CCT – CIMB
DPU uplift from MSCP to come later
• Negative reversions for rest of 2011; maintain Underperform. 2Q11 results met expectations, at 25% of our FY11 forecast and consensus estimate. Despite a 15bp cap-rate compression for its Grade-A assets, operational indicators continued to decline with revenue down 9.2% yoy on negative rental reversions from 6BR and OGS. This trend is expected to persist in 2H11 with expiring leases locked in at peak levels in 2008. Plans for MSCP redevelopment have been finalised with CCT potentially gaining full stakes by 2015. However, the DPU uplift is also not expected until then. We raise our DDM-based target price by 7% to S$1.46 (8% discount rate) to account for this. Maintain Underperform on valuations (1x P/BV), with limited near-term catalysts in sight for organic growth in the next 6-12 months.
• Renewal rents in 2011 locked at peak levels. Cap rates for CCT’s Grade-A assets (Cap Tower and OGS) fell from 4.15% to 4%, resulting in a S$145m revaluation gain for 2Q11. Operationally though, gross revenue continued to trend down by 9.2% yoy, primarily from negative rental reversions for 6BR and OGS and lost rental income from earlier disposals. Debt headroom is ample for acquisition growth, but the likely lack of immediately DPU-accretive assets for purchase is evident given physical cap rates of 3-4%. 6BR which makes up 20% of CCT’s rental income, with average expiring rents this year locked in at a peak of S$15.4psf. We expect (so does CCT) negative rental reversions to persist in the remainder of 2011.
• Plans for MSCP redevelopment firmed, but uplift to come only in 2015. CCT has firmed up a 40:50:10 JV agreement with CapLand and Mitsubishi Estate Asia to redevelop MSCP into a Grade-A office tower. The development is expected to cost S$1.4bn (CCT’s share S$560m) and would be completed by 2015. CCT expects a yield on cost of 6% or S$12-14psf gross rents on completion, a level we think is achievable. More meaningful upside potentially could come from its call option to acquire the remaining stakes from its partners upon completion, at a minimum price that must yield a least a compounded return of 6.3% p.a. to the sellers. The option is valid for three years starting at the completion date, giving CCT the flexibility to optimise yield upside. For the MSCP redevelopment, execution will be its priority for now, with the DPU uplift coming much later in 2015.
CCT – BT
CCT posts drop in Q2 distributable income
Mitsubishi Estate Asia to take 10% stake in Market Street project
CAPITACOMMERCIAL Trust (CCT) yesterday said it posted lower Q2 and first-half distributable income compared with the same year-ago periods following the divestment of two office blocks in Singapore and negative rent reversions.
It also announced yesterday that Japan’s Mitsubishi Estate Asia will take a 10 per cent stake in its Market Street Car Park (MSCP) redevelopment project. CapitaLand will take a 50 per cent stake and CCT 40 per cent.
CCT has been granted a call option to acquire CapitaLand’s and Mitsubishi’s interest in MSO Trust – an unlisted special purpose sub-trust set up to undertake the $1.4 billion project – or the completed development. It may exercise the call option any time over a three-year period after the new office tower obtains Temporary Occupation Permit (TOP). The purchase will be at market valuation that must reflect at least a compounded return of 6.3 per cent per annum – CapitaLand’s estimated cost of capital – to the sellers.
CCT also gave details of the MSCP redevelopment. A sum of $672 million is payable to the state comprising mostly differential premium or DP (equal to 100 per cent of the enhancement in land value resulting from the change of use of the site from ‘transport facilities’ to ‘commercial’), and other land-related costs.
MSO Trust will buy MSCP, currently owned by CCT, for $56 million, which reflects a 5.1 per cent premium to the $53.3 million average of two independent valuations (by Jones Lang LaSalle and CB Richard Ellis) in May this year.
The valuations were done based on the residual value of MSCP to be redeveloped into an office building, taking into account the DP payable to the state.
MSCP’s valuation as a car park facility as at end-December 2010 was $48.6 million. Construction and professional fees are estimated at $550 million. The new project’s gross floor area (GFA) will be about 887,000 sq ft and its net lettable area 720,000 sq ft.
The project is slated for completion before end-2014, when no major Grade A CBD office supply is slated for completion.
The new project can have about 170-180 car park lots which would be excluded from the GFA calculation – down from 704 lots in the existing MSCP building, which was shut on June 30.
Lynette Leong, CEO of CCT’s manager, said the group has applied to the authorities to allow the building of additional car park lots which would be excluded from the GFA.
CCT is not undertaking the MSCP redevelopment solo as it would exceed the 10 per cent limit on development projects (to total asset size) for Singapore Reits.
