PLife – CIMB
More legs to run
• Maintain Outperform with higher target price of S$1.91 (from S$1.57). PLife’s CPI-pegged Singapore assets are set to benefit from rising inflation, upcoming asset enhancement and overseas acquisitions. We factor in an additional S$200m of acquisitions for 2011, higher CPI assumptions, lower cost of debt and a longer lag time for contributions from 2010 acquisitions. Our DPU estimate dips by 5% for 2010 before rising by 4-20% for 2011-12. Our DDM target price rises accordingly to S$1.91 from S$1.57 (discount rate 7.2%). Earlier-than-anticipated announcements of acquisitions could provide stock catalysts, in our view.
• Singapore inflation to reach 3%. With the Singapore economy expected to expand 13-15% this year, inflation risks remain, auguring well for PLife’s Singapore portfolio, whose rental growth is pegged to CPI +1% in the base case. Our house predicts 3% inflation for Singapore this year.
• Organic growth in 2011. We believe asset enhancement at East Shore Hospital and Mount Elizabeth will start next year. Although details have not been released, we believe the AEI would centre on pockets of low-yielding space which could be converted to higher-yielding ward space, operating theatres or space for specialised use such as a cancer centre. We anticipate accretion for ROI in the region of 10% vs. its current NPI yields of 5%.
Fortis – BT
NEW DELHI – Indian hospital operator Fortis Healthcare is looking to list a real estate investment trust in Singapore in the next six months and is looking at a market value of US$600-$700 million, a company source said.
Fortis, which fell short in a bid for control of Singapore-based Parkway Holdings, has been working on a real estate investment trust (Reit) listing for a year, the executive said, adding that regulatory challenges remain.
'Now we are quite close. A listing will still take 5-6 months,' the official, who did not want to be named, said. — REUTERS
REITs – OCBC
Bringing up to date, Maintain Neutral
Recovery Cycle: The Singapore REITs sector saw good growth in the first half of 2010. The total market capitalization of SREITs surged by 39% YoY to S$32b as of end Aug 2010. According to the recent CBRE “REITs Around Asia 1H10” report, Singapore REITs market capitalization also came in second highest in Asia; Japan was top at S$43b (US$32b). In addition, there was also a new S-REIT listing of Cache Logistics Trust in Apr, which was well-received by the investment community and raised gross proceeds of S$417.2m. Previously battered by the credit crunch, many were now able to ride on the sector’s recovery cycle. In fact, we see several S-REITs raising capital once more to acquire assets and grow.
Acquisitions-no more sleepy backwater: The 1H10 saw acquisitions activity by S-REITs rebound sharply with a total value of S$4b. The credit freeze that made financing almost impossible two years ago has also largely thawed. Borrowing costs for most S-REITs are now sloping downwards rather than upwards. YTD, we have seen public financing issuances and transacted private placements amounting to S$1.4b (Exhibit 2). Moving forward, we expect S-REITs to continue the refinancing process to take advantage of the easing credit market, the low interest rate environment, and opportunities to pacify investor jitters. Quality sponsors and quality assets will continue to be crucial to securing competitive pricing.
Regulatory risk-looming cloud on the horizon: The Singapore government remains highly active in the real estate space. The spate of property cooling measures announced recently for the residential market is a case in point. Of all the new measures, we see the move to disallow concurrent ownership of HDB flats and private residential properties within the MOP as the most significant. The market now expects private home prices and sales to be hit. Even though the indirect impact on the S-REITs sector remains to be seen, this episode certainly demonstrated the extent of government influence on the real estate sector.
Focusing on value. Despite the still uncertain market conditions, the FTSE REIT sub-index is, in fact, up 5.85% YTD. This means that valuations for several S-REITs, especially the larger cap plays, are trading at significant premium to book value. But coupled with the risk of falling asset prices should the government decide to get tough on the nonresidential property market, we believe that these S-REITs are increasingly looking fairly priced. As such, we maintain a NEUTRAL view on the sector.
CDL H-Trust – RBS
There is still room for growth
Potential NAV accretion from acquisitions or asset sales could be catalysts for the stock in the near- to mid-term. In addition, CDREIT’s portfolio of business hotels may benefit from a ramp up in the number of conventions held at MBS next year. We raise earnings estimates on lower debt costs. Reiterate Buy.
