ART – CIMB
Global headwinds remain
We returned from a non-deal roadshow more positive on the stock after gaining more clarity on growth potential via asset enhancements and acquisitions. That said, we continue to expect macro headwinds to cap same-store growth and see forex volatility as an overhang.
We revise our assumptions for long-term and AEI-led RevPau growth, and factor in S$100m in acquisitions in 2013/14, adjusting our DPU accordingly. DDM-based target price (8.5% discount rate) also rises. As the stock has done well YTD, we remain Neutral on the lack of strong catalysts.
Allaying investor concerns
Investor concerns were precipitated by the REIT's wide geographic reach. Global outlook was a key concern, with queries targeted at its European portfolio as well as Asia growth opportunities. Concerns were slightly allayed by the nature of the asset class (serviced residence vs. hotels) and structure of leases. Management targets long-staying corporate travellers vs. a more volatile tourist segment. Tourist exposure is limited to 10-20% in Asia and 50% in Europe, with average length of stay at 5-6 months in Asia and <1 month in Europe. Potential earnings volatility in Europe is minimised by master leases and minimum income terms, providing downside protection on >40% of portfolio earnings.
Next phase of growth
With the renovation cycle for serviced residences at 8-10 years, we see AEI potential for older assets. The UK's Citadines Prestige Trafalgar Square, which was recently renovated and rebranded, saw a 30-40% uplift in room rates. Ascott Jakarta is next in line, with expected completion in 1Q13. Management expects a 10-15% average increase in room rates post-AEI. Acquisitions will still focus on Asia (e.g. China, India, Vietnam), through 3rd party and sponsor acquisitions, with the latter seeing S$2bn-2.5bn of assets completing over the next few years. Management will maintain 65:35 Asia/Europe exposure.
Macros still a concern
Macro headwinds are our key concern, as we see growth on 60% of portfolio on management contracts (though limited to Pan Asia exposure) largely capped. Forex volatility is also a worry. We take comfort in recent renewed optimism on ECB action, but remain sceptical on its sustainability. Management caveats it might hedge the Euro depending on conditions.
Cambridge – DMG
A pass at the sale of the year
As previously announced on 2nd and 24th May 2012, Cambridge Industrial Trust (CIT) has joined with other owners of Lam Soon Industrial Building to undertake an ‘en-bloc’ sale of the entire property at an indicative pricing of S$330m (equivalent to an estimated S$950 psf) – 2.5x the valuation of the property on books. Located in Hillview, Upper Bukit Timah, Lam Soon Industrial is a 230,915 sq ft freehold site zoned for residential use with a gross plot ratio of 1.92x. With regards to this matter, CIT has just announced that despite good interests on the property, a mutually agreeable pricing could not be reached and hence the en-bloc sale would not be carried out. Although this is a freehold piece of land, the indicative price may be on the high side after taking the development cost into consideration. Although CIT could have greatly benefitted from this sale, we believe CIT would continue to grow via other acquisitions and AEIs going forward while the management awaits a better time before carrying out another en-bloc sale. Maintain BUY on CIT with a DDM-based (COE: 9.8%, terminal growth: 1.0%) TP: S$0.660.
Selling price might be higher than what the developers are willing to pay. At S$330m, the indicative selling price translates to 2.5x the book value (for 79% ownership) of the property as per December 2011. Assuming a development cost of S$300-400 psf, the total cost of construction could add up to approximately c.S$1300-1400 psf. With the current selling price of S$1400-1600 psf for the residential development across the road of Lam Soon Industrial, coupled with uncertainty in the residential market, we believe the profit margin for developing this particular property may be too low for developers’ consideration.
CIT continues to remain attractive. With an estimated cap rate of 5.2% on this building, CIT could have greatly benefitted from this divestment. However, going forward, we expect CIT’s DPU to continue to remain strong from 1) additional contributions from its acquisitions, 2) resilient industrial rental rates coupled with average security deposits of 12.9 months, 3) the completion of the BTS project at Tuas View Circuit in August 2012 and 4) future AEIs in the pipeline. Maintain BUY on CIT with a DDM-based (COE: 10.7%, terminal growth: 1.0%) TP: S$0.660.
