A-REIT – OCBC
Awarded site at Fusionopolis
Award of the Fusionpolis site. A-REIT announced on 8 Jun that it has been awarded the Fusionopolis site by JTC for S$110m, which will be developed into a modern suburban business space facility. The public tender for the 6,253 sqm site at Fusionopolis Link by industrial landlord JTC Corp was launched on 28 Feb and closed on 20 May. The site, which lies within the 200-hectare one-north development housing research facilities and business parks, has a 60-year land lease and is on the confirmed list of the government’s industrial land sales programme for 1H11. It has a maximum plot ratio of four and can be developed up to 160 metres above sea level.
Development Plans. A-REIT will develop a suburban business facility of 25,000 sqm GFA comprising 60% business park space and 40% office space1 to cater to prospective tenants in the ICT and media industries as well as R&D activities in physical science and engineering. The expected completion date is 3Q2013. The strategic location of the site will also reinforce A-REIT’s presence and market share within the business & science parks segment while achieving economics of scale in operations. This 6,253-sqm site is located within walking distance to the one-north MRT station which is expected to be operational in 4Q2011 and easily accessible via the AYE. A-REIT believes that this development will provide unitholders with potentially greater returns compared to outright acquisitions of income-producing properties. It will also improve the NAV of its portfolio as A-REIT will receive any benefit of unrealised valuation gain from the development of the site.
Maintain BUY. We have factored in contributions from the new site into our valuation. Our assumptions place the total development costs, financed entirely by debt, at S$178.8m (S$665 psf ppr), with a modest initial NPI yield-on-cost of 7% and 6.5% for the business park and office segments respectively. This is slightly above A-REIT’s existing NPI yield of 6.46% in FY2010/2011. Nonetheless, we remain skeptical of the clear differentiation between the two segments, and presume A-REIT will probably market the business park segment with a more R&D slant. We expect rental income to be streaming in from Oct 2013 onwards. Our RNAV-derived fair value increased from S$2.04 to S$2.08. Maintain HOLD.
ART – OCBC
Potential headwinds may tamper growth
Global air travel softening. The IATA has recently revised its yearly profit outlook for the global airline industry with a 54% cut from US$8.6b three months ago to US$4.9b. This represents an almost 80% nose-dive from last year’s US$18b profit. Total passenger traffic is also expected to grow by just 4.4% this year compared to last year – slower than the 5.6% forecast three months ago. Asia Pacific is expected to be the most profitable while Africa is deemed the worst performer. Airlines also continued to be plagued by high taxes imposed by European governments and exorbitant charges imposed by some airports and service providers. We think ART’s hospitality growth, with its 43.2% and 10.7% exposure (asset values) in Europe and Japan respectively as of 31 Mar, may be tampered by the easing of air travellers ahead.
Euro Debt Woes. In Europe, business sentiments continue to be plagued by lingering debt crisis. Moody downgraded Greece credit rating from B1 to Caa1 (on par with Cuba). Italy and Belgium’s rating outlook were also cut from stable to negative by S&P. In UK and France where ART has the largest exposure in Europe (16.6% and 21% respectively), inflation and unemployment rates remain stubbornly high. The British recorded an inflation of 4.5% in Apr and unemployment of 7.7% for 1Q11. In France, inflation is 2.1% in Apr while unemployment is 9.7%, only slightly lower than the peak of 9.9% registered during the financial crisis. We noted that ART’s Citadines properties in France are on master leases and this provides some form of safeguards against deteriorating economic conditions. However, we remain wary of the prospects of ART’s properties in UK, Belgium and Spain, on the back of further fiscal tightening and rising inflationary pressures. The performance of the service residences industry has historically been correlated to GDP growth and FDI inflows, and the current state of affairs in UK, France, Belgium and Spain certainly suggests a less positive outlook.
Singapore’s prospects better. According to STB, international visitor arrivals reached 3.12m in 1Q11, representing a 15.7% YoY growth. RevPau also increased 15.7% YoY to S$191, on the back of robust performance in both room rates and occupancy rates. ART, with its largest asset exposure in Singapore (21.5%), looks poised to benefit from the uplift in its home country. Nonetheless, given ART’s exposure in Europe and Japan, its share price may face further secular headwinds in the form of weakening demand and continued inflationary worries. Maintain BUY albeit with a reduced fair value of S$1.30 (prev: S$1.34).
TCT – Phillip
Proactive asset management
•We visited commercial properties of TCT recently in Shanghai and Qingdao
•High quality of assets demonstrate capability of team in managing property
•Strong refurbishment and development pipeline, imply rental upside in future
•We have no rating on TCT
Background
Treasury China Trust (TCT) is a property owner, developer and manager with exposure purely in China commercial real estate market. Listed on SGX in June 2010, the trust is positioned as a ‘total return vehicle’ aims to increase shareholder value via both capital appreciation and income growth. These can be achieved by holding both income producing commercial real estate as well as development properties. Listed as a business trust also allows TCT to undertake higher component of development, up to 30% of total assets, compared to REIT. Currently the trust holds commercial property portfolio worth over RMB11.5bil (circa S$2.18bil).
Key takeaways
• Central Plaza is a showcase of TCT’s ability to carry out asset enhancement initiative to increase the assets rental and capital value. Current rental yield on cost improved from 5.5% to 6.7%.
