Suntec – BT
Suntec Reit dips, ARA surges on MBFC deal
Analysts guarded on deal’s impact on trust but upbeat on fund manager
SUNTEC Real Estate Investment Trust endured a sell-down on the stock market yesterday after investors learnt of its planned $1.496 billion property purchase.
In contrast, ARA Asset Management – whose unit manages Suntec Reit – saw its share price surge to its highest level this year on the back of the same news.
Suntec Reit said on Tuesday evening that it is buying a one-third stake in some properties in Phase One of Marina Bay Financial Centre (MBFC) from Cheung Kong Holdings and Hutchison Whampoa. Its units ended trading at $1.56 before the announcement.
Yesterday, Suntec Reit fell as much as five cents or 3 per cent to an intraday low of $1.51. But it later recovered slightly to close at $1.54 – two cents down. Some 9.79 million units changed hands.
Views on how the deal would affect Suntec Reit ranged from the guarded to the positive. Moody’s Investors Service put on review for possible downgrade the Reit’s Baa1 corporate family rating and Baa2 senior unsecured debt rating.
‘The large transaction size, if substantially funded via debt, may pressure its ratings,’ said Moody’s senior vice-president Philipp Lotter.
Analysts from Deutsche Bank expect a slight 2.8-3.5 per cent accretion to Suntec Reit’s FY2011 distribution per unit from the deal. Taking into account other factors, they raised the target price for the counter to $1.65 from $1.58.
Sentiments surrounding ARA were more upbeat. Its share price, which closed at $1.29 on Tuesday, rose eight cents or 6 per cent to an intraday high of $1.37 yesterday.
The real estate fund manager gave up some of these gains to close at $1.33 – four cents higher.
Two research houses raised their target prices for ARA. ‘ARA, as the manager of Suntec Reit, stands to reap 1 per cent in acquisition fees or $15 million in FY2011,’ said CIMB’s Janice Ding, who upped the target price to $1.57 from $1.35.
DBS Vickers revised its target price to $1.65 from $1.30. ‘MBFC will form part of the asset under management (AUM) of Suntec Reit, thus increasing ARA’s recurring fee income base,’ said analyst Derek Tan.
‘ARA’s goal of $20 billion in total AUM by 2012 appears within reach.’
FCT – DBSV
Clear and visible growth
• Organic growth flattish in FY11 as Causeway Point undergoes a facelift
• Earnings could surprise on the upside from potential acquisitions, which could happen in 2011
• Maintain BUY, TP revised to S$1.74 (total return 15%)
Record 4Q10 DPU of 2.16 Scts in line. Fraser Centerpoint Trust (“FCT”) reported a topline and net property income of S$32.5m (+31%yoy, +6%qoq) and S$22.2m (+26%yoy, +3%qoq) respectively, boosted by the contribution from newly acquired Yewtee Point, Northpoint 2 malls and stronger trading performance of North Point 1 post enhancement works (“AEI”). Distributable to unitholders of S$16.5m includes a S$1.6m sum retained from prior quarters (maintaining 100% payout). The portfolio also saw a 3% revaluation gain of S$42.5m (+3%) or an NAV of S$1.29.
Organic growth flattish in FY11 as Causeway Point undergoes a facelift. We continue to see positive rental reversions. For FY10, average rents were renewed at 7% higher rates. Average occupancy levels stood at 98.1%, slightly down from 99.4% a year ago. This is due to lower occupancy rates at Causeway Point (97% in 4Q10 vs 100% in 4Q09) given the ongoing AEI at the mall. While we expect occupancy levels to head down further in the coming quarters as work intensifies, we project limited impact on DPU given that works are phased over a long period of 30 months and earnings in FY11 should be somewhat offset by the full year contribution from YewTee Point and Northpoint.
Bedok Mall could be injected into FCT by 2011. The mall is currently 99% committed and is awaiting TOP in the coming months. The manager is guiding for an injection in 2011 with a potential equity fund raising to part fund this acquisition. We have not factored in this acquisition in our numbers as yet.
BUY call maintained, TP revised to S$1.74. FCT offers investors a solid FY11-12F yield of 5.3-5.5%, backed by resilient earnings from its portfolio of sub-urban malls. Catalysts for further upside to earnings hinges on the acquisition of the Bedok mall asset. BUY maintained with revised TP of S$1.74 as we roll forward our numbers to FY11.
