A-REIT – OCBC
Results dragged by higher costs
Results dragged by higher costs. Ascendas REIT’s (A-REIT) 4Q FY09/10 results came in below our expectations. Gross revenue fell 0.4% YoY to S$103.9m, attributable to the decommissioning of 1 Senoko Avenue. Net property income fell by a larger 4.2% to S$76.8m due to lower revenue, higher operating expenses with the expiry of the property tax rebate and land rental rebate, and higher utilities expenses. The valuation of A-REIT’s property portfolio was written down by S$53.7m following its annual revaluation exercise. DPU of 2.73 S-cents has been declared for 4Q FY09/10 and this is 17.8% below our forecast DPU of 3.32 S-cents. But the variance was largely attributable to the one-off upfront fees for its loans that slashed away 0.35 S-cents from DPU, as well as the higher operating expenses.
Mix signals from operating data. Portfolio occupancy rate declined to 95.7% at the end of March (end Dec 09: 96.5%) but was largely due to the addition of new business park space from the recently completed tower block at Plaza8@CBP. Affected by the economic slowdown, some tenants had also reduced their floor areas upon their lease renewals, which also contributed to the decline in occupancy rate. On a positive note, A-REIT secured more new tenants in 4Q FY09/10 and has continued to see a pickup in leasing enquiry. While management believes that rents are bottoming out, any increase would only be visible after 2-3 quarters, depending on economic growth. Nevertheless, A-REIT should continue to enjoy positive rental reversions in FY10/11 as the expiring rents are still below the current market asking rents.
Embarking on new AEIs. A-REIT plans to redevelop 1 Senoko Avenue to target potential tenants in the food processing industry. Further value can be extracted from this property by raising its plot ratio from the current 0.6x to 2.5x. The development will take place in two phases and complete in 18 months. For 10 Toh Guan Road, A-REIT plans to remove the existing Automated Storage and Retrieval System and reposition the property for higher value usage.
Maintain HOLD. There is no cause for concern despite the below expectation results as this was largely due to the oneoff upfront fees. While we have raised our forecasts for operating expenses, our cost of debt has also been lowered from 4.2% to 3.94% (A-REIT’s weighted average all-in funding cost). As a result, the net impact is an increase in our FY10/11 DPU estimate to 13.8 S-cents (previously 12.9 S-cents), which translates to a DPU yield of 7%. Our fair value has also been raised to S$1.85 (previously S$1.76). With a potential total return of just 0.1%, we maintain our HOLD rating on A-REIT.
A-REIT – CIMB
Industrials looking up
• Results in line; upgrade to Neutral from Underperform. FY10 DPU of 13.1cts was in line with Street and our expectations, forming 101% of our estimate. We make moderate adjustments to incorporate actual occupancy rates in the last quarter. Our DPU estimates decrease by 2% for FY11-12. We also introduce a DPU forecast of 14.8cts for FY13. Our DDM-based target price (discount rate 8.4%) is intact at S$2.02. AREIT offers a forward dividend yield of 7.3%. With a strong economic recovery, we believe the outlook is looking up for industrialists, auguring well for its portfolio. We upgrade the stock to Neutral in view of this. AREIT also offers some hedge against inflation with 32.5% of its leases structured with CPIpegged adjustments. Nonetheless, it is expensive against peers at a 26% premium to book value.
• FY10 net property income of S$320m was up 7.9% yoy from positive rental reversions (1-3% p.a.) in multi-tenanted buildings and step-up increases for singletenant buildings. Even more positive was take-up by new tenants, which had risen significantly qoq for Business & Science Parks (+13.8% qoq) and Light Industrial (+9% qoq). Portfolio occupancy as at Mar 10 moderated to 95.7%, down from 97.8% last year. Business Parks’ occupancy dipped 6.7% pts from last year. However, this was in part due to the late completion of DBS Asia Hub and Plaza 8 @ CBP where tenants were still fitting out.
• Rental income to increase organically and through acquisitions. Revenue contributions from FY11 are expected to climb with the following: 1) acquisitions of DBS Asia Hub and 31 Joo Koon Circle last year, with the sales only completing in Mar 2010; 2) full contributions from development projects completed late last year: 71 Alps Avenue, Plaza 8 @ CBP and 38A Kim Chuan Road; 3) anticipated improved occupancy; and 4) step-up increases in sale-and-leaseback leases. Management guides that sale-and-leaseback acquisitions as well as build-to-suit buildings remain possible in Singapore in the coming year. Although it remains interested in overseas acquisitions, there is nothing on the horizon yet. Current asset leverage is comfortable at 31.6%, with debt headroom of S$1.2bn if we assume asset leverage of 45%.
CCT – CIMB
Holding up well
• Results in line; Upgrade to Outperform. 1Q10 results met Street and our expectations (26% of full year forecast). With strong economic recovery and good take up of new office supply, we believe a revival in office rents and occupancy will come sooner than expected. We increase our rental growth expectations for CCT’s Grade A assets by 1-4%, taking into account updated lease expiry information; and assume 3-5% growth for other assets (from flat growth). After our changes, our DPU estimates rise 7-9% between 2010-12. Our DDM target price (discount rate 7.8%) rises accordingly to S$1.26 (from S$1.09). Our new target price offers a prospective total return of 15.2% from a potential price upside of 8.6% and forward dividend yield of 6.8%. CCT is the cheapest large cap SREIT (0.8x P/BV) with CMT and AREIT already above book value. We believe this is opportune time to accumulate the stock in view of improving office demand indicators. Upgrade to Outperform from Underperform.
