Healthcare REITs – OCBC
Maintain OVERWEIGHT on continued resilience
Promising 1Q11 results. First REIT (FREIT) and Parkway Life REIT (PLREIT) [NOT RATED] both reported healthy 1Q11 results recently, driven by both organic growth and contributions from newly acquired healthcare properties. For FREIT, gross revenue surged 95.6% YoY to S$14.6m while total distributable income jumped 88.5% YoY to S$9.9m. PLREIT’s gross revenue grew 15.2% YoY to S$21.5m and income available for distribution increased 14.4% YoY to S$14.3m. We believe that both healthcare REITs would be key beneficiaries of current inflationary pressures in Singapore. FREIT’s base rental revision for its Indonesian assets are based on Singapore’s CPI (albeit being capped at 2%), while 66% of PLREIT’s total portfolio are pegged to a CPI-linked revision formula. This signifies the likelihood of positive rental reversions for PREIT in Aug 2011.
Acquisitions to fund growth ahead. We believe that both FREIT and PLREIT have sufficient capacity to undertake more acquisitions to boost their portfolio. This is likely to be funded by debt given the current low interest rate environment and ample debt headroom that exists for both REITs. FREIT and PLREIT are able to take on S$218.0m and S$864.6m of additional leverage before hitting their regulatory gearing limit of 35% and 60% respectively.
Maintain OVERWEIGHT on continued resilience. Besides the strong sponsor support and favourable master lease terms enjoyed by healthcare REITs as highlighted in our previous report dated 10 Mar 2011, we note that both FREIT and PLREIT have continued to showcase their resilience in times of increasing global uncertainty. The share prices of both stocks have outperformed the FTSE ST RE Invest Trust Index and broader market substantially YTD. In addition, PLREIT and FREIT have helmed the top two performing positions in the SREIT universe YTD, returning 9.7% and 9.2% respectively. For the latter, we are maintaining our BUY rating although its share price has recently inched closer to our S$0.80 fair value estimate. This is due to the still attractive 8.0% prospective distribution yield offered by the counter, resulting in projected total returns of 11.9%. PLREIT’s share price has also rebounded after initial fears about the impact of the Japanese earthquake and tsunami on its nursing homes were allayed. Management highlighted that all of its 30 Japan properties were not structurally affected by the disaster and continue to be in operation. Given the defensive nature of healthcare REITs and the still sanguine outlook on the private healthcare scene in both Singapore and Indonesia, we maintain our OVERWEIGHT rating on the sector.
PCRT – BT
Perennial China 1.6 times subscribed
PERENNIAL China Retail Trust (PCRT) has raised $776.2 million from its initial public offering. At the close of its IPO, its institutional placement and public offer tranches were 1.6 times subscribed.
PCRT had initially planned to list earlier at about $1 a unit to raise some $1.1 billion but plans were put on hold in March, reportedly due to volatile market conditions. When plans were revived, its units were priced at $0.70.
PCRT had earlier secured eight cornerstone investors who subscribed for 516.65 million units. With additional units subscribed by cornerstone investor Shanghai Summit and the subscription by sponsor Perennial Real Estate under the placement tranche, these parties hold about 60.8 per cent of PCRT on the IPO’s completion.
The total offering of $776.2 million for subscription at $0.70 per unit comprised 545.221 million units (49.2 per cent of the offering) from the cornerstone investors and sponsor, while 511.451 million units representing 46.1 per cent had been placed out to international investors; and 52.128 million units (4.7 per cent) placed out to the public in Singapore.
Perennial China Retail Trust Management CEO Pua Seck Guan said: ‘We are very pleased with the warm reception that investors have given us, despite tough market conditions and a subdued appetite for new listings. We are especially encouraged by the strong support from real estate specialists, long-only funds and private wealth funds who account for over 80 per cent of the offering.’
He also went on to add that PCRT is well positioned to benefit from retail growth opportunities in China, which would allow it to provide unitholders an ‘attractive total return of strong net asset value growth and stable distributions’.
The balloting outcome for the public offer will be released today while the PCRT units will commence trading at 2pm tomorrow.
CMT, CCT – BT
CapitaCommercial, CMT plan issue of floating rate notes
CAPITACOMMERCIAL Trust (CCT) and CapitaMall Trust (CMT) intend to launch a ‘benchmark-size’ offering of US dollar secured floating rate notes this month, the trusts said yesterday.
The notes, which will be due in 2018, are part of the $10 billion multi-currency secured medium term note programme set up in September 2006.
CCT and CMT – which are both units of Singapore’s largest listed property group CapitaLand – did not provide the total value of the notes that will be issued in this tranche. But benchmark-size offerings are usually in excess of US$500 million.
Some $866 million worth of notes have been issued to-date under the programme, a spokesman said. He added that a further announcement will be made when the notes are launched, which is expected to be within this month. The notes, which will be secured by Raffles City Singapore, will be issued through special purpose vehicle Silver Oak.