Suntec – Phillip
•3QFY10 of $63.2 million, net property income of $50.6 million, distributable income of $46.2 million
•3QFY10 DPU of 2.502 cents
•Acquiring 1/3 MBFC
•Maintain Hold, pending more details of acquisition
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Suntec REIT recorded 3Q10 revenue of $63.2 million (+2.1% y-y, +1.3% q-q), net property income of $50.6 million (+7.6% y-y, 6.7% q-q) and distributable income of $46.2 million (- 3.2% y-y, +0.6% q-q). 3Q10 DPU was 2.502 cents (-14.3% y-y, -1.0% q-q). Essentially we note the office portfolio has been improving in the past five quarters with occupancy edging up every quarter. Reversionary rent for leases secured in the quarter at Suntec City Office was $7.39 psfpm. Although this still represents a decrease of approximately 45% from the peak in two years ago, it has stayed relatively constant in the past five quarters and we believe the trough is already past. Like we mentioned in previous reports, this is a conscious effort by management to retain tenants and gain occupancy rate in the prospect of the completion of new supply of office space in the vicinity. The retail portfolio has also shown consistent results. Revenue contribution breakdown from the office and retail portfolio is 47% and 53% respectively, which has been steady in the past five quarters as well.
Additionally, Suntec REIT announced that it is proposing to acquire one-third interest in Marina Bay Financial Centre (MBFC). The purchase price is $1,495.9 million inclusive of an income support of $113.9 million over 60 monthsThe REIT has not determined the method of funding and will announced in due course. Fig 1. Revenue breakdown ($’m) vs occupancy breakdown (%)
StarHill Global – DBSV
Stable performer
At a Glance
• DPU of 1.0 Scts in line
• Recovering office occupancy at Wisma Atria positive sign
• BUY, TP revised to S$0.76 offers 31% total return
Comment on Results
DPU of 1.0 Scts in line. Starhill Global REIT (SGREIT) reported a strong growth in topline and net property income to S$45.2m (+38.7% yoy, 22% qoq) and S$35.8m (37% yoy, 24%qoq), boosted by an expanded portfolio – from recently completed acquisitions: (i) David Jones in Australia and (ii) Lot 10 and Starhill Gallery in Malaysia. NPI was also slightly eroded from higher A&P, leasing commissions expensed by SGREIT. Distributable income to unitholders of S$19.4 (net of S$2.5m to CPU holders) translates to a DPU of 1.0 Scts.
Wisma Atria office occupancy levels rebounds – positive sign. While its retail portfolio continue to remain stable, SGREIT’s office revenues continue to remain weak at S$5.7m (-5%yoy, -4% qoq). However, we notice a pick-up in occupancy levels to 85.7% as of Sept 2010 (vs 81.4% in 2Q10) at Wisma Atria as positive sign and we understand that the manager is in negotiations with a couple more prospective tenants to take up further space, which should filter through to earnings in the coming quarter. The expected improved office leasing environment (projecting office occupancy to head up to 95% in FY11) should somewhat offset the projected negative rental renewals come 2011, mitigating downside earnings risk from its office portfolio in the coming quarters.
Recommendation
Valuations attractive, BUY, TP S$0.76. Trading at 0.7x P/BV, and offering forward FY11-12 yields of c7.3%, we see relative value in SGREIT compared to other SREIT peers who trade at 1.05x P/BV, and offer a weighted average yield of 6.0%. Our TP is raised to S$0.76 as we roll forward our valuation to FY11.
Suntec – DBSV
Buys one third share of MBFC1
• Results in line, topline +2.1% on higher office income
• Buying MBFC1 for $2400psf
• Maintain Buy call, TP $1.66
No surprises in Q3 results. Revenue was up 2.1% yoy and 1.3% qoq, lifted by higher office occupancy of 98.5% and better office rental income. Office rents at Suntec office improved to $7.39psf/mth. NPI was up 7.6% yoy on lower cost to income ratio of 20%. However, distribution income dipped 3.2% to $46.2m (DPU: 2.5cts) largely on increased interest expenses. The group revalued up portfolio by 3.6% translating to NAV of $1.828/share. Going forward, Suntec has c14% of office and 27% of retail NLA due for reversion in 2011 and we expect office rents to show some uptick while retail component to remain stable.
Interest savings from refinancing. Recent refinancing exercise of $700m due in FY12 are likely to lower its current overall cost of debt of 3.77% as the new loans were concluded at a lower spread of 1.5%, as well as smoothen out the group’s debt maturity profile. The impact is likely to be felt from FY11.
Buys 1/3rd MBFC1 at $2400psf. Suntec has announced its plan to buy a one third share of MBFC1 from Cheung Kong for $1495.8m, inclusive of a $113.9m income support payable over 60 months or $2400psf (excl the income support payable). This deal is viewed as a long-term strategic positive as enhance the overall quality of its office portfolio with a prime office property. The actual impact is difficult to ascertain pending details of financing to be released. The deal is subject to minority shareholder’s approval.
Retain current recommendation. We are tweaking our FY11 numbers by 3.1% to reflect the impact of recent refinancing exercise but exclude the effect of the MBFC1 acquisition. Maintain Buy call pending more information on the transaction. Based on FY10 and FY11 DPU of 9.8cts and 9.7cts, Suntec is trading at decent DPU yields of 6.3-6.2%. Our target price of $1.66 offers 12% total return.