FCOT – OCBC
UPDATES ON PREFERRED UNITS
- Expiry of restriction period
- CPPU redemption likely in FY13
- P/B still attractive at 0.88x
Update on CPPU conversion and redemption
Further to the expiry of the restriction period for redemption and conversion of Series A Convertible Perpetual Preferred Units (CPPUs) on 25 Aug, Frasers Commercial Trust (FCOT) announced that it has not exercised its right to redeem the CPPUs. However, CPPU holders had successfully exercised their right to convert ~1.0m CPPUs at a conversion price of S$1.1845 per unit. We understand that 878,697 new ordinary units will be issued on 1 Oct through the conversion process (0.14% of total units outstanding as at 30 Jun), but they will not be entitled to any distributions on FCOT’s ordinary units declared during the period between 1 Apr and 30 Sep. We estimate that ~341.5m CPPUs will be left in issue post conversion.
KeyPoint sale proceeds likely used to redeem CPPUs
We are currently maintaining our view that FCOT will likely redeem half of its CPPUs as the distribution rate is relatively high at 5.5% of its offer price. The divestment of KeyPoint is expected to be completed by 8 Oct, and will provide FCOT the financial resources to redeem the CPPUs as well as pare down its existing borrowings. As a reference, FCOT had proposed on 24 Apr to sell KeyPoint for a consideration of S$360m, representing a 26.3% premium to its latest valuation of S$285m. This is expected to result in a gain of S$72.8m.
Maintain BUY with unchanged fair value of S$1.23
In view of the CPPU conversion, we now factor in the new ordinary units into our model. Our fair value, however, remains unchanged at S$1.23. We continue to like FCOT for its growth potential, strong execution and attractive P/B of 0.88x. Based on our understanding, FCOT may possibly be in the final stages of discussion with potential tenants to take up most of the remaining 85% space formerly occupied by Marsh & McLennan at China Square Central. This, together with potential interest savings, may likely translate to better financial performance at FCOT’s portfolio going forward. Maintain BUY.
SREITs – Lim and Tan
S-REITS
- Bloomberg has a piece on the S-Reits sector this morning, saying it has been the best performing so far this year: averaging 37% (yield + capital gains), twice the gains in the US, UK and Japan, the other major reit markets. (S-Reits offer an average 6.,46% yield presently.)
- One of the reasons cited for this is the pace of acquisitions, accounting for a third of total acquisitions by reits in the region since 2009, second to Japan.
- The report also highlights the wide gap between yields of reits and 10-year government bonds: 413 basis points here vs 192 bp in Australia.
- While we remain bullish on S-Reits, we believe there are warning signs to look out for, especially when reits gain on every acquisition they make (eg the Mapletree Group of reits). Price to book will be the ratio to watch closely rather than the yield.
- For instance, retail reits like CapitaMalls trust, Fraser Centrepoint are trading at >20% premium.
REITs – Phillip
Results Season Takeaways
Sector Overview
The Real Estate Investment Trust (REIT) Sector in our Singapore coverage consists of 23 REITs listed on Singapore exchange with a market capitalization of USD35 billion.
- Majority of S-REITs turned in positive DPU
- S-REIT’s dividend yield of 5.5% is less appealing than a quarter ago and there is limited upside given rich valuation based on +1 STD of P/B ratio
Earnings Surprise?
Across the S-REITs universe, majority of them turned in positive DPU. Negative rental reversion was not the main reason for the dip in DPU. The drag in DPU was caused by some other factors such as divestment of property assets, issuance of new units, on-going major asset enhancement works and amongst others.
Under our coverage, the DPU estimates for CDL HT, PLife REIT and Sabana REIT were largely in-line, forming 49%, 51% and 50% of our FY12 projections.
Capital management outlook
- The variable-rate loans that are pegged to swap offer rates maintained flat
- Liquidity is expected to remain healthy at current loan-to-deposit ratio (LDR) level of 91.9%
- Financial position of REITs looks healthy, with comfortable gearing and longer weighted average debt to maturity
Recommendation
P/B ratio has progressively moved towards +1 SD and it had served as a strong resistance level for the past four years. From our viewpoint, it is going to be an uphill struggle to break above +1 STD. Given there is no major negative shocks from the western countries, P/B ratio should hover around this level as the current situation is not much better compared to two years before, undermined by lingering Euro debt problems and anaemic US growth.
For investors with mid- to long- term horizon, they may want to place their bet on Suntec REIT which is undergoing major makeover (phase 1-4) at Suntec City, stretching from Jun-12 to 2014. In this regard, return on investment from the refurbishments is likely to stream in in staggered phases. The tax savings from MBFC Phase I and potential ORQ could make up the loss for the drop in vacancy. Valuation is also undemanding and trading at a steep discount of 26.5% relative to Mapletree Commercial Trust (MCT) and Starhill Global REIT.