CCT – OCBC
Better-than-expected 1Q10 results
Better-than-expected results. CapitaCommercial Trust (CCT) reported its 1Q10 results which came in above our expectations. Net property income increased 11% YoY to S$77.6m, driven by positive rent reversions and lower property tax. CCT signed new leases and renewals of 144,373 sq ft in the last quarter and portfolio occupancy rate improved to 95.1% at end 1Q10. DPU of 1.93 S-cents has been declared for 1Q10, translating to an annualised DPU yield of 6.9%. This exceeds our estimate of 1.79 S-cents by 7.8%.
Further hint of divesting Starhub Centre for condominium redevelopment. There is no new update on Starhub Centre as the development plan is still pending government approval. Despite the increase in occupancy rates at most of CCT’s office buildings in 1Q10, occupancy rate at StarHub Centre had remained flat at 68.2% since the end of 2009. If CCT plans to divest Starhub Centre as an office building, achieving a higher occupancy rate for the building would help to secure a better price for the asset. However, by not doing so, we believe that this could be a further hint that the most likely outcome of the asset review would be a divestment of StarHub Centre for redevelopment into a condominium. Based on our estimates, CCT could potentially reap a gain of S$33.2m (S$0.01 per share) to S$93.9m (S$0.03 per share) from the divestment.
Managing refinancing through CB buyback. CCT had also announced that it repurchased a further S$125.5m of its convertible bond due 2013 for a consideration of S$135m, including accrued interest, and the outstanding amount has now been reduced to S$229.5m. This brings down its potential refinancing requirement in 2010, from S$1,025m at end FY09 to S$658m at end 1Q10. Refinancing for 2011 is making significant inroad and its average debt maturity to put has also increased to 2.1 years. After the bond repurchase and the recent issue of convertible bond, the gearing ratio will edge up marginally from 33.2% to 33.8%.
Fair value raised to S$1.26; Maintain BUY. We have adjusted our FY10 rental growth assumption from -15% to -10%. So far, Grade A office rents have held up better than non-Grade A offices. With the bulk of the FY10 expiring leases coming from its Grade A buildings, we believe that the negative rent reversion this year may not be as bad as we have expected earlier. However, we still hold a cautious view on the office market, given the upcoming supply of new office spaces. Our fair value, which is pegged at parity to RNAV, has now been raised to S$1.26 (previously S$1.19). With a potential total return of 16.4%, we maintain our BUY rating on CCT.
CCT – DBS
Within expectations
At a Glance
• 1Q10 results in line; positive yoy performance but slight dip qoq
• Office rents expected to have troughed but outlook on turnaround point mixed on large incoming supply
• Maintain Hold, TP at $1.23
Comment on Results
Within projections. CCT announced 1Q10 DPU of 1.93cts, up 19.1% yoy and +2.7% qoq, largely boosted by lower interest cost. The results were in line, representing 28% of our full year forecast. At NPI level, income fell 3% qoq to $77.6m on a 1.4% dip in revenue to $101.8m as well as a small hike in cost ratio. In terms of operations, occupancy rose marginally to 95.1% as CCT contracted or renewed 144373sf of leases with tenants from the banking and financial services, legal and real estate services sectors. As part of its capital management exercise, CCT also bought back $140.5m of its 2013 CBs, reducing the quantum to $229.5m.
Jury still out on office rent inflexion point. Management guided that demand for office space had improved and office rents may have reached a trough, although the timing and extent of recovery is still unclear due to the large 4.5m incoming supply. Our view is that office rents have reached a low and are likely to hover at the bottom until more of the new stock is digested. As a result, we expect negative reversions to kick in from 2H10 and 2011. This will put a drag on CCT’s earnings with 12% and 22% of its income due to be renewed this year and next.
Still awaiting asset review plan for Starhub Centre. Redevelopment of Starhub Centre is still awaiting govt approval. It has obtained outline permission to convert the building into a residential/ commercial property.
Hold call retained, TP $1.23. We believe share price catalyst could appear when the group announces further details on its portfolio review exercise, including acquisitions and plans for Starhub Centre. Balance sheet is healthy with gearing of 33.8% and debt maturity of 2.5 years. In the near term, DPU yields are expected to remain at 6.1-5.9% over FY10-11 on the moderated office outlook. Maintain Hold.
Shipping Trusts – OCBC
1Q10 results preview
1Q10 earnings should be fairly stable. We expect FSL Trust (FSLT) and Pacific Shipping Trust (PST) to release 1Q10 results next week, with Rickmers Maritime [RMT, NOT RATED] following later in the season. Earnings are likely to be fairly stable for the trusts and we expect FSLT to meet its guidance of 1.5 US cents DPU (flat QoQ), representing some 55% of cash earnings. PST paid out 43% of cash earnings in 4Q09, with cash used to repay debt and also retained for future acquisitions. We expect PST to retain this strategy and estimate a 1Q10 DPU of 0.80 US cents (-4% QoQ). RMT paid out 0.57 US cents in 4Q09 or 13% of cash earnings but said it could not give forward guidance for DPU because of ongoing discussions with lenders.
