FE-HTrust – OCBC
Far East Hospitality Trust: Largest pure Singapore hospitality REIT
- Pure Singapore hospitality play
- Strong sponsor
- Clear and sizeable pipeline
Largest diversified hospitality portfolio by asset value
Far East H-Trust’s portfolio consists of 11 properties in Singapore, including seven hotels and four serviced residences, with 2,531 rooms/units in total. The trust has the largest diversified hospitality portfolio in Singapore by asset value, equaling S$2.14b. With a mix of hotels and serviced residences, the portfolio is able to ride on the up-cycle in the hotel industry, while the serviced residences would provide downside protection during economic slowdowns due to the longer average stay. We note that the hotels have good locations, with the majority located in the Core Central Region. Five of the hotels are close to private hospitals, enabling them to benefit from anticipated growth in Singapore’s healthcare tourism.
Positive outlook for the Singapore hospitality sector
For 2012-2014, we estimate that the overall hotel room demand in Singapore will grow at 6.4% p.a., outstripping expected hotel supply growth of 4.8% p.a. On a combined basis, we see Mid-tier and Upscale hotel room supply growing at 4.8% p.a.
Credible and experienced sponsor
The Sponsor is part of Far East Organization, which is the largest private property developer in Singapore. Far East Organization has developed real estate in the residential, hospitality, commercial, medical and industrial sectors. It has substantial experience managing hospitality assets and its total hospitality portfolio (including the initial portfolio of the Far East H-Trust) comprises 18 properties valued at more than S$3.0b as at 31 Dec 2011. The hospitality operations have also established three inhouse brands – Village, Oasia and Quincy.
Visible and substantial pipeline
Three hotels and four serviced residences have been identified by the Sponsor as Sponsor Right of First Refusal (ROFR) properties which could be offered to Far East H-Trust. These properties, if acquired could increase the number of hotel rooms/serviced residence units in the trust by 1,242 rooms/units, or 49.1%, to 3,773.
Initiate with BUY
We initiate with BUY and a RNAV-based fair value of S$1.08.
Office REITs – OCBC
RENTAL DECLINES LIKELY SLOWING IN 3Q12
- Rental decline likely slowing in 3Q12
- Limited supply till 2H13
- Maintain OVERWEIGHT
Office rentals decline likely to slow in 3Q12
We believe the office rentals are likely to show a more subdued dip in 3Q12 after three consecutive quarters of declines since 3Q11. Over 2Q12, Grade A office rentals fell 4.7% QoQ to S$10.10 which cumulated in an 8.7% decline over three quarters. Core CBD vacancies, however, showed a reversal from a rising trend in 2Q12 to register a 0.9 ppt dip to 8.4%. A similar picture was seen for islandwide vacancy rates which declined 0.9 ppt to 6.4% (end 2Q12) from 7.3% (end 1Q12). We expect a similar trend for vacancies in 3Q12 which would likely contribute to a muted rate of rental decline.
Office absorption coming in above expectations
The 2Q12 decline in vacancies was mostly due to net absorption coming in at ~470k sq ft – in line with our forecast but markedly above market expectations which had anticipated a softer demand on macro-economic weaknesses. Grade A capital values also dipped an estimated 2% QoQ marginally to $2,450 psf in 2Q12 (1Q12: S$2,500 psf) as investment sales slowed and market players adopted a wait and see attitude in light of the residual uncertainty in the macroeconomy.
Limited supply till 2H13
Looking ahead to the remainder of FY12, it is likely that a situation of limited office pipeline completion would ensue with only ~70k sq ft of office space slated for opening – a mixed use development in Upper Pickering St – which has been fully pre-leased to AGC. We see this dynamic continuing until mid 2013 when Asia Square T2 and The Metropolis T1&2 are slated for completion.
Maintain OVERWEIGHT on Office REITs
We note that, since we have upgraded Office REITs to OVERWEIGHT on 21 Aug 2012, our top pick CCT has appreciated 4.0% against the STI’s 0.2 gain%. We maintain an OVERWEIGHT rating on Office REITs. Our top picks in the sector are CCT [BUY, FV: S$1.53] and FCOT [BUY, FV: S$1.23].
FirstREIT – AmFraser
First REIT has entered into conditional sale and purchase agreements for the proposed acquisition of two new properties in Indonesia. The proposed acquisitions comprise an integrated hospital and hotel in Manado, and another hospital in Makassar in Indonesia's southern province of Sulawesi, both of which will be purchased from two wholly‐owned units of PT Lippo Karawaci Tbk (First REIT's sponsor) for a combined purchase consideration of approximately S$142.9 million.
The acquisition of Siloam Hospitals Manado & Hotel Aryaduta Manado at a consideration of S$83.6 million will be funded by a combination of committed debt and proceeds from a proposed private placement exercise while the purchase of the S$59.3 million Siloam Hospitals Makassar will be financed entirely by a drawdown of committed debt.
