Singapore Reits – DBS
The quest for growth
• S-REITs offer FY11 yields of 6.1%, an attractive 340 bps spread against long bonds
• As inflation inches higher, we prefer SREITs with ability to continue delivering strong organic growth
• Strong balance sheets to leverage on in the chase for further acquisitions
• BUY FCT, P-Life, Cache, MLT, CDL HT, ART, CMT
Normalized FY11F yield of 6.1%. The S-REIT sector now trades at a normalized FY11F distribution yield of c6.1%, slightly below its historical mean of c6.5%. Spreads have narrowed but still remain attractive at c340bps above the long-term government bond yield, currently at c2.7%.
The quest for DPU growth. S-REITs offer a good hedge against inflation given that earnings growth can potentially outpace inflation, which is expected to inch higher to 3.2% in 2011. We prefer S-REITs with the ability to deliver growing distributions organically while having the opportunity to acquire accretively. We continue to hold the view that hospitality and retail sectors offer a more robust outlook on the back of expected strong visitor arrivals in 2011. Office REITs are expected to see topline pressure from negative reversions in 2011 though the sector is on an uptrend.
Interest rate hikes to have minimal impact on distributable income. Given the current low interest rate environment, S-REITs have taken the opportunity to refinance, lengthen the debt maturity profile as well as widen their sources of debt, hence enjoying savings in interest. DBS economist expects interest rate hikes only towards the end of 2011. Even then, our scenario analysis reveals that the impact on S-REITs FY11 distributable income is limited to -0.2 to -3.0% as majority of the S-REITs have hedged/fixed their interest rate positions.
Industrial & Sponsored REITs have potential for further accretive acquisitions. Even after acquiring cS$6bn of assets YTD, S-REIT sector gearing remains low at 34.4%. Further growth from acquisitions is possible and we look towards the industrial REITs for their ability to acquire earnings accretive assets given the relative higher yields of industrial assets while sponsored REITs continue to offer long-term portfolio growth visibility to investors from potential asset injections in the medium term.
Stock picks. CMT, FCT, CDL HT and Ascott REIT are expected to deliver strong organic growth potential coupled with sponsor injection possibilities. P-Life offers downside protection as revenue is pegged to inflation. MLT and Cache offer potential earnings surprise given their visible sponsor pipeline.
First REIT – SGX
ANNOUNCEMENT
EXTENSION OF HGB TITLE FOR MOCHTAR RIADY COMPREHENSIVE CANCER CENTRE
Further to:
(1) the announcement dated 9 November 2010 in which Bowsprit Capital Corporation Limited, in its capacity as manager of First Real Estate Investment Trust (“First REIT” and as manager of First REIT, the “Manager“), proposed the acquisition by First REIT of Mochtar Riady Comprehensive Cancer Centre (“MRCCC” and the proposed acquisition of MRCCC, the “MRCCC Acquisition“) subject to, among others, the condition precedent that the in-principle approval for the renewal of the “Right to Build” (Hak Guna Bangunan or “HGB“1) title in relation to MRCCC be obtained from Badan Pertanahan Nasional (or the National Land Office of Indonesia);
(2) the circular dated 10 November 2010 issued to unitholders of First REIT (“Unitholders“) to seek Unitholders’ approval for, among others, the MRCCC Acquisition; and
(3) the approval by Unitholders of the MRCCC Acquisition at First REIT’s Extraordinary General Meeting on 29 November 2010,
the Manager is pleased to announce that the National Land Office of Indonesia has extended the HGB title in relation to MRCCC (which was scheduled to expire on 27 August 2015) for a period of 20 years subject to, among others, the payment of a nominal premium and certain other standard conditions, and therefore the condition precedent described above has been satisfied. The amount of premium payable is approximately 193.2 million Indonesian Rupiah (approximately S$28,006.252) and is payable by the vendor of MRCCC.
K-REIT – CIMB
Still unattractive despite rental revisions
• Maintain Underperform. With positive pre-leasing momentum and rental growth, we upgrade our rental assumptions for One Raffles Quay (ORQ) and Marina Bay Financial Centre (MBFC). We raise our FY11-12 DPU estimates by 3-18% after factoring in higher rental growth and lease review assumptions. Our DDM (discount rate 7.2%) target price accordingly climbs to S$1.43 (from S$1.26). Also, should Keppel Land inject its 87.5% stake in Ocean Financial Centre (OFC) into K-REIT, any accretion would depend on asset price and source of funding. Maintain Underperform with yields remaining unattractive after our rental revisions. De-rating catalysts include lower-than-expected rental reversions, in our view.
• Rental revisions for ORQ and MBFC. With positive news flow on rental movements and strong pre-leasing momentum, we raise our rental assumptions for ORQ and MBFC and update lease review assumptions for ORQ. We now expect 30% of the leases to be renewed each year in FY11-12 for ORQ, which should mitigate the DPU fall expected when ORQ income support expires in FY12.