But what comes next is key. The most-watched event this time is likely to be how RMT addresses the maturity of a US$130m loan facility due later this month. Speculation is rife regarding its discussions on its US$918.6m in committed vessel purchases and on loan-to-value covenants. In response to a TradeWinds interview with Mr Bertram Rickmers, the Chairman of the RMT board (and of sponsor Rickmers Group), RMT announced that negotiations with its sponsor on its order book “have been positive”. What that means exactly and how it impacts unitholders remains to be seen. Positive developments here, especially in relation to the attitudes of RMT’s lenders, could uplift the broader sector.
Acquisitions, ahoy? RMT is not the only trust that has updates to give – FSLT, for one, has been sitting on the US$28.3m net proceeds from its Sep 2009 placement for about seven months now. We will be keen to get an update on how much closer it is to finding viable acquisition options to employ that cash effectively (so far, the larger unit base has not been offset by additional income or lower expenses). We also note that at this week’s EGM, a proposal to buy back units was passed successfully (after failing last year). How seriously the manager views this tool is another question mark, especially if that money could be used more productively – in our opinion – to repay debt or purchase vessels. PST’s manager has also been talking about acquisitions for a while – we are eager to hear if it believes if conditions are ripe to go a step further down this path, especially as distributable income continues to be retained. Maintain NEUTRAL view, with PST our preferred play.
SREITs – OCBC
1Q10 results preview
In 1Q10, YoY DPU improvements for most... The majority of the S-REIT universe will report 1Q CY10 results over the next two weeks, with CapitaCommercial Trust (CCT) kicking off the season on 16 Apr. Within our coverage universe, we expect Ascott Residence Trust (ART) to show a YoY improvement in DPU on the back of stronger occupancy rates and RevPAU1 . Based on our estimates, Mapletree Logistics Trust and Frasers Centrepoint Trust (FCT) could also see a YoY pick-up in DPU for the quarter due to a boost from recent acquisitions. FCT’s earnings in the preceding year were also impacted by asset works. CapitaMall Trust may also post a YoY increase in DPU as the REIT retained part of its distributable income in 1Q09. We expect Ascendas REIT to report stable operating performance, with this quarter’s DPU up 2.8% YoY.
…but not all. On the other hand, we expect Suntec REIT to report a YoY decline in DPU due primarily to a larger unit base (roughly 1.8b units now versus 1.6b units a year ago). We also estimate that CCT may record a YoY fall in DPU due to dilution from its 2009 rights issue. Meanwhile the Indonesian Rupiah continues to re-rate strongly (6596 IDR/SGD on average in 1Q10 versus 7701 IDR/SGD in 1Q09). The IDR’s ascent over the hedged rate employed by LMIR Trust could impact YoY DPU performance despite a stronger portfolio that has seen steady improvements in occupancy.
Leaping or waiting? Our primary focus this season is on the tone of manager guidance. REIT managers have been fairly aggressive and opportunistic in 2010 so far, with a sizeable S$1,218m worth of acquisitions announced year-to-date. The equity market was also active with FCT’s S$182.2m placement and the listing of Cache Logistics Trust [NOT RATED], whose S$417.3m IPO was 7.8x subscribed. The question is what happens next – market worries about how the second half of this year pans out have been well-documented and the consensus view is for a rather benign economic recovery. How this corresponds to/deviates from REIT managers’ guidance of individual earnings performance will be important to watch. Additionally, the delicate balance between 2H10 uncertainties and market appetite may prompt REIT managers to launch acquisition/fund raising plans sooner rather than later. How managers lay out acquisition and debt re-financing plans will also be worth tracking, in our view. We maintain our OVERWEIGHT stance on the sector. Top picks are ART and Suntec.
CLT – DMG
Ramped up and ready to go
We think Cache Logistics Trust (CLT) is priced right versus it peers at 8.7% yield and is 7.8x over subscribed. Apart from the large market share of 97% of rampup warehouses, there is a high barrier to entry. CLT has quality assets with high (above average) occupancy rates of 94.1%. Without a credit rating, CLT has a debt headroom of another S$100m before reaching its statutory limit of 35%. Assuming a 7-8% target yield (a discount to A-REIT), CLT should be valued at between S$0.96-S$1.09, or 9-24% above its IPO price of S$0.88.
97.3% share of ramp-up warehouses with high barrier to entry. CLT owns 97.3% (by GFA) of ramp-up warehouses in Singapore. As ramp-up warehouses require large sites (>1ha) relative to conventional warehouses, the shortage of such suitable sites in land scarce Singapore, particularly in well-established locations, is a natural barrier to competing new supply.
Quality properties with high occupancy rate. The assets are well located in established logistics clusters, near air and sea transportation ports such as Changi Airport, Jurong Port and PSA Terminal. The assets currently enjoy a higher than average occupancy rate of 94.1% (industrial’s average at 90%).
Ample room to gear up for acquisitions. CLT’s current gearing is 25.9%, lower than most of its peers at 30-40%. As CLT does not have a credit rating, it is only allowed to gear up to a maximum of 35% (versus 60% with rating). Assuming 100% debt financing for new asset acquisitions, this leaves CLT with a debt headroom of ~S$100m.
Priced right against peers. At S$0.88, CLT is priced at 8.7% yield, in between its peers trading yield of 7-11%. A-REIT trades at 7.1% FY10 yield (heydays at 6%) while Cambridge Industrial Trust trades at 11.2% yield (heydays at 7%). Assuming a 7-8% target yield (a 100bps discount to the larger A-REIT trading range of 6-7%), CLT should be valued at between S$0.96-S$1.09, or 9-24% above its IPO price of S$0.88.