CCT and CMT also said that in conjunction with the notes issue, DBS Bank, The Hongkong and Shanghai Banking Corporation (HSBC) and Standard Chartered Bank will grant a $200 million term loan facility and a $300 million revolving credit facility to the issuer. It is intended that the facilities will mature on the same date as the notes and will also be secured by Raffles City Singapore – but will be subordinated to the notes.
DBS, HSBC and Stanchart has also been appointed as the joint lead managers of the notes issue. The proceeds from the notes and facilities will be used to refinance existing borrowings, finance future capital expenditure and asset enhancement initiatives, and for general corporate and working capital purposes.
The notes are expected to be assigned an ‘AAA’ rating by Fitch and an ‘Aaa’ rating by Moody’s Investors Service, CCT and CMT said.
CCT shares gained one cent to close at $1.46 yesterday, while CMT closed unchanged at $1.95.
ART – DBSV
Journey to the West
• It is all about location – a visit to Ascott REIT’s prime properties in Paris/London
• Tapping the low hanging fruits, planned refurbishment to underpin earnings growth
• Maintain BUY and S$1.38 TP
It’s all about location. In our recent site visit to selected Ascott REIT’s serviced residences (or “apart’ hotels”) in Paris/London, we note a distinct feature – properties are strategically positioned in key business districts or major tourist attractions in London and Paris with good access to public transportation (most properties are within walking distance to the Metro in Paris and The Tube in London). Hence, these apart’ hotels attract a sustainable flow of guests – we understand that the Paris/London properties enjoy a healthy annual occupancy rate of between 75-85%.
Upgrading works at selected properties to underpin stronger operational performance. Ascott REIT has embarked on a refurbishment exercise for its European portfolio. We visited selected properties in Paris/London, which are currently undergoing renovation. We understand that Ascott REIT will be able to fetch average room rates in excess of 20% higher when the newly renovated rooms are re-opened, impressive given the competitive landscape in London/Paris. The manager targets an average payback period of 4-5 years on renovation capex spent in London.
DPU Growth of 8% expected. We project Ascott REIT to deliver a DPU growth of 8% in 2011, one of the strongest amongst its SREIT peers. Growth is expected to continue to be driven from a turnaround in its Asian operations, led by Singapore (contributing c19% of EBITDA in 2011) while London properties (29% of European EBITDA, 12% of EBITDA on a portfolio basis) are poised to be the strongest performer after its planned refurbishment exercise towards the run-up of the London Olympics in 2012, on top of a projected +2% adjustment in master leases in FY11.
BUY, DCF-based TP of S$1.38 maintained. Ascott REIT continues to offer an attractive above sector average FY11-12F yield of c7.0%-7.1%, which is unwarranted in our view, given its capable management track record, sponsor links and a portfolio of largely freehold properties. There is potential for further earnings upside if the manager executes on acquisitions.
CMT – OCBC
Acquisition of the Jurong Gateway site
$S969m tender award. CapitaMall Trust (CMT) has been successfully awarded the Jurong Gateway site, located at Boon Lay Way by URA on 30 May at a tender price of S$969m (S$1,1012 psf ppr). This was a joint tender by CMT, CMA and CapitaLand, of which CMT has a 30% stake in the JV. The total development cost is expected to be about S$1.5b (S$1,566 psf ppr).The land parcel has a prime location next to both Jurong East MRT station and Jurong East bus interchange. Jurong is slated to be the largest regional centre in Singapore for commercial developments outside the city centre (under URA’s Jurong Lake District Masterplan). Jurong Gateway is about 2.5 times the size of Tampines Regional Centre.
“3-in-1” Mega Mall in Jurong. CMT will be building a 25- storey retail-cum-office property at the new site, adjacent to another upcoming Lend Lease office/retail building, scheduled for completion in 2014. With two other CMT malls in the vicinity (IMM and JCube), CMT’s selling proposition is to create a “3-in-1” mega mall in Jurong, offering 1m sqft of retail NLA within three minutes’ drive from each other in Singapore’s soon-tobe largest regional hub. CMT intends to finance the development by internal funds and debt.
Downgrade to HOLD on valuation grounds. We have factored in contributions from both the retail mall and office building into our valuation, commencing on Dec 2013 and Jun 2014 respectively. Our total development costs for CMT works out to about S$469m, which accounts for 5.8% of CMT’s total assets as of 31 Mar (within the property fund guideline of 10% development cap). CMT has guided that it is targeting rentals of S$16-S$18 psf pm and S$7-S$8 psf pm for the retail and office segments respectively, with an initial yield-on-cost of 6%. According to our model, these targets are fairly tight and require somewhat vigorous occupancy rates in the first year to attain the desired 6% yield. In addition, unlike the Tampines Regional Centre, which is hailed as the “financial hub in the east”, the Jurong precinct does not have a strong financial institution catchment base. We therefore remain wary of (1) the office take-up in that area, with the nearby International Business Park, JTC summit and iHub buildings offering cheaper alternatives and (2) “retail tenants’ fatigue” among the four malls within a 500m radius from the MRT station. Moreover, CMT’s share price has appreciated 6.5% since our last report dated 21 Apr. Downgrade to HOLD on valuation grounds with an increased fair value of S$2.05 (prev: S$2.02). We will turn buyers at S$1.93.