Corporate hotels to see brisk business next year
We expect CDREIT’s corporate hotels to benefit from a higher volume of convention events held at Marina Bay Sands (MBS) next year. Conventions typically take 12 months to plan and MBS just opened its doors in April this year. This is positive for CDREIT, as 70% of its earnings are derived from business travellers. Its corporate business is generally more profitable than its leisure business, with rates being 30% higher. Management expects the average hotel occupancy rate in Singapore to be around 90-95% in 3Q10 vs 85% in 1H10. We believe this will lead to accelerated growth in the average hotel room rate; in 1H10, this rate was still 22% below the peak of S$248/night in 1H08.
We raise earnings on lower debt costs
CDREIT refinanced its S$260m debt at an all-in cost of 2.3% in August, representing a 130bp reduction to that of its previous SGD debt. This brings its weighted average interest cost to 3.4% (-70bp) for FY11. Thirty percent of CDREIT’s debt is denominated in AUD at a debt cost of 6% following its acquisition of five hotels in Australia in February. We estimate DPU will improve by 1.6% in FY11 and 1.4% in FY12 following the refinancing.
Potential conversion of hotels into residential projects?
CDREIT’s portfolio of five Singapore hotels are well located in prime locations. Given buoyant residential prices and the increasing popularity of city living, we believe CDREIT could convert one or more of its assets into residential projects. Its Singapore hotels were valued at S$640psf as of end-2009 vs a residential land cost of S$1,000psf. However, regulations do prevent REITs from undertaking residential developments, so we believe any conversion would require an outright sale.
We raise our target price to S$2.29
We reiterate our Buy rating and increase our DCF-based target price to S$2.29 (from S$2.24) on lower debt costs. Share price catalysts include: 1) possible future acquisitions, especially in Singapore; and 2) potential NAV accretion from any conversion of its hotels into residential projects. We estimate CDREIT offers yields of 5.2% in FY10 and 6.4% in FY11F.
FCT – RBS
A prime suburban mall play
FCT’s strong acquisition pipeline and pure prime suburban mall exposure puts it ahead of other retail plays, in our view. Suburban mall rent outperformed other malls; meanwhile its parent’s Bedok Point mall is nearing completion. Buy.
Bedok Point may be ripe for acquisition early 2011
Bedok Point, a suburban mall owned by parent F&N is nearing completion. Given the mall is more than 90% pre-committed, injection into FCT may occur early next year. We value Bedok Point at S$130m. While FCT has the debt capacity to fully fund this, we believe an equity raising is likely in order to keep gearing at below 40%. F&N’s 50%-owned Changi City Point is due to complete in 2H11 and may be injected to the REIT in 2012, in our view.
Suburban malls outperform all retailers
Prime suburban malls rents improved 1.4% hoh to S$28.50 psf in 1H10, according to CBRE, vs a 4.1% decline for prime Orchard Road rents and a 6.5% fall in rents for city fringe malls. Prime suburban malls continue to be in demand, with six bids received for a predominantly retail site at Jurong Lake District. Top bidder Lend Lease paid S$749m, or S$650 psf, for the site, which seems high relative to CapitaMall Trust’s Jurong Entertainment Centre’s current valuation of S$750 psf. We estimate a construction cost of S$300 psf for the Jurong Lake site. We believe FCT will benefit, as it is the only pure suburban retail play in Singapore.
Refinancing ahead of time
FCT is in the midst of refinancing its debt of S$260m due in July 2011 (57% of total). We expect debt cost for this to fall to 3.5% from 4.1%. This should bring its average debt cost to 3.5% next year, vs 3.8% now. We have added 2c/share to FCT’s valuation based on this.
Valuation comment
We maintain Buy on FCT with our DCF-based target price of S$1.74. Catalysts would include the potential acquisition of Bedok Point likely in early 2011. FCT yields 5.7% in FY10F and 5.4% in FY11F. The declining yield is due to temporary loss of income as Compass Point is now undergoing refurbishment. We prefer FCT to CapitaMall Trust due the strength of the suburban retail market and FCT’s strong acquisition pipeline.