Retail REITs – DBSV
Still a safe house
• AEI to take centrestage in driving earnings growth amidst slowing retail sales growth in 2013
• Suburban retail to continue attract good interests despite incoming supply
• Extra earnings kicker could come from acquisitions, particularly from sponsors’ pipeline
• MCT top pick given its superior earnings profile; SGREIT offers an attractive relatively yield to retail peers
AEI malls showed superior rental growth. Underlying fundamentals in the retail real estate sector remain strong. Rents have stayed resilient in the past year, largely supported by annual built-in step up rents. While increasing market shares, as evidenced by decade-high leasing transaction volumes, continue to be the retailers’ main focus despite rising cost pressures, the latter is likely to have a bearing on rental pricing ability with occupancy costs now at 16-17%. With retail sale expected to grow at 2-3% next year, we expect reversion to track inflation rates. Our preferences are for market beaters/outperformers that can exceed this benchmark for rent rolls via successful Asset Enhancement Initiatives (AEI) activities, to deliver superior earnings growth.
Still prefer suburban for its strong leasing interests. From a supply angle, the suburban market segment continued to be at almost “full house” at 98% occupancy. Going forward, c.50% of the new supply will come from suburban locations over the next four to five years but we believe robust consumer sentiment, amid a low unemployment environment, would translate to a keen appetite for new retail space.
Rerating catalyst could come from acquisitions, prefer reits with strong sponsors. Trading at an average P/BV of an average 1.1x and an average implied yield of 5.0%, we believe that certain retail reits could look at acquisitions to spearhead their inorganic growth ambitions. Prime yields are now hovering at between 5.25% and 5.65%, hence with a mix of equity and debt, reits would still be able to acquire accretively. With limited access to good retail assets in Singapore, given the tightly-held market and its stable nature, we believe sponsored reits would have an upper hand with the ability to tap sponsors’ pipeline for new assets to fuel their inorganic growth ambitions.
Stock picks. Within this space, we like MCT for its ability to continue to drive rental reversions as well as inorganic growth capacity from tapping its deep sponsor pipeline such as the recent maiden proposed acquisition of Mapletree Anson. In the small-mid cap space, we believe the completion of AEI works will continue to drive SGreit earnings while valuations at 0.8x P/BV and forward yield of 6%, which is higher than peers is attractive.
StarHill – Kim Eng
Orchard Road Retail Remains in Vogue
Orchard Road supply squeeze. Between 2013 and 2016, only three malls along Orchard Road (representing ~12% of available stock) are expected to be completed – and all in 2013. They include the asset enhancement works to The Heeren (156k sq ft), Orchard Gateway (180k sq ft) and the redevelopment of 268 Orchard Road (147.5k sq ft). The Heeren will be almost fully occupied by Robinsons (which will move out of Centrepoint) and Orchard Gateway is already more than half pre-committed with tenants such as Crate & Barrel, Religion, Swatch Megastore, Nike’s new concept stall called Amplify Women’s and library@Orchard. According to property agent CBRE, Prime Orchard Road rents were unchanged QoQ and YoY at SGD31.60 psf pm in 3Q12, while the capital value for strata-titled retail space rose 3.8% YoY to SGD6,500 psf, albeit unchanged QoQ. Occupancy rate remained robust at 93.7%.
Retail demand to remain steady. Indicators are still showing a general positive tone in the retail market despite the gloom over the world economy. As of Sep 2012, the RSI, excluding motor vehicles, and the F&B sales index are up 0.7% and 2.2% YoY, respectively. Prominent store openings in 3Q12 included Mulberry (first Asian flagship store at Mandarin Gallery), Carven and Crate & Barrel (Ion Orchard), Vivienne Tam (flagship store at Scotts Square), Paris Baguette in Wisma Atria, Malaysian celebrity Chef Wan’s 1-Market and Japanese restaurant Tsukada Nojo in Plaza Singapura. We expect retail demand to remain steady on healthy tourist arrivals and domestic spending, as well as new retailers and international concepts.
Our estimates. We forecast tourist arrivals to grow at a CAGR of 5.2% over 2011-2015, reaching 16.2m arrivals by 2015 (14.2m in FY12). In our view, higher tourist arrivals will provide some form of price support for Orchard rentals, especially since there is no more known supply after 2013. We believe that Orchard retail demand will grow at a CAGR of 2.7%, outstripping overall supply increases (CAGR: 2.3%) for 2011-2015. This will cause vacancy rates to dip from 5.4% in 2011 to 4.2% in 2015. We also expect Orchard rentals to register growth of 0-2.5% pa in 2012-2015, as previous concerns over a supply overhang are removed. Thus, NPI yields are likely to remain steady at 5.0-5.2%.
Investment thesis intact. SGREIT’s key assets are in the coveted Orchard Road area, where tight supply and the entry of new international retailers should give it greater bargaining power in terms of leasing its space. We continue to like SGREIT for the rental upside at Wisma Atria (3Q12 passing rent at SGD35.04 psf pm) and income stability in Malaysia and Australia. At 6.1% FY13F yield and 464bps yield spread, we reiterate BUY with a DDM-derived TP of SGD0.85.
