A-REIT – Kim Eng
Still Room for Yield Compression
Business Park exposure not fatal. AREIT’s business/science park portfolio constitutes 38% of our FY3/14 GAV and gross revenue. We noted that there is an onslaught of ~7m sqft of new known supply in 2012-2015. The majority of this supply (~81%) is in the central region (One North and Mapletree Business City), where AREIT has ten out of 23 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).
More than 50% supply pre-committed. In addition, we estimate that ~60% of the impending supply is already pre-committed. Most of the available space will also be catered for specific uses and hence limit the choices available for existing occupiers. The Singapore government is committed to provide incentives to attract established MNCs to Singapore, and this will stabilize occupancy in our opinion. At 94% occupancy (as of 30 Sep) for business park with mostly MNC tenants, we think AREIT stands in good stead with its East+West concentrated business park portfolio and remain confident that it will be able to lease out its upcoming Nexus@onenorth project (complete in 3Q12, 223k sqft) in due course.
New Asset Enhancement Initiatives and Developments to drive growth. The former Aztech Building and Ultro Building are undergoing refurbishment works till 2Q13 and 4Q13 respectively. We forecast rental upside of 117% for Aztech (SGD 2.73 psf/mth from SGD1.25 psf/mth) and 56% for Ultro (SGD3.90 psf/mth from SGD2.50 psf/mth on completion). We expect existing developments (Unilever Four Acres, Nexus@one-north) and AEI works (Freight Links, Xilin, TechPlace II) to be the main growth driver for AREIT in 2013.
Yields can be compressed by another 60bps. We continue to like AREIT for its stable DPU yield, healthy lease expiry (not more than 25.5% of income expiring per annum) and debt maturity profile (not more than SGD400m maturing per annum). In addition, only 19.8% of AREIT’s NLA is used for conventional manufacturing, which is a plus given that the per annum net demand for factory space has been modest compared to warehouses and business parks. From our estimates, the implied cap rate for AREIT is 5.5%. If we take this cap rate as the floor for FY3/14 DPU yield, we believe that yields can be further compressed by another ~60bps from our forecasted FY3/14 DPU of 6%. Reiterate BUY with a DDM-derived TP of SGD2.60.
Hospitality – DBSV
Pockets of opportunity
• Visitor arrivals in 2013 to continue rising
• Soft operating outlook with new completing supply to make hotel landscape more competitive
• Limited opportunities to raise ADRs, Industry RevPAR to grow by 3% (vs 5% previously)
• FEHT our pick given its superior earnings profile
Visitor arrivals in 2013 to continue growing. Notwithstanding a slow start, we believe Singapore’s tourism sector in 2013 continues to hold promise with the opening of new major attractions like the Marine Life Park, River Safari and the International Cruise Terminal anchoring Singapore as a regional holiday destination. Moreover, our top visitor markets like Indonesia and China (c30% of total visitors), continue to grow strongly. We expect visitor arrivals to grow 7.7% to15.3m in 2013 vs the expected 14.2m visitors in 2012.
New rooms added; industry occupancy levels to remain fairly stable. We expect the operating environment to remain competitive coming from 4,028 new rooms (1,572 rooms in 2012, remaining 2,456 rooms over 2013). Despite that, our base case scenario of 15.3m visitors should translate to record stable occupancies of c83%. Upside will hinge on the average length of stay (LOS) profile, which could increase if visitors extend their holidays to cover the full range of attractions available. We estimate that a 0.1 day extension in the LOS results in a 2 ppt increase in occupancy rates.
Moderating trends in recent months points to weaker visitor spending. After a strong start in 2012, we sense that travelers have turned more cautious in spending from the (i) weaker average spending per visitor in recent quarters and (ii) the relative weakness in the luxury and upscale hotel segments, implying that travelers, are trading down to cheaper accommodation. Thus, going forward, with competition from newly opened hotels, we expect hoteliers to focus on maintaining occupancies and see limited opportunities in raising average daily rates (ADRs). e expect the industry to record a 3% y-o-y growth in RevPAR (vs 5% before) in 2013.
Stock picks. Within the hospitality plays, FEHT offers the highest earnings growth given that 25% of its portfolio is currently undergoing refurbishment and will complete in the next 2 quarters. Further upside catalysts hinges on the proposed acquisition of Rendezvous Singapore Hotel.
FCOT – OCBC
WELL-POSITIONED FOR GROWTH
- Positive move to exit Japan market
- Lower funding cost burden
- Good growth potential
Transformational year
We are very positive on Frasers Commercial Trust’s (FCOT) transformation over the past one year. At the close of 4QFY12, FCOT announced the exit of the Japan market with the divestment of its Japan properties. This was earlier than we expected, even though we had been anticipating the move. We like the transaction because 1) the Japan properties had been recording weak performance, 2) divestment would enhance the portfolio occupancy and weighted average lease to expiry, and 3) gearing ratio is expected to drop from 36.8% to 28.6% (including partial prepayment of its AUD and SGD loans), with no debt maturing until FY15. This will significantly strengthen its financial position and flexibility, and aid FCOT in seeking the release of 55 Market Street and Caroline Chisholm Centre (CCC) from its securitized pool.
