to the more favourable supply and demand dynamics for the Luxury and Upscale tiers. The number of affluent visitors to Singapore is increasing with the general growth in arrivals, and supply is more stable for the higher-end hotel tiers.
Downgrade to NEUTRAL
We are downgrading the hospitality sector from Overweight to NEUTRAL. Our top pick is Ascott Residence Trust [BUY, FV:S$1.37], due its favourable exposure to the global growth regions of the serviced residence industry – Europe and developing Asia. We also have a BUY rating on Global Premium Hotels [BUY, FV: S$0.29], and HOLD ratings on CDL Hospitality Trusts [HOLD, FV: S$1.91], Far East Hospitality Trust [HOLD, FV: S$1.02] and Genting Singapore [HOLD, FV: S$1.33].