• Accretion from OFC acquisition? With the impending completion of the MBFC acquisition, we ran a scenario analysis to determine the impact of injecting Keppel Land’s 87.5% stake in OFC into K-REIT on K-REIT’s FY12 DPU. In view of KREIT’s limited debt headroom, any transaction will likely entail equity fund-raising. Whether the deal is accretive will depend on the actual price and source of funding.
Suntec – Phillip
Financing details of MBFC Acquisition
• Advance distribution for period 1 Oct – 8Dec approx 1.677 cents
• Private placement priced at $1.37 per unit raised $428.8 million
• Maintain Hold, target price $1.37
Suntec REIT announced the financing structure of the MBFC acquisition. Suntec REIT raised gross proceeds of $428.8 million through a private placement and according to the circular sent out, it will also draw down $1,105 million of debt to fund the balance of the acquisition cost. 313 million new units were to be issued pursuant to the private placement at a price of $1.37 per unit. The new units issued represent 16.9% of the total units before the private placement. The issue price was at a discount of 4% to the volume weighted average price of S$1.43 on 26 November 2010 and the issue was 3.1 times oversubscribed. In connection with the private placement, Suntec REIT will be paying out an advanced distribution to existing unitholders for the period 1 Oct – 8 Dec 2010, prior to the listing of the new units on 9 Dec. The REIT manager expects the advance distribution to be approximately 1.677 cents per unit. Post acquisition, we estimate Suntec REIT will have total debt of $2.8 billion which will bring gearing up to 42%.
The private placement was well oversubscribed at 3.1 times which reflects investor’s preference for downtown grade A properties. This we believe is also the catalyst for the stock. Minority unitholders may again feel disadvantaged by the inability to participate in the private placement, the first time being in Dec 2009. At the current price, Suntec REIT is trading at approximately 15% discount to book value and we are projecting 6.8% dividend yield for FY11E. However our concern with Suntec REIT lies mainly in its gearing. At 42%, it is one of the higher leveraged REITs and the gearing will also limit it on making further acquisition. Deleveraging will have to be carried out at some point. We raised our target price slightly from $1.34 to $1.37 and maintain our Hold recommendation.
Sabana – BT
Expect more Syariah-compliant Reits in 2011
HSBC Amanah M’sia CEO also expects an increase in global sukuk issuance
More Syariah-compliant real estate investment trusts (Reits) will come to market in Asia in early 2011 as cross-regional Islamic investors increasingly embrace the product, HSBC Amanah Malaysia’s new head said.
Singapore’s first Syariah-compliant Reit, Sabana Reit, listed on Friday, having drawn a mixture of both conventional and Islamic investors, a quarter of them from the Middle East, chief executive Rafe Haneef told Reuters on Friday.
‘The take-up (among Gulf investors) for future Islamic Reits will be a lot greater than that,’ said Mr Haneef, who is also managing director of global markets for HSBC Amanah.
‘At the moment there is no timeline for when other issuers will come out with Islamic Reits, but I would expect more in the first or second quarter of next year,’ he said.
HSBC Amanah was exploring other Islamic Reit opportunities in Malaysia and Singapore, Mr Haneef said, noting it was financial adviser for the Sabana Reit initial public offering (IPO).
Sabana Reit, the world’s largest Syariah-compliant property trust, sold 508 million units at $1.05 each in its IPO this week. The IPO was 2.5-times subscribed. Sabana Reit’s shares closed at $1.02 on Friday on the Singapore stock market, after being weighed down by jittery market sentiment.
On Nov 23, Dubai Islamic Bank launched the emirate’s first Syariah- compliant Reit in a joint venture with French property firm Eiffel Management, a move executives said would help fuel growth in the country’s battered real estate sector.
Mr Haneef said Syariah-compliant Reits ensured higher-quality investments because the screening process looked at both the underlying asset and the usage of the asset, and does not allow for speculative or risky investments.
Mr Haneef, who was appointed CEO this week, said HSBC Amanah Malaysia continues to see a healthy global pipeline for Islamic finance products – including Islamic bonds, or sukuk – as investors seek to tap the growing US$1 trillion market.
He expects an increase in global sukuk issuance in the first quarter of 2011, with Middle East investors potentially looking to issue sukuk denominated in the Malaysia ringgit to satisfy interest among corporates and sovereign-linked entities.
Sources said Dubai plans to issue about US$1.5 billion worth of sovereign sukuk in Malaysia as the Gulf Arab emirate looks to tap the world’s largest Islamic bond market to diversify its funding avenues.
‘We were the first to bring a Middle East credit to the Malaysia ringgit sukuk,’ Mr Haneef said. ‘Currently, there’s a price advantage to tapping the Malaysian ringgit and swapping it back to dollar.’ – Reuters