CCT – GS
Starhub sale books gain; our preferred office company
What’s changed
On July 16, CCT announced the sale of office building Starhub Centre to Frasers Centrepoint for S$380mn or S$1,357psf. The divestment of Starhub Centre and an earlier sale of Robinson Point in 1Q10 for S$203mn (S$1,527psf, gain of S$19mn) are inline with its broader strategy to unlock value. The sale is done at a 42.5% or S$113.3mn, above the appraised valuation of S$266.7mn, and will book one-off gain of S$109.1 mn with net proceeds of about S$375.8mn. CCT’s appraised book will improve by 3% to S$1.43/share. Starhub Centre is a non-Grade A office building (280,069sqft NLA) located off shopping district Orchard Road, and has 85 yrs in its land lease; it accounts for about 5.0% of portfolio asset value, approximately 4.0% of NPI.
Implications
CCT’s decision to divest rather than participate in the redevelopment of the property into Residential is as expected, with the sale gain of S$109.1mn coming in above our expectations (est. S$80mn gain). The sale makes business sense; we estimate CCT would have had to achieve office rentals closer to S$6.9psf vs. current passing rents of below S$6psf in order for Starhub to have been revalued at S$380mn (assuming no change of use). We believe the recent asset sales could assure investors that progress is underway to upgrade its portfolio mix, addressing concerns that it may be losing its foothold in the office space with its older portfolio. With a strengthened cash position, CCT has the capacity to acquire Grade-A assets (up to S$1.2bn) without having to return for a cash call. With spot rents stabilizing and as confidence in appraised valuations grows, we believe CCT’s gap to BVPS will close.
Valuation
Valuation and our 12-m DCF-based TP of S$1.42 are unchanged. The sale could raise 2010E net income by 50%, but will lower core earnings and DPU by 4% with the fall in rentals.
Key risks
Key risk to our investment view includes a slowdown in job additions.
CCT – MS
Starhub Centre Sold for S$109mn Gain; N/T Positive
Quick Comment: We maintain our Overweight rating on CapitaCommercial Trust (CCT) and see the recent profitable sale of Starhub Centre as providing near-term support for the stock. While the recent strong stock price performance of +13% in the last month (vs. +4% for the STI) no longer leaves valuation looking as attractive, news flow in the office sector should remain positive as we increasingly hear of rising rents and stronger office demand for 2010. We estimate a potential impact on NAV of +5%, and impact of forgone future rentals on DPU could be as much as -1%/-5%/-4% in 2010E/11E/12E (Ex. 1). With capital values already on the uptrend (Ex.3), we think the potential for accretive acquisitions to be limited in the current environment. Hence, to avoid the drag of excess cash, we think the sizable proceeds could be: 1) distributed to shareholders – potentially S$0.13 per share, 11% of the current stock price; or 2) used to reduce debt and interest expense – up to 4% addition to DPU (Ex. 2).
What’s new: CCT announced the sale of Starhub Centre to Frasers Centrepoint for S$380mn (net: S$375.8mn), expected to complete on September 16, 2010. CCT gains S$109.1mn from the sale of the 10-storey commercial building, which was valued at S$266.7mn in June 2010. Market talk of a potential sale began as early as January 2010, when CCT received URA approval for the change of use of the property to residential (up to 80%). SLA approval for a lease extension to 99 years was subsequently received on July 13, 2010.
Rationale for Sale: Part of its strategy to free up capital by divesting assets that have reached the optimal stage in their life cycle, CCT cited the benefits of the sale as :1) realizing value significantly above valuation; 2) strengthening cash position and financial flexibility.
Investment thesis:. CCT is currently trading at 0.9x 2010e P/B, implied capital value of S$1,480psf, and we recommend investors accumulate the stock on any potential share price weakness.
A-REIT – DB
1Q results marginally ahead; a steady start to the year
1Q results marginally ahead; outlook continues to improve
AREIT’s 1Q results were marginally ahead of expectations, underscoring its steady organic growth profile underpinned by a well-diversified portfolio. Operating outlook continues to improve with rents bottoming out and occupancy rates stabilizing. Execution of BTS projects has been solid and it is well positioned for acquisitions with its strong balance sheet and significant financial flexibility. Maintain Buy on undemanding valuations at 6.8 % FY11 yield.
1QFY11 DPU of 3.37cts (+3.4% YoY, +23% QoQ) slightly above DBe of 3.26cts
Revenue rose 10.9% YoY and 9.3% QoQ underpinned by contributions from new acquisitions (eg. DBS Asia Hub, 31 Joo Koon) and positive rental reversions, driving an 8.2% YoY rise in NPI. Overall portfolio occupancy was stable QoQ at 95.6% (91.5% for MTBs). AREIT successfully leased & renewed leases amounting to 0.77m sf during the quarter, out of which c.0.5m pertained to renewals with new leases growing a strong 2.6x YoY. AREIT continued to enjoy positive rental reversions of 3-4% for business park and hi-tech industrial space although a moderation from last quarter’s 8-10% rise. Apart from logistics space, rents for new take-up fell 6-9% QoQ due to differences in specifications and user size.
