A-REIT – OCBC
1Q DPU boosted by one-off items
1Q11 DPU boosted by one-off items. Ascendas REIT (AREIT) reported 1Q FY10/11 gross revenue of S$113.6m, up 10.9% YoY and 9.3% QoQ. Net property income of S$87.3m also rose 8.2% YoY and 13.8% QoQ. A-REIT will pay out 3.37 S cents to unitholders, down 6.9% YoY because of an enlarged unit base (+11.2%) over the previous year. On a QoQ basis, DPU actually jumped 23.4% but we note that this is largely due to one-off items. To recap, one-off upfront fees for loans dented 4Q DPU by a magnitude of 0.35 S cents. This quarter’s DPU also included favorable non-recurring items of about S$4.8m (approximately 0.26 cents). Stripping out these items for both 1Q11 and 4Q10, DPU rose a marginal 1% QoQ.
Stable portfolio performance. Portfolio occupancy slipped marginally to 95.6% at end Jun versus 95.7% at end Mar and 96.5% at end Dec. Occupancy of its multi-tenanted buildings clocked in at 91.5% versus 91.2% three months ago and 93.1% six months ago. Occupancies remained above market averages across asset types. The manager secured 41,619 sqm of lease renewals and 29,919 sqm of new leases during the quarter, achieving positive rental reversions in two of four sub-sectors. 11.8% of property income remains due for renewal this financial year. Guidance was cautiously optimistic noting positive data points in Singapore are offset by increasing uncertainty in the global macroeconomic outlook. Nonetheless, with low lease expiry for this year, a diversified portfolio, and a weighted average lease to expiry of 4.9 years, A-REIT said it saw “a high degree of predictability and sustainability of earnings”‘.
Most expensive industrial S-REIT. As of 30 Jun, A-REIT has an aggregate leverage of 34.1%, which is fairly comfortable in our view. A-REIT is currently trading at a 26.6% premium to book (as of 30 Jun). Based on 1Q11 DPU, it also trades at an annualized yield of 6.7% (or 6.2% after stripping out one-off items). In comparison, other industrial REITS are trading at an average 7.6% discount-to-book and an average trailing yield of 8.6%. While we believe A-REIT may deserve a premium because of its size and the quality of its portfolio, valuations do not seem compelling at the moment. With a change in analyst coverage, we will be reviewing our assumptions and this may affect our FY11 and FY12 estimates. As such, we put our previous HOLD rating and S$1.85 fair value UNDER REVIEW. A-REIT will trade ex-distribution on 22 Jul
PLife – DMG
Adds another five Japanese nursing homes
Further enhances presence in Japan. PREIT bought another five nursing home properties in Japan, for a total of JPY3.1b (~S$46.8m). These properties come with an expected net property yield of 8.35%. We estimate that this acquisition (expected to be completed by 23 Jul 10), would boost our FY10 DPU to 9.3 S¢, from 9.1 S¢. With this acquisition, PREIT’s Japanese assets will have a value of S$408m, which is what management has been building towards. With the additional contribution from the new assets, based on our DDM valuation we derive a TP of S$1.66 (from S$1.62), which would translate into 5.6% FY10 yield. PREIT currently trades at 6.8% FY10 yield. Maintain BUY.
Achieves minimum asset size of S$400m. PREIT has been building up towards a minimum asset size of S$400m for its Japan portfolio, which is one of the requirements to allow it to switch tax structure. Its Japan assets are acquired under the “Tokumei Kumiai” (TK) structure. Switching to the “Tokutei Mokuteki Kaisha” (TMK) structure could allow PREIT to lower its withholding tax from 20% to 5%. The TMK structure issues bonds (TMK bonds) or preferred shares to its investors. Hence, the other requirement to consider, for a successful switch to the TMK structure, is the Japanese bond market’s reception to the bond issue. Hence, even though PREIT has achieved the minimum asset size needed, it does not need to immediately switch structure.
Gearing still below 40%. The acquisition of these five nursing homes will be funded entirely by debt. PREIT’s gearing would rise to 34% at end FY10. This leaves it with debt headroom of ~S$140m before crossing 40% gearing.
CCT – CIMB
Starhub Centre sold
Starhub Centre sold for S$380m
Maintain OUTPERFORM and target price of S$1.37. CCT announced that it will be selling Starhub Centre to Fraser Centrepoint Limited (FCL) for S$380m or 42.5% above the last valuation. The proceeds from the sale are earmarked for acquisitions and debt repayment. We are positive on the sale due to the premium sale price and believe the lowered asset leverage positions CCT well for future refinancing needs.
We maintain our earnings estimates and DDM target price of S$1.37 (discount rate 7.8%), pending the announcement of their 2Q10 results on 21 Jul. More clarity on the repayment quantum, potential accretive acquisitions and early refinancing of debt will provide further catalysts for this stock. Our current DPU estimate of 7.99 Scts for FY10 represents a 6.1% yield and CCT remains the cheapest large cap stock in the SREIT space.
The news
Sale price of S$380m, 42.5% above valuation. The sale of Starhub Centre was conducted via a formal tender process by an appointed property consultant. The sale of Starhub Centre and the non-participation of CCT in the redevelopment of a nonoffice asset falls within our expectations (see our note entitled “Holding up well”, 19 Apr 2010) and is in line with the management’s intention to move away from non-core assets towards Grade A assets. Nevertheless, we are pleasantly surprised that the sale price of S$380m or S$1,354psf for NLA of 280,066 sq ft is 42.5% higher than Starhub Centre’s last valuation as at Jun 2010, which was S$266.7m or S$952psf. After adjusting for divestment-related costs, the estimated net gain to CCT is about S$109.1m. FCL intends to redevelop Starhub Centre as a high-end residential and retail development. The sale is expected to be completed around 16 Sep 2010.
