Cambridge – DMG
Proposed new acquisitions in the pipeline
Acquisition of 30 Marsiling Industrial Estate Road 8 and 11 Woodlands Walk. The management of Cambridge Industrial Trust (CIT) just announced the proposed acquisition of the properties at 30 Marsiling Industrial Estate Road 8 and 11 Woodlands Walk for a purchase consideration of S$39.0m and S$17.3m respectively. 30 Marsiling is a light industrial building with a GFA of 20,249 sqm. Upon completion of the acquisition, the building will be leased back to BIPL for a period of three years. The second property 11 Woodlands Walk is also a light industrial building with a GFA of approximately 8,977 sqm. Upon completion, the property will be leased to HFB for a period of five years. Given a forecasted annual NPI of S$2.8m for the property at Marsiling and S$1.4m for 11 Woodlands Walk, the yields from these properties are estimated at 7.2% and 7.9% respectively. Maintain BUY on CIT with a DDM-based TP of S$0.660.
Decent land tenure on both properties. According to the announcements, Marsiling Industrial has a land tenure of 30 years commencing from 1st December 1989, with an option to renew for an additional 30 years, while 11 Woodlands Walk has a balance tenure of 43 years. The management further indicated that the acquisition of the Marsiling property will be funded solely via debt facilities. Although no announcements have been made with regards to the method of funding for the property at Woodlands Walk, given the size of this acquisition we speculate that it would similarly be funded via debt and cash.
Property acquired to replace the lost of income as a result of SLA acquisition. Previously, SLA has announced a compulsory acquisition of two of CIT’s properties located in Tuas. Given that these properties will be sold to SLA by January 2013, these new acquisitions are seen as partial replacements to those in Tuas.
More acquisitions to be expected going forward. Since the forecasted NPI from these new properties only accounts for c.5.0% of CIT’s total NPI; while the two properties to be taken over by SLA makes up 11% of total revenue, we believe there will be more acquisitions going forward as management strive to replace the lost in income from the compulsory acquisitions. We maintain BUY on CIT with an unchanged DDM-based (COE: 9.8%, terminal growth: 1.0%) TP of S$0.660.
CRCT – OCBC
CHINA AIMING FOR 15% P.A. RETAIL SALES GROWTH
- Targeting 15% p.a. growth in retail sales
- Strong demographic fundamentals
- CRCT is one-of-a-kind
Targeting 15% p.a. growth in retail sales
According to the 12th Five-year Development Plan for Domestic Trade released by the State Council recently, China aims to expand its retail sales of consumer goods to around RMB32tr (~US$5.05tr) by 2015, with an average annual growth rate of 15%. While the targeted growth rate is slightly lower than the 16.1% p.a. growth rate over the past decade that propelled retail sales to RMB18.4tr in 2011, 15% is still very good. China’s retail sales rose 13.2% YoY in Aug, 0.1 percentage points higher than the growth rate in Jul. To make a simple comparison with a developed country, we note that for the month of Jun (the latest month for which data is available), Singapore’s retail sales actually decreased by 0.9% YoY.
Positive demographics means increasing “firepower”
We see the MoM decline in consumer confidence to be short-term; the Bankcard Consumer Confidence Index fell 0.5 percentage points MoM to 86.21 points in Aug. Having gathered demographic data on the cities that CRCT operates in, we believe that long-term fundamentals remain good for the retail industry. Beijing, which accounted for 67% of CRCT’s 2Q12 gross property revenue, saw overall retail sales grow 13.0% YoY in 1H12. While Beijing’s 1H12 expenditure per capita only expanded by 3.6% YoY, disposable income climbed 6.4%, which means that consumers have growing amounts of unutilized “firepower”, especially given that the rate of inflation is historically low (consumer inflation grew at only 2.0% in Aug).
The only pure-play China retail REIT
We are confident that CRCT can achieve healthy double-digit positive rental reversions for 2012 for its multi-tenanted malls. For 2Q12, CRCT’s multi-tenanted malls achieved rental versions of 15.2%, excluding the gross turnover component. Most of the leases have rental escalation clauses. The only listed pure-play China retail REIT globally, CRCT is our top pick in the overseas retail REIT space.
Maintain BUY
We maintain our BUY rating on CRCT and our fair value of S$1.70.