On track to meet our FY11 DPU forecast of 13.6cts (+4% YoY)
Around 11.8% of AREIT’s revenue is due for renewal for the rest of the year and with demand recovering and rents turning up, we believe it is on track to meet our FY11 forecast. In 1Q, it continued to attract demand from new tenants across the board, especially in transport & storage and electronics. With expiring rents still below current market rents, AREIT should continue to benefit from positive rental reversions and a gradual improvement in occupancy rate. Balance sheet remains firm with gearing at 34.1% and no major refinancing this year. The partial BTS project for Citibank in CBP remains on track for completion in early next year.
Undemanding valuations; maintain Buy with DDM-pegged TP of S$2.23
AREIT is currently trading at 1.27x P/B (vs LT avg of 1.33x) and offering FY11e yield of 6.8% implying an attractive 444bps spread over the 10-year bond compared to the LT average spread of 428bps. Risks: reversal of growth trends impacting leasing demand, credit risk from tenants on long sale & leaseback leases, development risk and deterioration in credit markets
A-REIT – MS
Time For Portfolio To Improve
Quick Comment: Ascendas Real Estate Investment Trust (A-reit) 1Q11 headline earnings were in-line, with NPI and distributable income both 25% our full-year estimates. However, results were bolstered by S$4.8m of non-recurring income which was comprised predominantly of liquidated damages. Excluding the non-recurring income, A-reit’s 1Q11 would marginally miss our estimate, at 23% of our full year distributable income. Going forward, we expect A-reit’s underlying operations to start improving on the back of a pick up in occupancy and bottoming industrial rents. We maintain our Equal-weight rating for A-reit and expect it to trade in-line with the sector given the lack of positive catalysts.
Organic Growth Now More Important: Post the acquisition/completion of DBS Asia Hub, 31 Joo Koon and 38A Kim Chuan, we see limited opportunity for material acquisitions or Built-to-suit opportunities and further upside to A-reit’s earnings will have to come from improvements in the underlying portfolio. We think MTB occupancy at 91.5% will start to track higher, as we believe occupancy at buildings like 3 Changi Business park (56.9%), Ubi Biz Hub (79.2%), 3 Tai Seng Drive (76.7%) and Xilin Distri Centre (83.1%) will improve over the course of the year as economic activity in Singapore continues to stay buoyant. Industrial rents are bottoming, and rental reversions could start turning more positive going forward.
Maintain Equal-weight: A-reit has risen 5.8% in the last month and is now yielding 6.9% for FY11e (March year end). We believe A-reit is fairly valued, trading slightly below its historical average dividend yield of 7.8%. Positive sentiment from stronger than expected Singapore economic growth recently announced is, in our opinion, already reflected in the price and we do not see any near term positive catalyst for the stock.
CCT – UOBKH
Sale of StarHub Centre – building up for acquisitions
What’s New
Sale of StarHub Centre. CapitaCommercial Trust (CCT) has sold StarHub Centre to a subsidiary of Frasers Centrepoint Ltd for S$390m. This amounts to a price of S$1393psf of Net Lettable Area (NLA) of
280,069sf.
Stock Impact
Divested at a gain of S$109.1m, though below expectations. The selling price is 11% below our estimate of S$1560psf. However, the price is 45.5% or S$122m higher than the valuation of S$268m as at 31 Dec 09 and 42.5% or S$123.3m higher than its valuation of S$266.7m as at 30 Jun 10. The sale price is also 5.1% above the highest valuation achieved at S$361.5m as at Jun 08. The estimated gain from the sale is S$109.1m or about 3.8 cents/share. This is 37% below our previous estimate of a gain of 6 cents/share.
Minimal impact on net property income. StarHub Centre currently accounts for about 4% of CCT’s net property income. The impact on CCT’s 2010 income will be minimal as occupancy is already at a low 68% and the completion of the sale will be close to end-3Q10. Potential acquisitions are likely to offset the impact on 2011 and 2012 earnings.
Maintaining focus on core portfolio. This sale comes on the heels of the sale of Robinson Point, another non-Grade A office building in Jan 10 for S$182.5m. CCT has opted not to participate in a JV or to develop the property itself so as to avoid exposure to the non-core residential segment. The sale will enable CCT to divest its non-core assets to maintain focus on Grade-A office developments.
Watch out for acquisitions. Net gearing will decrease from 29.1% to 25.5%, which gives CCT about S$700m debt headroom to fund Grade-A office acquisitions in Singapore assuming a target gearing of 37.5% (based on the target range of 30% to 45%).
Beneficiary of the office sector turnaround. CCT has the largest portfolio of prime office properties in Singapore, deriving about 72% of its value from this segment. The office segment is deep in value relative to other sectors with prime office rentals still at a 57% discount to the peak levels vs 12%, 15% and 19% discounts in the prime residential, retail and industrial segments respectively.