The trust’s portfolio of eight investment properties (excluding MSCP) was valued at $5.6 billion at end-June 2011 – up 2.8 per cent from their valuation at end-December 2010.
CCT’s total asset size stood at around $6.2 billion at end-June 2011, down 0.1 per cent from end-December 2010. Net asset value per unit, excluding distributable income to unitholders, was $1.52 at end-June 2011, an increase from $1.47 at end-December 2010.
Distributable income to unitholders dipped 2.3 per cent year on year to $54.4 million for Q2 ended June 30, 2011. Gross revenue slid 9.2 per cent to about $91 million while net property income declined 5.9 per cent to $69.8 million. Distribution per unit (DPU) fell 2.5 per cent to $1.92.
For the first-half, CCT’s distributable income eased 3.2 per cent to about $106.5 million; gross revenue fell 9.9 per cent to $182 million and net property income declined 7.9 per cent to $139.8 million. First-half DPU fell 3.3 per cent to 3.77 cents, translating to a 5.2 per cent annualised distribution yield based on CCT’s July 13 closing price of $1.46.
The counter ended one cent lower yesterday at $1.45. Unitholders can look forward to receiving their semi-annual DPU payout on Aug 26; the books closure date is July 28.
The weaker showing for both periods was due to lower revenue from Six Battery Road, where occupancy rates are lower as the office tower is being revamped; loss in rental income from the sale of Robinson Point and StarHub Centre; and negative rent reversions (that is, leases signed or renewed at lower rental rates than the previous lease agreement).
‘Current signing rents for office space are still substantially below the expiring rents for the leases due this year as they were predominantly signed during the peak of the previous cycle in 2008.
‘Hence, negative rent reversions for most of the trust’s properties are expected to persist through the rest of this year. We will continue our proactive leasing and cost management strategies to mitigate the expected fall in distributable income,’ said Richard Hale, chairman of CCT’s manager.
SREITs – DBSV
Sustainable growth
• High yield spreads and a strong S$ continue to attract investors to S-REITs
• MCT, FCT, MLT expected to deliver strong earnings growth in coming quarters
• Relative value in smaller cap REITs like Cache and FCOT
S-REITs outperformed benchmarks but still offer an attractive 350 bps over long bonds. Having outperformed the FSSTI and developers by 3% and 13% respectively YTD, S-REITs currently offer a weighted average yield of 5.9%, which remains an attractive c350bps over the long-term government bond. The current high yield spread and a strong S$ will continue to sustain investor interests in S-REITs.
Looking for “positive earnings surprises”. As we approach the upcoming second reporting quarter for 2011, we believe that earnings growth sustainability will remain a key focus. We remain positive that Hospitality S-REITs should continue to deliver strong results, judging by latest statistics posted by the Singapore Tourism Board, but we believe that street has already priced in strong growth expectations. Retail REITs are expected to see positive rental reversions going forward supported by the current positive consumer sentiment. FCT (BUY, TP S$1.73) is expected to deliver a good set of numbers in the coming quarters, as reconstruction works at Causeway Point have passed the most crucial stage, with committed occupancy at over 99%. In addition, the impending purchase of Bedok mall will act as a re-rating catalyst for the stock. MCT (BUY, TP S$1.05) should also see strong reversionary rental growth of c10% in the coming quarters, coming off from a first renewal cycle at its Vivo city retail mall.
Acquisition-driven growth. S-REITs have collectively acquired cS$1.9bn of assets YTD, which should start contributing to earnings in the coming quarters. After two months of relatively flattish DPU, we believe MLT (BUY, TP S$1.07) is poised to deliver a strong uptick in earnings momentum, boosted by recently completed acquisitions.
Value proposition in smaller cap S-REITs. We see relative value amongst certain smaller cap S-REITs. Cache ( BUY , TP S$1.11), which currently offers a yield of over 8.0%, is attractive, backed by transparent earnings structure and armed with a low leverage of 26%, has the headroom to acquire further. FCOT (BUY, TP S$1.05), at a P/BV of 0.6x, is unjustified in our view, given the yield enhancing steps taken by management and plans to re-finance its expiring loans should result in future interest savings.
A-REIT – CIMB
Further enlarging business-park presence
Acquires Nordic European Centre for S$121.6m
Moderate DPU accretion. AREIT has acquired Nordic European Centre, its sixth property in the International Business Park (IBP) for S$121.6m. This translates to S$512 psf NLA and an initial yield of slightly above 6%, a slight premium to yields for its current portfolio. We are neutral on the acquisition with the improvement in its asset quality overshadowed by the small accretion and a slightly high acquisition price. Nevertheless, we recognise benefits through an expansion of AREIT’s leading market share in the business-park space, strong leasing and renewal expectations (with its proximity to the Jurong Lake District) and operational efficiencies (as AREIT’s sixth asset in IBP). We factor in the acquisition and adjust our FY12-13 DPU estimates by – 0.6% to +0.6% and our DDM target price to S$2.18 (from S$2.17) (discount rate 8.2%). We continue to like AREIT for its quality management and asset portfolio and see catalysts from higher-than-expected occupancy and rentals and accretive acquisitions.