A-REIT – OCBC
STRONG BUT NOT COMPELLING
- Another divestment of property
- Expecting stable performance
- Valuation not very compelling
Divestment of Block 5006 Techplace II
Ascendas REIT (A-REIT) has been actively involved in capital recycling activities YTD in a bid to optimize its portfolio yield. Following the proposed sale of 6 Pioneer Walk in Jun, we note that A-REIT had on 24 Aug announced the divestment of another property, Block 5006 Techplace II, for S$38m. According to management, the proforma impact on A-REIT’s FY12 NPI and DPU would be approximately S$1.46m and 0.01 S cents respectively, assuming the divestment was completed on 1 Apr 2011. However, based on our estimates, the proceeds are likely to relieve its interest burden and may potentially add 0.01 S cents to its FY14F DPU.
Maintain caution on business/science park segment
For the rest of FY13, we believe A-REIT will deliver a stable set of performance, supported by full-year contributions from its past investments. We are only cautious on its significant exposure (34% by valuation) to the business/science park segment. According to CBRE’s latest Real Estate Research Report, the occupancy rate for this segment had declined for three consecutive quarters to reach 91.7% in 2Q12, while its rents had declined four straight quarters to hit S$3.70 psf/month. For the rest of 2012, CBRE projects the downward pressure on occupancy and rents to continue, with a 6% correction in rents expected for 2H12. Hence, we are maintaining caution on AREIT’s business/science park space. On a positive note, we understand that the current market rents are 16-35% higher than the average passing rents for the areas due for renewal. As such, we believe A-REIT will still put in a stable set of results.
Maintain HOLD
We are tweaking our estimates for FY13-14 to reflect the divestment. Our fair value is now revised to S$2.28 from S$2.27 previously.However, at current price level, we believe A-REIT’s P/B ratio is not very compelling at 1.25x. Its FY13F DPU yield of 5.9% is also lower than the industrial REIT subsector average of 7.2%. Maintain HOLD.
CLT – AmFraser
A Juicy Yield Play
We initiate coverage on Cache Logistics Trust (Cache) with a BUY and a fair value of $1.291 based on DCF. Backed by a quality portfolio of logistics warehouse assets, Cache is well positioned to capture the growth opportunities presented by Singapore’s development as a global logistics hub. Built‐in rental escalation rates of 1.5‐2.5% and the long‐term nature of its triple‐net master lease agreements underpin earnings resilience even in the face of subdued macroeconomic conditions. A forward FY2012‐13 dividend yield of 7.0‐7.3% further accentuates Cache’s attractiveness.
INVESTMENT MERITS
Built‐in rental escalation rates and triple‐net lease structure offer protection against inflation. Cache’s master and multi‐tenanted leases are structured with built‐in rental escalation rates of 1.5% to 2.5%. This, along with its triple‐net master leases, allows Cache to pass on the bulk of its inflationary burden to its master lessees and end‐user tenants.
Backing of a strong sponsor. CWT has provided Cache with a strong pipeline of local and foreign acquisition assets by granting it a Rights of First Refusal (ROFR) on 13 properties, bolstering its inorganic growth plans.
A juicy yield play. The biggest attraction for us is its sustainable FY2012‐13 yield of 7.0‐7.3%. A portfolio of strategic assets, strong underlying occupancy rates and its long‐term triple‐net master lease structure all combine to underpin its earnings stability and thus ensuring the consistency of its attractive dividend yield.
Comfortable debt headroom. Should Cache obtain a credit rating, the company would be able to drive up its aggregate leverage to a maximum of 60%. Amid the current environment of strong liquidity and low interest rates, Cache could be motivated to take on a more aggressive stance on gearing to support its acquisition of desirable assets.
KEY RISKS
Over reliance on master lessees CWT and C&P for rental income. Should CWT Limited and C&P fail to meet their lease obligations, this would severely impact Cache’s bottom‐line and distribution income.
Asset concentration risk. Generating around 40% of its rental revenues from CWT Commodity Hub, Cache is largely exposed to risks that could adversely impact the operations or business of CWT Commodity Hub.
VALUATION
DCF Valuation. We derive a fair value of $1.291 based on a DCF model. Our model factors in a terminal growth rate of 1.5% and is based on the assumptions of a risk‐free rate of 1.38%, a beta of 0.8, and market risk premium of 9.2%.
SREITs – Kim Eng
The allure of S-REITs
Gravity Defying: Highest Yield-Spreads and Returns Globally.
- S-REITs has risen 28.7% YTD, outperforming even major REITs markets such as US, Australia and Japan etc
- We pointed out that S-REITs has one of the highest yield spreads globally in our previous report dated 3 Sep 2012. We took a deeper look at global/regional peers and below are our assumptions and proposed theses why this may be the case:
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Why Asian REITs have much higher yield spreads.