• A sizable extension is being built to enlarge City Centre by ~50%. Higher rental reversion is expected when the current anchor tenant, Parkson, vacates the mall in 2012 as the existing rent is well below market rate. TCT has secured Marks & Spencer to be the next anchor.
• TCT is in the process of acquiring Huai Hai Mall, located in one of the high-end shopping precinct in Shanghai. Thorough refurbishment work is planned to reposition the status of the mall. We see great potential on this acquisition due to its prime locality.
• Out of Shanghai, TCT acquired Central Avenue Mall in Qingdao earlier this year with an attractive gross yield of 10% on the current operating mall, in addition to 3 adjoining land parcels to be developed into retail malls by 2015. The sites are situated in the centre of activities in the Laoshan District.
Investment merits
• Rental income upsides substantiate by the strong pipeline activities.
• Potential divestment of majority stake in Central Plaza allows redeployment of cash to other high-yielding investment opportunities.
• Expansion in Tier 2 and 3 cities, with the fast growing Xi’an is next in the line.
• Professional management team.
Key risks
• Interest rate hike and credit tightening are concerns to TCT as the Chinese government continues to curb runaway property price and inflation.
• Concentration risk is high with main exposure in Shanghai commercial market, and rental income is 70% derived from City Centre.
• Supply glut in Shanghai office sector may pose pressure on rental yield going forward.
Total Return Strategy
TCT’s total return strategy is to acquire, own, develop and manage commercial properties in China and thus diversify risks and income sources across the real estate spectrum.
Flexible investment vehicle
TCT is listed as a business trust featuring a more flexible capital and operating structure. Compared to conventional REIT, business trust has higher development cap of 30% of total asset value compared to 10% for REIT, and a self-imposed debt covenant of 45% gearing limit compared to 35% for REIT. The Manager has the discretion to make distribution from net distributable income as well as from realised and unrealised gains from asset enhancement of its properties. That aside, TCT is committed to distribute 80% of net rental income for the first 3 years compared to 90% compulsory distribution in REIT, which allows more funding capacity for future growth.
TCT – BT
TCT’s unit buyback boosts liquidity, valuation
Unit price rises 12% in first month of implementation
TREASURY China Trust (TCT), the first business trust to initiate a unit buyback programme, said this exercise has bolstered its liquidity and valuation.
Over the first month of its implementation to June 3, third-party trading activity accounted for 40 per cent of total trading turnover.
The period also saw its unit price rise by 12 per cent, narrowing the discount between the unit price and net asset value to 43 per cent from 49 per cent over the one-month period.
TCT said this unit buyback programme is part of its strategy to ‘proactively manage its capital structure, provide a strong platform for stable growth and ultimately increase unitholders’ value’.
This programme will continue until June 24, when TCT will enter a ‘close period’ for the release of its mid-year valuation updates and half-yearly trading results during which it is not allowed to deal with the units.
TCT chief executive Richard David said he was pleased that the programme has met its objectives in just the first month in providing liquidity, a consistent trading pattern and closing the valuation gap.
He also assured shareholders that the unit buyback scheme ‘has been implemented under a regime that values integrity above all else’.
The Business Trust Act does not provide for the specific mechanics of a buyback programme.
Under listing rules, TCT has to promptly inform the market of any acquisitions made under the unit buyback programme and units can be purchased at a price no greater than a 5 per cent premium to the average closing price of five prior trading days.
TCT is also limited to buying back no more than 10 per cent of its total issued units over a 12-month period. All units acquired under this programme are cancelled.
Listed since June last year, TCT owns commercial real estate in China comprising completed assets in Shanghai, Beijing, and Qingdao and a development pipeline. Its 800,000 sq m portfolio is valued at more than 12 billion yuan ($2.3 billion).
It reported last month a net property income of $12.45 million for the first quarter ended March 31, exceeding its forecast by 8.6 per cent and marking a 3.5 per cent improvement over the fourth quarter of 2010.
A-REIT – BT
A-Reit awarded business park site at Fusionopolis
ASCENDAS Real Estate Investment Trust (A-Reit) was officially awarded a business park site at Fusionopolis by JTC Corporation yesterday.
The industrial Reit had put in the top bid of $110 million for the 60-year leasehold site at Fusionopolis – within the one-north research hub – at the close of the state tender on May 20. The 67,300-sq-ft site at Fusionopolis Link has a maximum gross floor area of 269,200 sq ft.
A-Reit is a unit of Ascendas Pte Ltd, which is in turn a wholly-owned subsidiary of JTC.
The acquisition therefore constitutes an ‘interested person transaction’. But the deal is exempted from the usual constraints as the site was awarded by way of a public tender, said A-Reit.
The trust said that the the strategic location of the site will reinforce A-Reit’s presence and market share within the business & science parks segment while achieving economies of scale in operations.
‘The manager believes that the development of the site will provide unitholders of A-Reit with potentially greater returns compared to outright acquisitions of income-producing properties and thus improve the net asset value of A-Reit’s portfolio as A-Reit will receive any benefit of unrealised valuation gain from the development of the site,’ A-Reit said in a filing to the Singapore Exchange.
‘This property is also in line with the future economic development direction of Singapore to attract further investment from value and knowledge intensive industries.’
A-Reit shares gained one cent to close at $2.01 yesterday.