• 1Q DPU of 1.93cts (CIMB-GK 7.3cts). Distributable income of S$54.3m and DPU of 1.93cts formed 26% of full year forecast. DPU grew 19.3% yoy and 2.6% qoq. Net property income (NPI) of S$77.6m was up 11% yoy mainly on positive rental reversions and/or higher average occupancies for Capital Tower, Six Battery Road, Robinson Point, Market Street Carpark and Wilkie Edge. CCT portfolio occupancy rose 0.3%-pts to 95.1%. Grade A offices in the portfolio As at 31 Mar 09, average portfolio passing rents stood at S$8.64 psf, a marginal 1.4%-point improvement from S$8.52 psf (31 Dec 09).
• Recovery of office market could be sooner than expected. Net new demand for office space has traditionally shown high correlation to economic movements. Strong GDP numbers and good pre-leasing of new office supply suggests that recovery of rents and occupancy could be sooner than expected.
• CCT well-prepared to take on acquisition opportunities. We view CCT’s strategy to 1) divest non-core assets, 2) undertake capital management and 3) prepare for the debt maturity in 2011 positively. We believe CCT will be ready to take on acquisition opportunities when they arise.
StarHill Gbl – DBS
A landmark transaction
• Asset portfolio to grow to S$2.6bn post acquisition of 2 Malaysian malls
• Partially funded through new issuance of convertible preference units (“CPUs”)
• Accretion to earnings estimated at 6-13% in FY10-11F
• Maintain BUY, TP revised to S$0.73.
Adding Malaysia exposure in its portfolio. Starhill Global REIT (SGREIT) has signed an agreement to purchase Lot 10 and Starhill Gallery (located in central Kuala Lumpur, Malaysia) from Bursa-listed Starhill REIT at a cost of RM 1.03 b (S$450.1m). Upon completion of the transaction, SGREIT’s portfolio of assets will increase by 20% to S$2.6bn.
Issuing new convertible units. The transaction will be funded through an asset-backed securitisation structure, involving cash (31% of purchase price), debt (32%) and the issuance of new convertible preference units (“CPUs”) (39%). The CPUs, amounting to RM405 m (est. S$177m) will be paid an annual coupon of 5.65%, and convertible into new SGREIT units at a 30% premium to the last vwap upon listing of the CPUs. There is a moratorium of 3 years before the conversion, which will turn mandatory after 7 years.
6-13% accretion to FY10-11F distributions. Upon completion, we estimate distribution income accretion of c6-13% in FY10-11F. We have also accounted for the conversion of all of the CPUs in year 3 into new SGREIT units.
BUY, TP adjusted S$0.73. Maintain our BUY call, with adjusted target price of S$0.73 assuming the full conversion of the CPUs from FY13 after moratorium period. Further price catalyst in our view may come from: (i) stronger than expected 1Q10 results, and (ii) clarity of its refinancing plans for majority of its loans due in Sept 2010.
CCT – BT
CCT posts 19.7% higher Q1 distributable income
CAPITACOMMERCIAL Trust has posted a distributable income of $54.3 million for the first quarter of 2010, up 19.7 per cent from the same period a year ago.
Reflecting the resilience of its portfolio, committed occupancy rate rose to 95.1 per cent for the quarter from 94.8 per cent for the fourth quarter of last year. Its Grade A office committed occupancy rate also rose to 99.1 per cent from 98.7 per cent.
The office landlord’s distribution per unit (DPU) is 1.93 cents, a year-on-year decrease of 40.4 per cent from 3.24 cents in Q1 2009. On an adjusted for rights basis, DPU rose 19.1 per cent from 1.62 cents. However, there is no distribution payment this quarter as CCT distributes semi-annually, which will be in July.
Q1 gross rental income rose 7.1 per cent year-on-year to $93.6 million, while Q1 gross revenue rose 4.5 per cent to $101.8 million. Net property income improved 11 per cent to $77.6 million. Its total current assets stand at $401.6 million while its current liabilities are lesser at $313.1 million. Its cash and cash equivalents at the end of the period are $172.73 million, up from $70.49 million a year ago.
In addition, the repurchased convertible bonds due 2013 have been cancelled and the outstanding aggregate principal amount of convertible bonds due 2013 has been reduced to S$229.5 million.
Lynette Leong, chief executive officer of CCT Management, said: ‘The strong performance for this quarter is attributed to our good track record of proactive leasing, with the signing up of leases with positive rental reversions, and further strengthening building occupancies.’
She added: ‘Moreover, successful efforts in refinancing debt well ahead of maturity dates, lengthening the average debt maturity, diversifying the sources of funding, and keeping the proportion of secured debt low also boosted the bottom line.’
CCT shares closed two cents higher yesterday, at $1.16.