FCT – Daiwa
Potential price drivers are well known
What has changed?
• Frasers Centrepoint Trust (FCT) announced its 2Q10 (FYE June) results on 23 April 2010. The distribution per unit (DPU) of 2.06¢ was 1.5% above forecast.
Impact
• Gross revenue was 1.6% better than our forecast, due largely to higher-than expected (non-rental) revenue from Causeway Point, while net-property income (NPI) was 5.9% above our forecast due to lower-than-expected operating expenses at Northpoint and Anchorpoint (as well as the revenue from Causeway Point). FCT achieved an average rental-reversion increase of 6.6% for renewals and new leases for the quarter. The contributions from the new acquisitions were in line. Higher-than-expected management fees, borrowing costs, and the retention of about S$1.1m in distributable income offset the strong showing at the NPI level.
• We have revised up our DPU forecasts by 0.7-1.7% for FY10-12, after revising up our NPI forecasts by 1.2-1.8% and adjusting downward our net tax adjustments assumptions. Our forecasts do not include any asset-enhancement initiative (AEI) assumptions for Causeway Point. The manager indicated that it expects to announce plans for this project before the next results briefing. The manager expects the construction of Bedok Point (by the sponsor) to be completed in early 4Q10. FCT acquired Northpoint 2 and YewTee Point from the sponsor about one year after they were completed. Given the relatively minor DPU accretion for these two acquisitions (based on the circular forecast), we have not included Bedok Point in our forecasts or valuation.
Valuation
• We have raised our six-month target price, based on our parity to our RNG (a finite-life Gordon Growth model) valuation, to S$1.46 from S$1.44. Our valuation assumes an effective cap rate of 5.25% (a discount rate of 7.75% and an internal growth rate of 2.5% for the remaining leasehold period) for FCT’s portfolio. For Causeway Point, we have assumed a mid-cycle passing rent of S$11 psf.
Catalysts and action
• We maintain our 3 (Hold) rating for FCT, which looks nearly fully-valued (already trading at an 18% premium to its NAV as at 31 March), given the marginal upside to our target price. We also believe the potential unit-price drivers (Causeway Point AEI and Bedok Point acquisition) are well known.
MLT – Daiwa
NPI and borrowing costs below expectations
What has changed?
• Mapletree Logistics Trust (MLT) announced its 1Q10 results on 22 April 2010. Net-property income (NPI) of S$45.77m was 4.0% below our forecast, while distribution per unit (DPU) of 1.50¢ was 3.5% below our forecast.
Impact
• NPI was the major negative variance. Overall occupancy (at 98%) and the arrears ratio (at 1% of annualised gross revenue) were stable. Rental reversions for 1Q10 (3% of the total portfolio and 22% of renewals for 2010) were flat. We believe part of the shortfall was due possibly to a timing issue, as MLT acquired two properties, CEVA (Changi South) in Singapore and Shonan Centre in Japan, in the latter half of the quarter.
• The biggest positive variance was borrowing costs, 14.8% below forecast. MLT’s weighted average annualised interest rate declined to 2.5% as at 31 March 2010, compared with 2.6% as at 31 December 2009. To date, the manager has refinanced S$60m of the S$204m debt due in FY10.
• We have revised up our DPU forecasts by 2.3% for FY10, 0.9% for FY11, and 0.9% for FY12 after adjusting down our NPI assumptions by about 0.3% and borrowing costs by about 11%. Our forecasts do not include any acquisition assumptions.
Valuation
• We have raised our six-month target price, based on parity to our RNG valuation (a finite-life Gordon Growth model), to S$0.87 (from S$0.84) after lowering our core-operating income and cost-of-debt assumptions. Our valuation assumes a blended, effective cap rate of 6.9% (consisting of a discount rate of 8.4% and an internal growth rate of 1.5%) and a blended cost of debt of 3.3%. MLT’s NAV as at 31 March 2010 was S$0.867.
Catalysts and action
• We maintain our 3 (Hold) rating for MLT as the units look fully valued to us, and we think accretive acquisitions might be hard to come by in 2010.
CRCT – Daiwa
Subdued organic growth, rental reversions
What has changed?
• CapitaRetail China Trust (CRCT) announced its 1Q10 results on 23 April 2010. Distribution per unit (DPU) of 2.14¢ was 1.9% above our forecast.
Impact
• Net-property income (NPI) was 1.6% above our forecast. In local currency terms, gross revenue dipped by 0.8% QoQ due to an 11% QoQ drop for the Qibao Mall. NPI (in local currency) was 1.5% above our forecast, with Xizhimen Mall, Anzhen Mall and Wangjing Mall exceeding our forecasts, while Qibao Mall fell short.
