Industrial REITs – OCBC
2Q12 RESULTS ROUNDUP
•Interim results matched projections
•Positive performance to carry on
•Good capital and lease management
Consistent set of results
Industrial landlords continued to deliver, meeting expectations for 2Q12. YoY growth in NPI ranging from 3.9-26.4% was seen among the REITs, bolstered by contribution from completed developments/ acquisitions, positive rental reversions and improved operational performances. Mapletree Industrial Trust was the top performer for the quarter, raking up 14.1% YoY increase in DPU. This was followed closely by Cambridge Industrial Trust and Ascendas REIT, with 13.9% and 10.3% growth respectively. Only AIMS AMP Capital Industrial REIT (AAREIT) and Cache Logistics Trust (CACHE) saw a sequential decline in DPU. However, this was due to the absence of distribution in retained income seen in 1Q by AAREIT. For CACHE, we note that it was attributable 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.
Positive outlook remains
Going forward, we believe that industrial REITs will likely maintain their financial performances. While most of the landlords acknowledge that the macroeconomic landscape has remained uncertain and volatile, they expect stable results from their portfolios, driven by contribution from recent investments and healthy leasing activities in the industrial space. A few industrial REITs also cited the possibility of further positive rental reversions, as current market rents are still above the passing rents at some of their assets.
Occupancy rate and gearing remained at healthy levels
Industrial REITs, we note, have also done well on their lease and capital management. The subsector average occupancy rate as at 30 Jun stood at 98.4%, representing a 60-bp improvement QoQ, while the weighted average lease to expiry held steady at 3.6 years. This reflects active portfolio management and continued strong demand for industrial property. In addition, the subsector aggregate leverage average was still comfortable at 33.5% (vs. 33.9% in 1Q). As such, we maintain our OVERWEIGHT rating on the industrial REIT subsector. Cache Logistics Trust remains our preferred pick, given its attractive FY12F DPU yield of 7.6% and robust portfolio.
Cambridge – DMG
Another attractive quarter
2Q12 results in-line with expectations. Cambridge Industrial Trust (CIT) just released its 2Q12 results posting gross revenue and net property income of S$21.5m (+10.4% YoY) and S$18.4m (+8.8% YoY) respectively. The increase in revenue is mainly attributed to additional contributions from the acquisitions at 16 Tai Seng Street, 25 Pioneer Crescent and 3C Toh Guan Road East. DPU for the quarter came in at 1.180S¢ (+13.9% YoY), equivalent to 24.4% of our FY12 DPU estimate. 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. On the back of falling risk free rate to historic low together with the improvement in the quality of assets of CIT, we maintain our BUY call on CIT with a revised DDM based (COE: 9.8%, terminal growth: 1.0%) TP of S$0.660. With CIT currently trading at 7.2% spread vs the pre-crisis historical mean of 4.6%, our TP represents a spread of 6.3% posting a potential upside of 11.8%
Multiple acquisitions and AEIs a positive for DPU. Since the beginning of the year, CIT has completed three acquisitions (namely: 16 Tai Seng Street, 25 Pioneer Crescent and 3C Toh Guan Road East) and proposed a future acquisition at 30 Teban Gardens Crescent. Together with the completion of the BTS project at Tuas View Circuit by August 2012, we expect CIT’s DPU to grow by c.0.5S¢ (+12%) in FY12.
Pro-active management with room for slight positive reversion. CIT’s management continues to be pro-active in engaging tenants early on negotiations of lease renewals in a bid to reduce lease concentration. Average lease expiry profile for FY13/14 continues to decline to 46.3% from >50.0% last year. Currently, CIT’s portfolio occupancy is at 99.1%, together with a high average security deposit of 12.9 months, and a WALE of 3.1 years, we believe CIT’s portfolio will continue to remain defensive amid a volatile global economy.
Acceptable gearing amid multiple acquisitions. Management has been undertaking a portfolio reconstitution exercise since beginning of 2010, divesting nonperforming assets and redeploying capital into yield accretive acquisitions. Amid multiple acquisitions, gearing has been pared down from 42.6% in Dec 2009 to 35.8% in Jun 2012. With an internal target gearing 40%, CIT will still has some room for further acquisitions. Together with an attractive yield of 8% and a strong pipeline of acquisitions, we maintain our BUY rating with a revised TP of S$0.660.
CDL H-Trust – Kim Eng
Trade with caution ahead
1H12 earnings inline. CDLHT’s 2Q12 revenue rose by 6% YoY to SGD36.6m, while the distributable income for unitholders decreased by 0.9% YoY to SGD28.2m, due to a higher one-off property tax refund of SGD3.3m by IRAS in 2Q11. 1H12 revenue at SGD75.4m, up 12.2% YoY, was 50% of our FY12 forecast but 45% of consensus estimate. 1H12 DPU at 5.70 SG-cts, up 6.7% YoY, was 47% and 46% of ours and consensus estimate respectively.
Portfolio review. Singapore 2Q12 hotel occupany (excluding Studio M Hotel) at 89.7% was up 1.2ppt QoQ and 1.6ppt YoY. Average Room Rate (ARR) at SGD242 was flat QoQ but up 4.3% YoY. However, Orchard Hotel and Copthorne King’s Hotel are showing signs of moderation this quarter, with gross revenue down 7.5% and 3.7% QoQ respectively. Overall 2Q12 portfolio revenue has also softened, down 4.7% QoQ.