Use of sale proceeds. Management intends to use the sale proceeds for acquisitions and/or to pare down debt. Management had also implied earlier that a special dividend is unlikely. We believe that CCT will acquire another office asset in the near term although potential targets are unclear at this point of time.
Valuation and recommendation
DPU for FY10 will fall 2-7% over FY10-11 with no debt repayment. Based on 1Q10 results, Starhub Centre contributed only 4% to CCT’s portfolio net property income. Assuming Starhub Centre contributes nine months of revenue (if the sale is completed by end-Sep) and there is no repayment of debt, DPU for FY10 will fall 2-7% over FY10-11. However, with the paring down of debt, the interest expense is likely to fall by 4Q10, moderating the fall in DPU, in our view.
Asset leverage to reach below 30% by Sep. The current asset leverage of CCT is 32% and we expect this to go down to about 26% after the completion of the sale in Sep, assuming there are no other key developments. We believe this highly improves CCT’s position to refinance its relatively chunky debt, which is due to expire in 2011, at more attractive interest rates.
Maintain estimates and target price for now. We are positive on the sale of Starhub Centre at an attractive premium over valuation and believe this will provide short-term catalysts for this stock. We maintain our current DPU estimates, pending the release of CCT’s 2Q10 results on 21 Jul. More clarity on the repayment quantum, potential accretive acquisitions and early refinancing of debt will provide further catalysts for this stock. Our current DPU estimate of 7.99 Scts for FY10 represents a 6.1% yield and CCT remains the cheapest large cap stock in the SREIT space. We maintain our OUTPERFORM call at an unchanged DDM target price of S$1.37 (discount rate 7.8%).
CCT – DBSV
Divests Starhub Centre
• Sells Starhub Centre for $380m or $1357psf of NLA
• Locks in $109m gain, lifts book NAV to $1.41
• Maintain Hold, TP raised to $1.30
Sells Starhub Centre. CCT has announced it has entered into an agreement to sell Starhub Centre to Frasers Centrepoint Ltd for $380m or $1357psf of NLA. This is slightly ahead of our earlier expectation of $320-350m. URA has approved the change of use at Starhub Centre into a commercial-residential development where 20-40% of its 330000sf GFA must be retained for commercial use. Plot ratio remains unchanged at 4.9x. The Singapore Land Authority has also given an in-principle lease upgrade approval for an extension of the lease to a fresh 99-year lease.
Locks in $109m gain. The sale was expected and conducted as part of CCT’s portfolio evaluation strategy. The sale price is 42.5% above the latest valuation of $266.7m as at June 2010. CCT is expected to recognise a gain of $109.1m from the sale and boost book NAV to $1.41. The sale will give the group greater financial flexibility to pursue acquisitions or repay debt. Net proceeds of $375.8m would expand the group’s gross cash position to $548.5m and lowers gearing to an estimated 19.3%. Starhub Centre contributed about 4% to net property income in 1Q10 based on its current occupancy level of 68.2%.
Maintain Hold, TP raised to 1.30. In terms of earnings impact, FY11 DPU is lowered by 3% to 6.5cts taking into account earnings vacuum from the sale, offset by interest savings. However, DCF is raised to $1.30 with the additional cashflow from the divestment. Maintain Hold with a revised DCF-backed TP of $1.30. Catalysts, in our view, for the stock remains its ability to pursue yield accretive acquisitions to replenish its portfolio or potential redevelopment of some of its older properties.
CCT – DMG
Sale of Starhub Centre; one-off gain of 4¢/share
Sale of Starhub Centre; one-off gain of 3.9¢ per share. As part of CCT’s portfolio reconstitution strategy, CCT entered into an S&P with Frasers Centrepoint Limited to sell Starhub Centre for S$380m. This comes at a 42.5% gain over its last appraised value of S$267m. After adjusting for divestment fee and other costs, the net gain works out to S$109m, a one-off gain of 3.9¢ per share. Management has no intentions of paying special dividends but to pursue possible acquisition opportunities and/or to repay debt. Maintain NEUTRAL.
Rationale for property sale instead of redevelopment. In January, management alluded that their portfolio reconstitution strategy plans would include the divestment or redevelopment of properties that has reached the optimal stage of their lifecycle. They have evaluated the alternatives and have decided against redeveloping Starhub Centre into a residential property in view of exposing the group to undue residential development and market risks.
Best possible way of unlocking value. We are in favour of this divestment as Starhub Centre is nestled away from the main financial district and, in our view, will struggle to command reasonable market rents, in the long-term. At the peak of the office market, Starhub Centre had an average passing rent of below S$5/sqft, significantly lower than most schemes in the Raffles Place and Tanjong Pagar vicinity.
Stronger balance sheet; maintain NEUTRAL. The sale of Starhub Centre will have no material impact on DPU as it contributes to only 4% of CCT’s net property income. Management has reiterated that they will use the proceeds to pursue possible acquisition and/or repay debt. Recall, CCT has S$85m debt due for expiry in 2010 and a further S$658m in 2011. CCT has a cash holding of S$173m as of Mar 2010, which will likely increase to over S$550m after this sale. This puts it in good stead for greater financial flexibility. We reduce our FY10 DPU estimate by 3.2% to 7.2¢. Maintain NEUTRAL and TP of S$1.24.