• Rental reversions for 1Q10 (involving 52 leases) were subdued at an average of 2.4% above preceding rents. Only Wangjing Mall (21 leases) recorded a positive average rental reversion (of 9.2%). CRCT’s portfolio occupancy improved slightly over the previous quarter to 95.2% from 95.0%. The overall leasing environment appears stable, but still delicate, in our opinion.
• We have revised up our FY10 DPU forecast by 0.5% after revising up our NPI forecast by 0.9%. However, we have revised down our DPU forecast for FY11 by 14.1%. We assumed previously that CRCT would acquire about S$1bn of China-mall properties annually from its sponsor’s private equity funds from the start of FY11. We assume now that these acquisitions will begin from FY12.
Valuation
• We maintain our six-month target price, based on parity to our RNG (a finitelife Gordon Growth model) valuation, of S$1.11. We have assumed an effective cap rate of 6% (consisting of a discount rate of 11% and an internal growth rate of 5% p.a. over the portfolio’s remaining leasehold of 34 years). Our valuation also assumes the inclusion of about S$966m of acquisitions at a yield of 7.5%.
Catalysts and action
• We maintain our 4 (Underperform) rating for CRCT and believe it is on track to record a year-on-year decline in DPU for FY10. Moreover, FY11 could be another listless year for DPU growth, by our estimates, unless CRCT makes a major accretive acquisition.
CRCT – JPM
1Q10 results review
• 1Q10 results slightly ahead of expectation, with trust announcing DPU of S$0.0214/unit, annualizing 7% yield based on Friday’s closing price. The better than expected earnings was a result of lower than expected interest expenses. Note that the trust pays dividend on a semi-annual basis.
• Capital management a big focus this year. Whilst the trust has extended S$88million term loan for another two years to 2012, CRCT has yet to refinance S$283.5million worth of debt (68.2% of total borrowings), comprising S$200.5million term loan due Dec-10 and S$83million short-term money market line. With expectation of RMB appreciation at high level, we see upside risk for the trust to refinance at a better than expected rate. Current gearing for CRCT is 33.8% with average cost of debt at 2.4%.
• Operating performance to turn around in 2H10, in our view. Whilst net property income grew 7.5% in RMB term, the increase is largely a result of new contributions from Xizhimen Phase 2. Net property income for initial portfolio grew only 1% Y/Y due to still challenging Beijing retail market as well as the repositioning of Qibao Mall in Shanghai. That said, as tenant sales started to increase with 9% sequential growth and the new commitment at Qibao Mall to be started in July, we see potential turn around in underlying performance in 2nd half this year.
• We retain our Neutral rating, with Dec-10 DDM based price target at S$1.25/unit. Key risks to our rating and price target include surprises on operating fundamentals both on the upside or downside, and the uncertain timing of the introduction of China REIT code, which is likely to support or even lift up the valuation of the trust.
FCT – CIMB
Asset enhancement on the way
• DPU meets expectations; maintain Outperform. 2QFY10 results met Street and our expectations. 2HFY10 DPU was 54% of our full-year forecast. FY11 growth should be driven by asset enhancement at Causeway Point which could start within the year. We continue to like FCT for its resilient income streams and ability to grow organically and via acquisitions. We maintain our estimates, DDM target price of S$1.73 (discount rate 7.9%) and Outperform rating. We see stock catalysts from organic growth after Causeway Point has been enhanced.
• YTD DPU of 3.97cts met our expectations despite the retention of S$1.1m of distributable income in 2QFY10. YTD net property income of S$36.3m grew strongly by 31.8% yoy, boosted by maiden contributions from North Point 2 and Yew Tee Point in 2Q10.
• Healthy rental reversions. Average rental reversions were positive at 4.5% over preceding rents for the 50,852sf (or 6.4%) of net lettable area renewed in 1HFY10. Reversions were better in the second quarter with a 6.6% increase from the first half of 4.5%. Occupancy was almost full at 99.4%, gaining ground from the 98.6% in Dec 09.
• Upward reversions for Causeway Point from lease expiries and asset enhancement. FCT has only 3.2% of NLA from 36 leases left for renewal in this financial year. However, next year’s leases renewals would be chunky at 30% of NLA. About half of these leases, or 167,342sf, will be from Causeway Point. Separately, the manager is preparing for asset enhancement work at Causeway Point. Announcements should come before the end of 3QFY10. We believe both events represent good upward-reversion opportunities as the occupancy cost of this asset is considerably low at 12% vs. FCT’s weighted average of 14.2%.
• Bedok Mall due for completion in 4Q10. One of the key assets in the pipeline from the sponsor, Bedok Mall, should be completed by 4Q10. With an estimated 1-year gestation, we believe this asset could be ready for injection into FCT by end-CY11, likely after the completion of asset enhancement work at Causeway Point. Management guides that debt and equity will be used for this acquisition.