Successful redemption of CPPUs
More recently, FCOT had also exercised its right of redemption in respect of 170.7m Series A CPPUs, representing 50% of the number of CPPUs in issue. This is in line with our view that FCOT may redeem half of the CPPUs using the net proceeds (S$537.8m) of KeyPoint divestment. Based on the latest announcement on 5 Dec, FCOT had successfully redeemed 162.6m CPPUs, or ~47.6% of total outstanding CPPUs, in cash. With this positive development, we expect FCOT to post an improvement in the distributable income, since the funding costs (distribution rate) of the CPPUs are relatively high at 5.5%.
Maintain BUY
Apart from having a significantly strengthened financial position and lower funding cost burden, we expect FCOT to gain from interest savings following the refinancing of its S$500m term loan facility. In fact, average borrowing rate fell from 4.0% in 3Q to 3.5%. In addition, the increased stake in CCC and expected improved performance at China Square Central will likely continue contributing positively to its rental income. Hence, we are staying optimistic on its growth potential in FY13. Maintain BUY with an unchanged fair value of S$1.31 on FCOT.
Healthcare REITs – OCBC
STABLE OUTLOOK FOR 2013
- Strong share price performance YTD
- Defensive income streams and lease structure
- Quality likely priced in
Year in review
The S-REITs sector has been a standout performer in 2012 (+34.5% YTD), buoyed by the ‘yield compression’ theory in light of the current low interest rate environment. Unsurprisingly, healthcare REITs have also delivered strong YTD price appreciation, with First REIT (FREIT) rising 36.2% and Parkway Life REIT (PLREIT) a more modest 19.0%. Both healthcare REITs also continued to showcase steady growth in their financial performance, supported by organic and inorganic growth. For 9M12, FREIT’s revenue and DPU increased 5.4% and 9.1%, while that of PLREIT climbed 8.0% and 6.8%, respectively.
Defensive play amid uncertain macro environment
In our opinion, healthcare REITs offer the most defensive attributes within the S-REITs space. This stems from the following reasons: 1) long-term master lease tenures which have significant downside revenue protection and 100% committed occupancy; 2) Singapore CPIpegged rental structure which allows for positive rental reversion (3.5-4.5% headline inflation expected in 2013, according to the Monetary Authority of Singapore); 3) triple net lease structure inherent in a substantial proportion of leases; and 4) resilient underlying cashflows from operators which enhances their ability to fulfil rental obligations. We believe that these defensive qualities would provide stability for investors amid the still-uncertain macroeconomic environment.
Maintain NEUTRAL
Moving into 2013, we believe that healthcare REITs will remain on the lookout for further acquisitions to boost their portfolios. Indonesia will likely continue to be the main focus for FREIT, while PLREIT could deepen its foothold in Malaysia (through sponsor-related or third party acquisitions), in our view. In terms of valuation, we believe that the subsector positives have already been priced in, with healthcare REITs trading at an average historical P/B ratio of 1.37x, while offering current and forward yields of 5.8% and 6.0%, respectively, based on Bloomberg consensus estimates. This is a rich premium to the S-REITs universe (ex. healthcare REITs), which are trading, on average, at 1.06x historical P/B and current and forward yields of 6.1% and 6.4%, respectively. Hence, we maintain our NEUTRAL rating on the healthcare REIT subsector. Within this space, we have a HOLD rating and RNAV-derived S$0.98 fair value estimate on FREIT.
FE-HTrust – OCBC
PROPOSED ACQUISITION OF RENDEZVOUS GRAND HOTEL SINGAPORE
- Pure Singapore hospitality play
- Rendezvous Grand Hotel Singapore
- Reduce FV to S$1.02
Largest diversified hospitality portfolio by asset value
The portfolio of Far East Hospitality Trust (FEHT) consists of 11 properties in Singapore, including seven hotels and four serviced residences, giving a total of 2,531 rooms/units. The trust has the largest diversified hospitality portfolio in Singapore by asset value, equaling S$2.14b.
Proposed acquisition of Rendezvous Grand Hotel
In Nov, FEHT and Astor Properties Pte. Ltd., a member of the Far East Organization group (the sponsor) entered into a non-binding memorandum of understanding (MOU) with The Straits Trading Company Limited to acquire Rendezvous Grand Hotel Singapore and its retail component Rendezvous Gallery Singapore. FEHT is exploring the proposed acquisition of a leasehold interest in the property, while the sponsor is exploring the proposed acquisition of the reversionary interest for the remaining leasehold period in the property. FEHT also entered into a separate non-binding MOU with the sponsor to grant a master lease of the hotel component to the sponsor as master lessee under a master lease agreement Rendezvous Grand Hotel Singapore is a modern 4.5 star hotel with 298 rooms located at Bras Basah. The REIT manager and the sponsor are evaluating the proposed transactions and the REIT manager is exploring options to finance the proposed acquisition. We have not incorporated the proposed transactions into our model since no definitive agreements have been executed.
Visible and substantial pipeline
The proposed acquisition of Rendezvous Grand Hotel Singapore is in addition to the three hotels and four serviced residences which have been identified by the sponsor as Right of First Refusal (ROFR) properties which could be offered to Far East H-Trust.
Downgrade to a HOLD
Rolling forward our RNAV model to FY13F, and using more conservative capitalization rates given a more cautious outlook for tourism in 1H13, we reduce our fair value from S$1.08 to S$1.02, and downgrade FEHT from Buy to a HOLD.