CCT – DMG
Fairly valued in near term
Limited ro om to drive growth on the back of weak economy. After meeting with the management of CapitaCommercial Trust (CCT) recently, we believe this counter is currently at fair-value with limited upside potential in the short run on the back of slower 2012 economic growth in Singapore. Positive rental reversion, apart from the already signed leases, is also believed to be constrained with MBFC – Phase 2 expected to be completed in 1QFY12. Going forward, we raised our FY11 and FY12 DPU estimates by 3.3% and 1.8% respectively to account for the additional DPU contribution from the new building in 20 Anson Road. Based on our DDM valuation (COE: 8.7%; TGR:2.0%) we maintain NEUTRAL on this counter with an unchanged TP of S$1.38.
Fairly-valued acquisition. The recent purchase of Twenty Anson is expected to add 0.36$¢ to the DPU while the price of S$430m being paid is viewed as fair-valued. Currently, this property is generating a yield of 2.6% with a potential to be increased to 4% when CCT revise the rental rate to the average market rate of S$8.44 psf/month from its current S$6.18 psf/month when 50% and 44% of the property’s NLA is due for renewal in 2013 and 2014 respectively.
Volatile occupancy rate due to AEI. Occupancy rate in Six Battery Road fall to 85.4% in FY11 from 99.7% the year before. Going forward, occupancy is expected to fall with one of its anchor tenant moving out when the lease is due. The occupancy rate at this property is expected to remain volatile until 2013 when the AEI is scheduled to be completed.
Limited room for growth in 2012. Going forward, the positive rental reversion brought about by some of CCT’s properties (e.g. HSBC building) are expected to be offset by the loss in income due to lower occupancy rate in some of its other properties. In addition, with a softer economic forecast in Singapore for 2012, we expect to see strong positive reversion to occur only in 2013. Given limited room for growth in near term on the back of weak economic forecast, we maintain NEUTRAL on this counter at this juncture
A-REIT – CIMB
Business Park blues overdone but few catalysts
An unprecedented supply of new business-park space is anticipated in the next four years. While there could be some pressure on AREIT’s business parks, we believe fears may have been overdone.
We maintain our estimates and DDM target price (discount rate 8.6%) but downgrade AREIT to Neutral from Outperform in view of limited catalysts. We advocate a switch to CCT at a cheaper 0.7x P/BV with similar yields (6%).
61% of supply pre-committed
We anticipate almost 7m sf of new business/science park space between 2012 and 2015. Almost 40% of this should be completed in 2012. There are some doomsday forecasts in the market, which we believe are over pessimistic. For the whole 7m sf of new supply, pre-commitment is 61%. For the 2.8m sf of new space completing in 2012, 68.5% has been pre-committed.
Demand looks positive, still
Net formation of companies that are likely to take up space at business/science parks (manufacturing information & communication, financial & insurance, professional scientific & technical activities, and arts & entertainment) is still positive, auguring well for take-up of business-park space.
Low rents of single-user and BTS buildings to offer buffer
AREIT’s fairly high weighted average rent of S$4.22 is skewed by unusually high rents from its Telepark data centre which has high specifications. If we exclude this, rents for its single-user space would range between S$1.25 and S$2.39psf; multi-user space between S$1.83 and S$3.85psf. On a weighted average basis, gross income from buildings with average rents below S$2.75psf contributed 40% to its gross income in FY11. We believe the pockets of low-based rents in its portfolio provide a safety net for possible negative rental reversions.
PLife – Phillip
Breaking new ground
Company Overview
PLife REIT is one of the largest listed healthcare REITs in Asia by asset size. Its mandate is to invest in income producing real estate and/or healthcare-related assets primarily used for healthcare and/or healthcare-related purposes in Singapore and Asia.
• Acquisition of three Japan nursing homes at S$53.3mn and Malaysia medical centre at S$6.45mn
• DPU accretive resulting from debt and cash financing
• Maintain ACCUMULATE with a higher target price of $1.950
What is the news?
PLife REIT started the year with a bang. The trust strengthened its foothold in Japan with three nursing homes and in tandem penetrated into Malaysia private healthcare sector by acquiring a medical centre. The three nursing homes will be on 20-year master lease, lengthening the weighted average lease term to expiry for PLife REIT’s Portfolio to approximately 12.35 years. Akin to other acquisitions made in Japan, the properties are secured with backup operators and protected with rental income guarantees. The acquisition is expected to be wholly funded by a fresh term loan facility of S$53.3mn at an estimated all in cost of 1.8% and to be concluded by March 2012.
Making inroads into Malaysia, the trust acquired strata titled units within Gleneagles Medical Centre Kuala Lumpur at S$6.45mn and the transaction is expected to complete by August 2012.
How do we view this?
We like the management approach when in comes to venturing into uncharted waters and would attempt to label this as “start small and finish big” approach which they have demonstrated by expanding their presence in Japan in the past four years. From unitholders’ standpoint, the purchases are DPU accretive as no equity is raised. The Japan properties offer income stability with downside protection while Malaysia property provides organic growth potential with shorter lease term. Based on our model, the leverage ratio is likely to be c.36.8% and this leaves the trust with debt headroom of S$80mn and S$220mn with respect to 40% and 45% gearing respectively.
Investment Actions?
With latest acquisition, DPU is anticipated to elevate by 3.6% on average over the next five years and resulting to higher price target of $1.950. We are confident that the management will continue to deliver sustainable DPU with its growth model and therefore maintain our call to Accumulate.