- The Asian REITs (S-REITs, J-REITs, and HK-REITs, excluding M-REITs), outperformed the non-Asian REITs (US-REITs, UK-REITs, A-REITs) in terms of yield spreads partly due to higher borrowing costs in the West (consequence of US/European deleveraging) and Australia.
- With the exception of M-REITs, the Asian REITs incur average cost of borrowing (sector average) of ~1.5%-3.1%, much lower than the 5.5%-6.9% expensed by non-Asian REITs.
- We noted that despite risk-free rates being low in the US (1.7%) and UK (1.8%), the actual borrowing costs to companies on the ground are relatively higher, compared to Asia. Western banks have become parsimonious in their lending vis-à-vis the robust loan growth situation amongst Asian banks.
- From our observations, A-REITs and UK-REITs have average cost of borrowings much higher than normalized1cap rates, rendering DPU yields to be trading near cap-rates levels. As a result, yield spreads are much lower in comparison. For US-REITs, the high borrowing costs are partly offset by their higher cap rates, but this is still insufficient to cover the 178-211 bps yield spread lag behind Asian REITs (excluding M-REITs).
- In M-REITs case, both the cost of borrowing and risk free rates are much higher than S-REITs, J-REITs and HK-REITs, resulting in much lower yield spreads.
- The Asian REITs (S-REITs, J-REITs, and HK-REITs, excluding M-REITs), outperformed the non-Asian REITs (US-REITs, UK-REITs, A-REITs) in terms of yield spreads partly due to higher borrowing costs in the West (consequence of US/European deleveraging) and Australia.
- What gives S-REITs the edge over other Asian REITs.
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Higher Capitalization Rates:
- On a sector basis, Singapore has relatively higher normalised2 cap rates (net property income that can be extracted per annum for each S$ dollar invested in investment properties), compared to Hong Kong and Japan.
- For example in HK, cap rates (net basis) for prime office and prime retail buildings on a stabilized basis are around 3%-3.5% and 3.5%-4% respectively. However, in Singapore, cap rates for prime office and prime retail properties are at least 4.0% and 5.0% respectively.
- This enables S-REITs to offer DPU yields of ~6% without trading at price-to-book discount (1.07x PBR). On the other hand, in order to offer DPU yields of ~5%, HK-REITs and J-REITs have to trade at ~0.8x PBR.
Unlikely interest rates hike until end 2014:
- The MAS manages the Sing dollar’s strength by buying or selling currencies to keep its exchange rate against major currencies within a policy band, and by adjusting the band occasionally to steer the exchange rate. This FX-centred monetary policy regime means that Singapore’s short-term interest rates are essentially a function of US short-term interest rates.
- Most economists do not expect any significant interest rates hike until end of 2014, following the US Fed’s intent to keep short-term interest rates near zero till then. If correct, this would imply that the cost of borrowings for S-REITs (some pegged to SIBOR) will stay at current low levels through 2012-2014.
Others reasons:
- The strong SGD, chasing yields climate and lack of investable alternatives in the market are other factors providing price support for S-REITs. Investors are also drawn to the transparency and predictability of S-REIT dividends, particularly in the midst of the external market uncertainty
- On a sector basis, Singapore has relatively higher normalised2 cap rates (net property income that can be extracted per annum for each S$ dollar invested in investment properties), compared to Hong Kong and Japan.
Yields can compress another 70-90 bps (Peak Valuations).
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S-REITs are presently trading at 5.9% FY12 yield and a yield spread of 463 bps. We think there is downside room for another 70-90 bps compression in view of the following two reasons:
- The S-REITs’ average and stabilized long-term yield spread (excluding the GFC period) is around ~370 bps.
- The effective cap rate for S-REITs is around 5.3%. If we take cap rates as the floor for FY12 DPU yield (since overall S-REITs sector trading at P/B of ~1x), there is another 70 bps for yields to be compressed further.
- The S-REITs’ average and stabilized long-term yield spread (excluding the GFC period) is around ~370 bps.
- A yield-spread compression of another 70-90 bps equates to an average price appreciation of 13%-19% for the sector.
Maintain OVERWEIGHT on S-REITs.
- We conducted a 2QCY12 results round-up and target price update for S-REITs under our coverage. Most S-REITs reported 2QCY12 distributable incomes that were in-line with our forecasts. Moving forward, we expect DPU growth of 1.4%-9.6% per annum over FY11-FY13F (except Suntec REIT which will likely suffer DPU decline due to ongoing refurbishments at Suntec City).
- Our top BUYS remain with the more defensible industrial and retail REITs with total returns of 10%-17%. We think their risk-reward proposition still appear favorable to yield-driven investors. Maintain OVERWEIGHT on the overall S-REITs sector.