CCT – OCBC
Fresh catalysts needed; maintain HOLD
Rents are bottoming out. The Office Rental Index in 2Q registered an increase of 1.1% QoQ, buttressing the uptrend rental recovery since the start of the year, which pre-ceded six consecutive quarters of decline. Office rents have also turned around on the back of strong economy recovery and office demand, rising to an average of S$8.45 psf/month (up 5.6% QoQ) for Grade-A office space.
Office transactions pick up pace. Investment activity in the office market has also warmed up. With close to S$2.6b of deals done YTD, buoyed in part by the entry of foreign property funds and the economic recovery, transaction sizes were also larger and prices have hit $2,000 psf in 2H10 (versus S$3,000 psf peak in 2008). This was in stark contrast to the relatively bite-sized deals of less than S$200m during the financial crisis. We believe that CCT stands to benefit in this rising rental/demand environment, since it has a large exposure to Grade-A office space. And in anticipation of faster growing rentals for Grade-A offices, we also expect more tenants to make a ‘flight to quality’ to take advantage of the still narrow gap between Grade A and prime office rentals.
MSCP conversion unlikely. CCT first revealed its plan to redevelop Market Street Car Park (MSCP) into a new Grade-A office tower in 2008, with a GFA of 850k sf. But management was unsuccessful in topping up the leasehold duration for MSCP (expiring on 31 Mar 2073). The remaining period makes it unappealing for CCT to pursue the premium office conversion option any further, given that development works will probably take up at least another three years, leaving the property with a lease of less than 60 years.
Reinvestment risk. CCT is also sitting on a cash pile of some $750m following the sales of Robinson Point & StarHub Centre. The challenge, however, lies in sourcing for yield-accretive Grade-A office acquisitions, given the growing competition for quality commercial properties and CCT’s geographic focus within Singapore. And given the persistently low interest environment, having excess cash on the balance sheet could also result in a cash drag; but an option would be to pare down its debt.
Maintain HOLD. On the back of favourable conditions in the office sector, our RNAV-derived fair value for CCT rises from S$1.26 to S$1.50. But given the limited upside, with total return <10%, our HOLD rating remains; potential re-rating would need to come from further yield-enhancing acquisitions/redevelopment-projects.
PLife – DBSV
Life has positive surprises ahead
• Acquisitions should continue to fuel growth; we factor in S$200m for FY11F
• Funding likely to be part equity, part debt; maintaining gearing slack for opportunistic purchases
• Asset enhancement opportunities in Japan and Singapore could supplement growth
• Raised DPU by c.5% even after factoring potential new units; Maintain Buy, TP raised to S$1.84
Japan and Malaysia on Life’s radar. From our visit to PREIT’s nursing homes in Japan last week, we believe the opportunities for investment continue to be strong there. We have factored in S$200m acquisitions for FY11F (Japan/Malaysia). We believe management is keen to continue its strategy in Japan, as well as expand into other countries, namely Malaysia, given the recent resolution of ownership at Parkway.
AEIs in Japan and Singapore. PREIT is also exploring asset enhancement initiatives (AEI) in Japan, such as converting common areas into more rooms. In Singapore, we believe PREIT could look to increase GFA of existing hospitals given recent initiatives by Raffles Medical for its hospital.
Equity raising likely for acquisition. Equity raising to fund future acquisitions is probable, in our view. While PREIT still has debt headroom of S$121m before reaching 40% gearing, we believe management is likely to maintain some slack to avail for quick response to opportunistic acquisitions. Along with our acquisition assumption, we have assumed $140m proceeds raised through equity and S$60m funded through debt in FY11, maintaining its gearing level at c.35%.
TP raised to S$1.84, Buy. YTD, counter is up c.34%, given its accretive acquisitions, astute management and defensive profile, among others. We believe there is further upside as management continues to pursue accretive acquisitions. Our TP is raised to S$1.84, after factoring in S$200m acquisitions (funded by 30%/70% debt/equity), lower all-in interest costs to 2.15% and rolling our valuations to FY11F. Our DCF TP is S$1.84 (WACC 6.3%, t=2%), representing 18% total return upside.
CMT – BT
CMT repurchases $100m of bonds
CAPITAMALL Trust has repurchased convertible bonds (CBs) with total principal amount of $100 million (plus accrued interest) for a total cash consideration of about $105.25 million.
The repurchase was funded in cash from internal resources. ‘We saw an opportunity to proactively reduce our debt exposure for next year,’ said Simon Ho, CEO of CapitaMall Trust Management Ltd (CMTML).
The CBs repurchased were part of the $650 million CBs – with a coupon rate of one per cent and a yield to maturity of 2.75 per cent per annum – that were issued on on July 2, 2008, to help the trust fund its acquisition of The Atrium @ Orchard.
The settlement of the repurchase of the $100 million CBs took place yesterday and the repurchased CBs have been cancelled, leaving the outstanding aggregate principal amount of CBs currently at $550 million, CMTML said.