StarHill – BT
Starhill-Toshin rent case goes to Court of Appeal
Independence of valuers is the bone of contention
A DISPUTE between Starhill Global Reit and its master tenant in Ngee Ann City over whether a process used to set retail rents is still operable has gone before the Singapore Court of Appeal.
At issue is whether the independence of the international valuers that are part of a rent review process has been compromised by alleged bias. This was after Toshin Development Singapore allegedly ‘secretly’ approached all eight valuers and hired seven in 2010 to do valuations for a period that included a new rental term beginning June 8, 2011, several months before a joint rent review exercise was to have started.
Toshin, a unit of Takashimaya, leases more than 225,000 sq ft in Ngee Ann City, which it then sub-leases to luxury brands such as Chanel, Louis Vuitton, Burberry and Tiffany & Co.
In opening arguments before the appellate court yesterday, Senior Counsel Alvin Yeo of WongPartnership and Starhill’s lawyer argued that Toshin had ‘in a calculated manner, undermined the rent review mechanism such that it is no longer operable to provide parties with a rent that is objectively determined’.
Starhill would be ‘unfairly prejudiced’ because Toshin ‘knew exactly the prevailing market rent which the valuers would provide … based on their valuation report in 2010’ and would ‘be in the position to choose and manipulate the appointment of valuers in their favour’, Mr Yeo said.
As such, Starhill wants the court to replace the existing rent review process with another that will ‘provide parties with the objective and unbiased evidence of the prevailing market rental of the premises,’ he said.
‘This can be done, for example, by the court ordering an assessment where parties can call evidence from local valuers,’ Mr Yeo said.
Starhill’s appeal comes after its request for the court to determine the prevailing market rent of the Toshin lease was rejected in January by High Court Justice Lai Siu Chiu.
In her grounds of decision, she said she had her ‘reservations about the legitimacy of this remedy’ as it ‘would amount to the court substituting its own terms for those in the lease agreement, which was a contract made between the parties’.
She also found that the valuers were ‘not involved in a conflict of interest’ and that Toshin had ‘not obtained any unfair advantage by engaging seven of the eight valuers in 2010’.
But Starhill disagreed. ‘Regardless whether the valuers have a conflict of interest, the issue is whether the valuers are perceived by the parties as not biased,’ it said.
But Toshin, which is represented by Senior Counsel Cavinder Bull of Drew & Napier LLP, argued that Starhill has ‘no legitimate basis to derail the contractual rent review machinery’.
Mr Bull pointed out that five valuers have ‘confirmed in writing that they will not have any conflict of interest and that nothing has compromised their ability to objectively carry out professional, fair and independent valuations’.
In hiring the valuers in 2010, Toshin wanted to gauge how rentals had moved in light of a nearly 20 per cent jump in annual rents to $33.9 million at the last review in 2008, and in the aftermath of the financial turmoil later that year, as well as the opening of new shopping malls in Orchard Road.
‘This was so that it could estimate the possible impact on its business (eg, sub-tenants’ rentals could be affected),’ Toshin said. ‘Its head office in Japan also needed accurate information for preparing earnings forecasts to shareholders, and there was heightened scrutiny on Toshin’s rental rates due to the large hike in 2008.’
Furthermore, Mr Bull argued that Toshin could not demonstrate ‘a live conflict of interest’ because 18.5 to 19 months had elapsed since most of the valuations were carried out in 2010.
‘The price of a three-year lease transacted in June 2010 is not the same as the price of a two-year lease transacted in June 2011; they are based on two different sets of information and circumstances that exist on the two valuation dates, which are a year apart,’ he said.
TCT – BT
Treasury China Q4 income falls short of its forecast
TREASURY China Trust (TCT) yesterday posted a net property income of $15.9 million for the three months ended Dec 31, 2011, up 31.9 per cent from $12 million a year earlier.
In renminbi terms, Q4’s net property income of 78.68 million yuan (S$15.9 million) was 4.6 per cent lower than TCT’s own forecast of 82.47 million yuan.
Meanwhile, gross revenue for the quarter rose 27.4 per cent to $26.1 million, underpinned by the continued strengthening of its portfolio occupancy, and the increase in underlying average rent per square metre.
This was in turn driven by an average 8.5 per cent increase in rent for the 32 leases negotiated during the quarter.
Earnings per unit for Q4 2011 slipped to 8.1 cents from 8.7 cents for Q4 2010.
For the full year ended Dec 31, 2011, TCT’s net property income was $58.1 million, 0.8 per cent lower than its forecast. Gross revenue was $93.2 million.
For the period from May 19 to Dec 31, 2010, net property income was $22.6 million on revenue of $39.6 million. TCT, a Singapore-based business trust focusing on commercial real estate in China, was listed in June 2010.
TCT did not declare any distributions for the financial period, citing the ongoing uncertainty in China’s liquidity environment and its current development of The HQ – a retail and office complex in Shanghai.
TCT’s chairman, Richard Barrett, called the decision to delay the declaration of a distribution ‘one of prudence’, in order to ensure liquidity should bank lending be further tightened.
Mr Barrett also issued a note of caution for 2012: ‘Despite the (Chinese) government’s decision on Feb 17, 2012, to reduce the reserve requirement ratio by 0.5 per cent, equivalent to approximately 380 billion yuan in additional liquidity, the prospect of increased certainty from banks as to the availability of funding for the real estate sector remains patchy at best.’
The reserve requirement ratio refers to the amount of funds Chinese banks are required to hold with the central bank.
In a separate filing to the Singapore Exchange yesterday, the group also clarified that TCT, its intermediate holding companies, and its project companies are ‘in compliance with their respective debt covenants.’
TCT units fell 11 cents to close trading at $1.39 per unit yesterday.