The news
AREIT has acquired Nordic European Centre, its sixth property in IBP for S$121.6m from a fund managed by Alpha Investment Partners Ltd. This works out to S$398 psf GFA and S$512 psf NLA. The pro-forma annualised financial effect is estimated by management at 0.02 Sct (0.2% of FY12 DPU), assuming 40:60 debt:equity funding. After the acquisition, business and science parks will account for 39% of its portfolio (by asset value) from 37%. The acquisition will also bring in more quality tenants such as Merck Pte Ltd, Evonik Degussa (SEA) Pte Ltd and Thyseenkrupp Mannex Asia Pte Ltd.
Comments
Initial yield estimated at slightly above 6%. Pegging the property to rentals for its business-park assets, we estimate an initial yield of 6.2-6.3%, slightly below the NPI yield of 6.5% for its overall portfolio. At S$512 psf NLA, the acquisition is also priced at a 15% premium to AREIT’s business-park valuation of S$443 psf as at end-Mar 11. We believe AREIT paid the slight premium as it wants to expand its leading market share in the business-park space further and on expectations of strong leasing and renewals and operational efficiencies.
Expectations of strong leasing and operational efficiencies. The asset is located in the Jurong Lake District, which will be developed into a major commercial and leisure hub. This could allow AREIT to ride rental upside as the hub develops. Notwithstanding a lower occupancy of 83% currently, we do not foresee difficulty in leasing out the remaining space in view of its quality specifications. As AREIT’s sixth asset in the IBP, AREIT is also likely to extract operational efficiencies and cost savings with economies of scale in managing its assets.
Accretion could be enhanced by debt funding. Notwithstanding management’s plans to redeploy the net proceeds from its previous placement (previously to fund development and AEI projects in Shanghai and Singapore) for this acquisition, we expect management to draw down its borrowings eventually for development and AEI projects with its current low gearing of 32-33%. We have thus factored in full debt funding. There could be upside to management’s annualised DPU accretion of 0.02 Sct from this acquisition in view of current low interest rates.
Valuation and recommendation
Moderate DPU accretion on full-year contribution in FY13. Overall, we are neutral on the acquisition. We adjust our FY12/13 DPU forecasts by -0.6% to +0.6%, assuming full debt funding. Accordingly, our target price rises to S$2.18 (discount rate: 8.2%) from S$2.17. We continue to like AREIT for its quality management and asset portfolio. We see catalysts from higher-than-expected occupancy and rentals and accretive acquisitions.
FirstREIT – BT
First Reit buys Korean hospital
FIRST Real Estate Investment Trust (Reit) has purchased South Korea’s Sarang Hospital for US$13 million.
Sarang Hospital – said to be one of the largest rehabilitative and nursing facilities in Yeosu – is a six-storey hospital with one basement accommodating 217 beds. Yeosu is the city that will host the World Expo next year.
The hospital boasts a gross floor area of nearly 5,000 square metres on a total freehold land area of 2,142 sq m.
The acquisition, funded entirely by a bank loan, is expected to be completed by next month.
Upon completion, the master lease agreement for Sarang Hospital will start for a 10-year lease term, with an option to renew for a further term of 10 years.
According to First Reit, Sarang Hospital has an initial net property yield in excess of 9 per cent and its annual rental income is expected to climb 2 per cent annually.
After the acquisition, First Reit’s total asset size is expected to grow to S$602.6 million, and its gearing to increase 16.4 per cent before transaction costs.
‘The quality of healthcare in South Korea is among the highest in Asia, supported by top-notch medical professionals, facilities and technology,’ said Ronnie Tan, CEO of Bowsprit Capital Corporation Ltd, manager of First Reit. ‘Operating in such an environment, Sarang Hospital provides a very niche service in rehabilitative care and enjoys a high occupancy rate throughout the year.’
First Reit also saw the opening of its Mochtar Riady Comprehensive Cancer Centre (MRCCC) in Indonesia yesterday.
Located in the heart of Central Jakarta, the 29-storey MRCCC is said to be the first of such facilities in Indonesia that specialises in cancer diagnostics and treatment.
Moving forward, the healthcare real estate investment trust plans to expand its portfolio size to S$1 billion in the next 2-3 years as it seeks out yield-accretive assets throughout the Asia Pacific region.
The company’s shares rose one cent to close at 80.5 Singapore cents yesterday.