The CBs, due 2013, have a conversion price of $3.39. On the stock market yesterday, CMT closed three cents lower at $2.11.
CMT recently issued four-year and seven-year notes under its Multi-currency Medium Term Notes Programme, which took its gearing to 37.2 per cent. With the repurchase of the CBs announced yesterday, the trust’s gearing will drop slightly. ‘After this repurchase, CMT continues to have enough cash for its asset enhancement initiatives as well as general working capital,’ Mr Ho said.
The trust acquired The Atrium in May 2008 for $839.8 million, or $2,249 per square foot of net lettable area. In July this year, CMT unveiled plans to invest about $150 million in asset enhancement works for the asset. The first three levels of The Atrium will be converted to retail use and linked to Plaza Singapura. A canopy will be built along the open plaza between the two properties to maximise their combined 170-metre-long frontage along Orchard Road.
CitySpring – OCBC
Dispute resolution process starts
Dispute resolution process starts. CitySpring Infrastructure Trust (CitySpring) announced recently that state-owned Hydro Tasmania has invoked dispute resolution procedures. Hydro Tasmania is CitySpring’s counterparty on the 25-year revenue agreement for the Basslink asset. To recap, discussions were ongoing with Hydro Tasmania on its demand for an additional A$6.9m in commercial risk sharing mechanism (CRSM) payments from Basslink for CY2009.
What is CRSM? CRSM is designed to share the market risk of operating in the National Electricity Market between Basslink and Hydro Tasmania. Payments under CRSM are based on differences between the top 30 and bottom 50 electricity pool prices and can range from up to 25% of base power cable revenues or up to negative 20% of revenues depending on the volatility of electricity prices in Victoria. While the CRSM is designed to have a neutral effect in the long term, it creates a level of volatility in Basslink’s revenue (offering both upside and downside).
Could require resolution by arbitration. Hydro Tasmania’s demand for additional CRSM payments was first disclosed in Feb, at the 3Q FY10 results. In the latest announcement, CitySpring noted that the Basslink Services Agreement contains dispute resolution procedures which can be activated to resolve such matters. Hydro Tasmania issued a dispute notice on 17 Sep on the “CRSM matters and other alleged breaches” of the services agreement. It also noted that such procedures ultimately may require Hydro Tasmania and Basslink to enter into arbitration. While further details were not revealed, we note in a typical arbitration, a third party reviews the case and imposes a decision that is legally binding for both sides.
No provisions made yet. To date, CitySpring – after taking legal advice – had not made any provision for liabilities arising from the discussions with Hydro Tasmania. We note that with dispute resolution procedures invoked, there could a greater risk of CitySpring booking some sort of provision on its P&L. Separately, discussions with Singapore’s Energy Market Authority (EMA) regarding the conversion, and ensuing liberalization, of the City Gas town gas network are ongoing. The manager re-iterated that it was re-assured by the consistent and fair nature of EMA’s decisions so far as a regulator, especially in the electricity market. The manager also emphasized that the marginal returns per household create a natural barrier for newcomers to the residential market; City Gas serves 623,000 customers. We are suspending coverage on CitySpring as we see limited positive price catalysts in the near-term.
PLife – Kim Eng
Flourishing in the Land of the Rising Sun
Event
• Our recent visit to ParkwayLife REIT’s (PREIT) nursing homes in Japan and the discussions with their operators have bolstered our confidence in the strength of PREIT’s portfolio. Not one to rest on its laurels, management is stepping up efforts on its asset enhancement initiatives (AEIs) and is eyeing acquisitions in Australia and Malaysia. The recent entry of Newton Investment as a substantial shareholder at $1.56/unit lends further support. Reiterate BUY with a higher target price of $1.94.
Our View
• PREIT’s nursing homes in Japan, which target the low‐ to mid‐end market, are relatively new and enjoy a strong operational occupancy rate of 95% on average. The long waiting list for the homes is clear evidence of the robust underlying demand, boding well for the operators/lessees who lease the properties from PREIT based on a 100% committed occupancy for 17 years on average. All this renders PREIT the benefit of a stable rental income.
• Apart from the inflation‐linked rental growth, organic growth will come from the AEI programme. This includes converting common areas into bedrooms and building annexes to house more beds. In some cases, these activities can fetch a return on investment of 30%. We estimate the AEI capex to be around $30m over the next two years.
• We expect PREIT to acquire a few more nursing homes from its operators, given their attractive yield of about 8% and the low credit spread the REIT can get for its term loans. Its recent term loans of 4‐5
years have been signed at a low credit spread of about 110bps. We understand that PREIT will have no refinancing needs until FY13.
Action & Recommendation
We have factored in an additional $200m worth of acquisitions (fully debt funded) over the next two years, with hospitals and medical centres in Australia and Malaysia (including the Pantai hospitals) being the potential targets. Rolling over our estimates to FY11 valuations, we raise our target price from $1.64 to $1.94. Reiterate BUY.