PT Lippo Karawaci Tbk, First REIT's sponsor and Master Lessee of the two properties, has signed conditional master lease agreements for lease terms of 15 years, with an option to renew for a further term of 15 years. The two properties are estimated to earn a total of $14.1mil in net rental income, or 26% of First REIT's $53.4mil net profit in 2011.
We view this as a positive development for First REIT (UNRATED, S$1.03). The acquisition of two hospitals in Indonesia not only improves its portfolio diversification in terms of locations and medical specializations but also enhances its weighted average lease expiry profile (WALE). The acquisitions are expected to improve its WALE from 10.8 years to 11.7 years. More importantly, the acquisitions would strengthen First REIT's reach in Indonesia, a market we perceive to be highly attractive on the back of strong underlying demographics and the government's aim of improving healthcare access to the public. Given that the acquisition of Siloam Hospitals Manado & Hotel Aryaduta Manado is to be funded by a mix of committed debt and cash from private placement exercise, we expect First REIT's aggregate leverage to remain below 30% (lower than the regulatory limit of 35%), which should provide comfortable headroom to support its future acquisitions.
CLT – OCBC
ON STRONG FOOTING
- Resilient portfolio
- Sturdy income streams
- Better 2H12 performance
Demand for portfolio assets to stay strong
We continue to favour Cache Logistics Trust (CACHE) for its resilient portfolio. The REIT currently owns 12 logistics warehouse properties, of which eight of them have ramp-up features. Such warehouse space is limited in Singapore as specialized planning and design specifications are required for the development. Based on our understanding, CACHE holds a sizeable 22.9% market share of rampup warehouses in Singapore. Hence, we expect the demand for its properties to remain robust.
Strong and predictable income streams
CACHE’s portfolio has retained 100% occupancy rate since its listing in Apr 2010. In addition, the bulk of its leases are based on triple-net master lease structures with built-in annual rental escalation of 1.5-2.5%. This arrangement provides CACHE not only with high NPI margins of 95.0%-97.4% over the past eight quarters but also stable income streams and a long weighted average lease to expiry of 4.4 years (with less than 2% of GFA due for renewal in 2013).
Improved performance for 2H12
For the rest of FY12, we expect CACHE to turn in a better set of results. While its 2Q12 DPU eased 5.0% YoY, we note that it was due to an enlarged unit base arising from private placement to fund the acquisition of Pandan Logistics Hub, even though the property has yet to contribute to its income. When rental income from Pandan Logistics Hub starts to kick in from 2H12 onwards, we believe CACHE will see a lift in its DPU going forward. This is in addition to a potential gain from interest savings following the recent refinancing of its outstanding debts with a new S$375.0m bank facility (all-in financing cost is expected to improve to 3.44% from 4.38%).
Maintain BUY
As CACHE is approaching the end of its 3Q, we now roll our valuations to FY13. This in turns raises our fair value estimate from S$1.18 to S$1.26. We reiterate our BUY rating on CACHE.
LMIR – OCBC
INTEREST EXPENSE LIKELY TO HIT DPU
- Interest expense drag
- 2012 new JKT supply manageable
- Downgrade to HOLD as px is close to FV
Incorporating acquisition assumptions
We have incorporated assumptions into our model about potential acquisitions that may be funded by the S$250m raised by LMIRT in early Jul under its S$750m MTN programme. The S$200m 3-year bonds were priced at 4.88% while the S$50m 5-year bonds were priced at 5.875%, giving a blended interest rate of ~5.1%. Before the acquisitions are completed, we should see a short-term drag on DPU due to the additional interest expense. We anticipate that the acquisitions will be yield-accretive with initial net property yields of ~8.5%. We assume an acquisition of S$100m will be completed on 1 Jan 2013 and an acquisition of S$150m will be completed on 1 Apr 2013.
Good pre-commitment level for 2012 JKT retail supply
According to DTZ, there was no new additional retail space supply for Jakarta in 1Q12. In 2Q12, the 21k sqm Ancol Beach City in North Jakarta brought the total supply to 1.94m sqm in NLA. The total supply growth expected for 2012 is 12.1% YoY, with Kota Kasablanka (82k sqm) and Ciputra World (130k sqm), both located in South Jakarta, forming the rest of the supply. The pre-commitment level for the 233k sqm is 88%, in line with the 2Q12 Jakarta retail market occupancy rate of 87.5%.
Significant supply coming onboard in 2013
LMIRT registers 58% of its portfolio NLA in Greater Jakarta. 16% of the portfolio NLA is located in North Jakarta (Pluit Village), and another 14% is located in South Jakarta (The Plaza Semanggi and Depok Town Square Units). It is worthwhile noting that some 391k sqm of retail space is expected to come to the market in 2013 (DTZ), implying substantial YoY growth of 18.2%, which will likely increase competition.
Downgrade to HOLD
We maintain our fair value of S$0.45 but downgrade LMIRT to a HOLD since the share price is close to our fair value.