Not all hotels are equal. CDLHT Singapore YoY hotels performance has been lagging the overall hotel sector performance in terms of ARR growth (STB registered average year to May 2012 growth of 9.4% p.a.). We suspect that some of the islandwide growth are driven by the the two IRs, such as Marina Bay Sands which saw its 2Q12 ARR rise 29.9% YOY to USD348 (~SGD435) and occupancy up from 90.8% in 2Q11 to 99.1% in 2Q12. Genting Singapore also registered 1Q12 ARR growth of 20.7% YoY to SGD338 with occupancy up from 79% to 86%.
Expect slower tourism growth amidst a more competitive landscape. CDLHT derived ~80% of revenue/NPI from Singapore. We expect tourist arrivals to register 5.2% CAGR over 2010-15 but hotel room supply will grow at 6.3% CAGR, outstripping demand growth of 5.9%. ARR growth is project to slow from 15% in 2011 to 6% this year and 2%-3% over 2013-2015.
Reiterate HOLD. With more hospitality trusts coming onboard (At FY12F P/B of 1.3x, scarity premium likely to compress) and more hotel rooms coming on-stream, we would advise investors to stay cautious. The stock has run up 35% YTD and at FY12F DPU yield of 5.8% and yield spread of 415bps vis-à-vis historic average of 502bps, the stock has limited upside ahead in our view. We think investors would be better off with the more defensive industrial and retail REITs or cheaper hospitality alternatives such as OUE, which has further upside if it injects its assets into a hospitality trust. Reiterate HOLD; TP SGD1.97.
ART – OCBC
RAISING FV WITH GOOD 2Q12
•2Q12 better than expected
•RevPAU grows 6% YoY
•Approval for Cairnhill sale
1H12 DPU in line
ART registered 2Q12 revenue of S$78.9m, up 8% YoY, and gross profit of S$42.7m, up 4% YoY. Revenue growth was chiefly due to contributions from Citadines Shinjuku Tokyo and Citadines Karasuma-Gojo Kyoto as well as better performance from the serviced residences in UK, the Philippines and China. 2Q12 DPU climbed 2% YoY to 2.38 S-cents. 1H12 DPU of 4.52 S-cents was better-than expected, forming 53% of our initial FY12 projection. We raise our FY12 DPU projection from 8.6 S-cents to 9.1 S-cents. The value of the investment properties as of 30 Jun was S$2.9b, up 2.5% versus the last valuation on 31 Dec.
UK, Philippines and China performed well
Revenue per Available Unit (RevPAU) for the portfolio climbed 6% YoY to S$156. In London, good response to the rebranded Citadines Prestige Trafalgar Square London helped ART achieve better rental yields. In the Philippines, ART saw stronger demand from business process outsourcing, O&G and aircraft engineering. The properties in China are experiencing more business from projects and relocations. These three countries helped to offset the weakness in France and Singapore. Singapore saw gross profit declined 5% QoQ to S$7.1m due to disruption from construction activities near to Somerset Grand Cairnhill and higher property tax and operational expenses. The Olympics will provide a boost for the London properties for three weeks in 3Q12, with management seeing occupancies of 85% and average room rates increase of 25%.
Approval for Cairnhill sale
Close to 100% of shareholders voted in favour of the four interconditional transactions involving the sale of Somerset Grand Cairnhill, the purchases of Ascott Guangzhou and Ascott Raffles Place, and a put and call option on a new Cairnhill serviced residence scheduled to be completed in 2015. We have already incorporated the first three transactions into our model. We maintain BUY and raise our RNAV-based fair value estimate from S$1.23 to S$1.34.
HPH Trust – DBSV
On track to deliver promises
• Decent y-o-y volume growth at both Yantian (4%) and HIT (8%) in 2Q12; boosted by transhipment cargo
• 3.1 UScts DPU declared in 1H12, as per IPO guidance
• DPU should be sustainable at 6.6UScts level annually, as capex deferral is not a very significant proportion of total distributable cash flow in FY12
• Maintain BUY with unchanged TP of US$0.85
Highlights
Market share gains continue. Overall throughput volume growth at HPH Trust's ports have continued to exceed estimates, with c.5% y-o-y growth being recorded in 2Q12. This was driven by 8.3% throughput growth at HIT and 4% throughput growth at Yantian Port in 2Q12. YTD in 2012, volume growth at HIT and Yantian Port was at at 8.9% and 1.9%, respectively. Growth at HIT has significantly outperformed overall HK Port volumes YTD, largely driven by transhipments. The higher mix of transshipment cargo, however, has led to lower ASPs at HIT. ASPs at Yantian Port continue to improve with the gradual shift to Rmb pricing.
Earnings growth more muted. Though volume growth has led to 6% growth in revenues y-o-y, net profits were largely flat. Without the impact of forex gains/losses, net profits would have been up by about 4%. Higher staff costs, higher interest costs and the higher transhipment mix continue to weigh on EBITDA margins.
Our View
There will be low volume growth but negative volume growth is unlikely. We have explained this in our last report "Sustainable yield story" published 21 June, 2012. Though volumes to Europe have contracted, and sedate US volume growth barely offsets that, we still expect a 4% overall volume growth in FY12, driven by other trade routes and transshipment growth. For the upcoming peak season, berth bookings are looking robust according to management, but it remains to be seen how full these ships will be over the next few months.
Recommendation
3.1 UScts DPU declared in 1H12, on track to meet IPO projections for 2012. We expect the Trust to meet its DPU guidance of 6.6UScts for FY12, as it will be deferring some development capex to future years, and have the option of redeploying the cash to dividends. We estimate the Trust could defer about HK$500m from its original HK$1.2bn capex plan for FY12. We appreciate that this is not a sustainable strategy for propping up dividends, but this capex deferral is still a small component and only adds about 5% to estimate total distributable cash generated in FY12. This implies that, at worst, FY13 DPU would likely stay flat as operating cash flows can grow at more than 5%, in line with throughput volume growth.