Suntec – Kim Eng
Equity Fund Raising Overhang Removed
MBFC Twr 3 acquisition. DBS announced on 10 Dec that it has entered into an agreement with Choicewide Group Limited, a JV of Cheung Kong (Holdings) Ltd and Hutchison Whampoa Limited, to purchase 30% equity stake (and its associated loan) in Marina Bay Financial Centre (MBFC) Twr 3 for an aggregate consideration of SGD1.035b (SGD2,555 psf). DBS is the anchor tenant at MBFC Twr 3, occupying over 600,000 sq ft or 18 floors. Both parties also entered into a conditional put option agreement for DBS to take up Choicewide’s remaining 3.33% equity stake and its associated loan for an estimated aggregate price of SGD115m. The remaining stake on MBFC Twr 3 (66.66%) is held by Hong Kong Land and Keppel Land.
A little bit of history. DBS sold its Shenton Way office buildings (Twrs 1 & 2, about 875k sq ft net lettable area at Shenton Way) to funds managed by Goldman Sachs fo SGD690m (SGD800 psf) end-2005, with a leaseback agreement for an initial period of 8 years. The logic back then was that the sale to enhance the efficiency of its balance sheet. Goldman Sachs later sold the buildings to Overseas Union Enterprise for
SGD871m (SGD970 psf) in 2010, whose upgrade plans prompted DBS’ shift to Marina Bay Financial Centre (MBFC). In Oct 2012, DBS moved into its new headquarters at MBFC Twr 3, occupying over 600,000 sq ft or 18 floors of the 46-storey building. Some of the support functions were relocated to Changi Business Park. Recall also that Suntec REIT purchased MBFC Phase 1 (33.33% stake) from the same vendor on 9 Dec 2010 for SGD1.495.8b, including rental support of SGD113.9m over a 60-month period. This works out to SGD2,568 psf with income support and SGD2400 psf excluding income support. The latest FY11 valuation for MBFC Twr 3 (as of 31 Dec 2011) was SGD1.523b (SGD2,615 psf).
Positive for Suntec. We view this acquisition positively for Suntec REIT as it removes the EFR overhang of MBFC Twr 3 being injected into the REIT. It can henceforth focus more on its organic AEI on Suntec City. In addition, Suntec REIT has, over the weekend, also appointed the CEO of APM Property Management Pte Ltd as its Deputy CEO with effect from 1 Jan 2013. We think this shows Suntec REIT’s commitment to making the
Suntec City revamp a success. We reiterate a BUY rating for Suntec REIT. Our TP of SGD1.70 is unchanged for now, but we believe there is upside potential after FY12 results as pre-commitments for phase 1 Suntec City Mall (complete by 2Q12) are likely to be secured above Suntec’s post-AEI target of SGD12.59 psf/mth.
Saizen – AmFraser
Snapping Up Yield‐Accretive Acquisitions
Carrying out its inorganic growth plans. Saizen REIT’s TK operator Godo Kaisha (GK) Gyokou has, on 30 November 2012, entered into a sale and purchase agreement for the acquisition of Rise Shinoe (RSO) for a cash consideration of JPY 285mil (S$4.2mil). RSO is located in the Central Ward of Kumamoto City and is within 10‐minutes walk from train and bus networks. RSO was built in June 2003 and comprises 34 residential units and 19 car parking lots. RSO is currently generating annual revenue and net property income of approximately JPY 27.0 mil (S$0.4 mil) and JPY 19.3 mil (S$0.3 mil) respectively, which are equivalent to about 0.8% of both Saizen REIT’s annual revenue and net property income in the financial year ended 30 June 2012.
A positive step. The acquisition of RSO is a positive step for Saizen REIT. Noting that Saizen REIT is backed by a cash hoard of JPY4bn (S$59.2mil), we previously highlighted in our initiation report that Saizen has the firepower to engage in yield‐accretive acquisitions and initiatives to grow inorganically will only translate into improving momentum in its top‐line.
Acquisition complementary to existing strengths. While the acquisition of RSO translates into an increased reliance on Kumamoto – revenue contribution from Kumamoto following the acquisition has increased from 17.7% to 18.3% ‐ we view this as a strategic move given RSO’s accessibility to transport networks, young building age and high occupancy rate of 98% (by revenue). Evidently, these characteristics are complementary to the strengths of Saizen REIT’s overall portfolio. The acquisition would lower the building age of Saizen REIT’s overall portfolio as well as improve its portfolio’s average occupancy rates.
Acquisition of RSO likely to be yield‐accretive. According to Saizen REIT’s announcement, the net operating income yield of RSO is around 6.8%. Given that the acquisition is expected to be financed entirely by cash, we expect the acquisition to be yield‐accretive. Saizen REIT’s current dividend yield is at 7.3%.
Cash hoard to support Saizen REIT’s acquisition appetite. Saizen REIT’s estimated cash balance of JPY3.3bil (S$49mil), after factoring in the acquisition and debt amortization, should continue to equip it with the financial muscle to engage in further yield‐accretive acquisitions. We raise our fair value for Saizen REIT to S$0.213 and reiterate BUY.
Charities and Cause – 2012
Attention to Readers of Singapore REITs
Thank you for your kind support of our website. Year 2012 is coming to an end and this is the second year of our annual tradition to contribute back to our society. We have decided to donate our proceeds to the Children’s Aid Society.
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