K-REIT – Daiwa
No reward for dilution, excess capital
Rating downgraded to 5 (Sell) from 4 (Underperform)
We have downgraded our rating for KREIT to 5 from 4, because we believe the recent three-month unit-price performance is unjustified.
We estimate that the current market value of KREIT, more than any other office S-REIT, can only be justified if investors are willing to pay effective cap rates of 4.5-4.6%, similar to cap rates in the physical market. We regard this as risky, given the historic volatility of the Singapore office market and the imposing CBD supply pipeline for 2010-12.
No reward for rights-issue dilution ahead of acquisitions
We do not believe KREIT should receive the benefit of the doubt for holding excess cash when there is a high degree of risk that it might not come through with a successful, DPU accretive acquisition. The opportunity cost is high, in our opinion, especially for the unitholders that have been diluted already.
A high-yield acquisition in a high-yield market
We do not believe the acquisition of a single asset in Australia (a 50% stake in 275 George Street for A$166m) does much to improve KREIT’s financial efficiency or investment attractiveness. If anything, it only serves to deplete its recent rights issue and divert focus, if the manager’s ultimate objective is to land a major acquisition in Singapore.
DPU forecasts revised down by 2.8-5.6% for FY10-11
We have revised down our DPU forecasts by 2.8% for FY10 and 5.6% for FY11after adjusting downward our rental-renewal assumptions. We have revised up our DPU forecast by 0.6% for FY12 after an upward adjustment to our rental-renewal assumption for KREIT’s associate, One Raffles Quay.
Six-month target price lowered to S$0.96 (from S$1.06)
We have lowered our six-month target price, based on parity to our RNG valuation method (a finite-life Gordon Growth model), to S$0.96 from S$1.06. Our core operating-income estimate assumes average (monthly) passing rents of S$8.50 for Prudential Tower, S$6.50 for Keppel Towers and GE Tower as well as Bugis Junction Towers, and S$10.00 for One Raffles Quay (one-third stake). We have removed the presence of the recently completed Brisbane office acquisition (for A$166m) so that our valuation only considers Singapore income-producing assets discounted at Singapore cap rates and capital-market conditions. We have assumed that all excess cash (as at 31 December 2009) would be used to retire debt.
Suntec – Daiwa
Yield attraction is inadequate
Office-sector and concentration risks still valid
We maintain our 3 (Hold) rating for Suntec and believe the unit price is fairly valued in light of lingering office-sector risks. Suntec has a slightly higher DPU yield (based on our forecasts) compared with other office S-REITs with office exposure, but it also has (arguably) greater concentration risk. We also expect Suntec’s office tenants to feel the pull of the new CBD office supply for FY10-12.
Even though Suntec has a major retail component to buffer the decline in the office segment, Suntec City Mall is not a defensive suburban mall, in our view, and could face some operational weakness in 2010 when the retail sector resettles after the opening of several major malls (indirect competition for Suntec City Mall) on Orchard Road in 2H09.
Opportunities and threats
We believe Suntec City‘s strategic location will be a long-term benefit for its core assets, but that the entire development would have to be refreshed and repositioned to stay relevant against newer projects (Marina Bay Sands and the South Beach project).
Risk of acquiring too soon
We believe the major risk factor would be an over-ambitious acquisition-growth agenda, which could cause Suntec to acquire assets including the Suntec convention centre or MBFC (phase one) before they are suitable (with sufficient income stability and DPU accretion) for injection.
Marginal DPU-forecast revisions
We have revised up our DPU forecasts by 0.7% for FY10 and 0.6% for FY12, but revised down our DPU forecast by 1.9% for FY11 after fine-tuning our forecast assumptions. We still expect a relatively sharp fully-diluted DPU decline of over 21% YoY for FY10 due to a pick-up in borrowing costs, weaker net-property income and the full-year impact of the S$152.9m private placement done on 22 December 2009.
Six-month target price lowered to S$1.30 (from S$1.33)
We have lowered our six-month target price, based on parity to our RNG valuation method (a finite-life Gordon Growth model), to S$1.30 from S$1.33. Our core operating-income estimate assumes average (monthly) passing rents of S$7.50 for Suntec City Office Towers, S$10.75 for Suntec City Mall, and S$10.00 for One Raffles Quay (one-third stake).
CCT – Daiwa
Major challenge: enlarging the office portfolio
Fully-valued for recent stability and future risks
We maintain our 3 (Hold) rating for CCT, and believe the current unit price reflects fully a more stable office market, but with lingering short-term uncertainty ahead of the MBFC phaseone opening (in 2Q10) and an outlook clouded by further supply risks in 2011 and 2012.
Leasing skills likely to be put to the test in FY10-12
The CCT manager’s industry-leading leasing skills were apparent during the most recent office-market peak, as the key buildings in CCT’s portfolio enjoyed high occupancy rates and rents. We believe these skills will be put to the test again as the incoming CBD supply would naturally draw tenants from its existing buildings.
Our thoughts on CCT’s portfolio reconstitution
Before investors get carried away by CCT’s recent portfolio reconstitution announcements, the divestment of Robinson Pointand redevelopment potential of StarHub Centre (almost a done deal, in our opinion, but still subject to approval from other government authorities), we believe it would be critical from a recurrent-income perspective for CCT to be able to swap these assets for investment-grade office assets. With cap rates for Singapore offices starting to narrow, we do not believe it would be easy for CCT to acquire assets in a DPU-accretive manner. We believe potential acquisitions could even be put on hold to facilitate potential debt refinancing for FY11 (when the put option on its S$370m convertible bond could be exercised in May and a S$520m CMBS for Raffles City would be due in September).
DPU forecasts revised down by 0.7-9.0%
We have revised down our DPU forecast by 9.0% to 6.76¢ for FY10. We had assumed (erroneously) that the estimated divestment gain of about S$19m from the disposal of Robinson Point would be distributed to unitholders. The manager has clarified that the proceeds from the disposal would be retained for financial flexibility. Our DPU-forecast revisions for FY11 and FY12 are negligible.
Six-month target-price raised to S$1.19 (from S$1.17)
We have raised our six-month target price, based on parity to our RNG valuation method (a finite-life Gordon Growth model), to S$1.19 from S$1.17, after lowering our (long-term) cost-of-debt assumption to 4.0% from 4.2%. Our core operating income estimate assumes average (monthly) passing rents of S$6.50 for Capital Tower, S$10.00 for Six Battery Road, and S$9.00 for 1 George Street.
LMIR – OCBC
Implications of Matahari Department Stores sale
Matahari sale. Matahari Department Stores (MDS), a related company of LMIR Trust (LMRT), is being sold by its 90.8% owner PT Matahari Putra Prima (MPP). MPP, Indonesia’s largest retailer, owns retailing formats including MDS, Hypermart, Foodmart, Boston Healthcare, Times Bookstore, and Timezone. Its majority owner is the Lippo Group. MDS is being sold to CVC Capital Partners, a private equity group, for IDR 7200b. Most of the cash proceeds will be used by MPP to repay debt. MPP will also get a 20% stake in Meadow Asia, a joint venture that will hold the MDS stake. The proposed deal is currently in process as MPP addresses concerns raised by the local regulatory agency1.
Major tenant. Several MPP businesses including MDS, Hypermart, and Times Bookstore are tenants at LMRT properties. MDS, which has over 80 department stores in Indonesia, is LMRT’s second largest mall tenant – it contributed 4.1% of mall portfolio gross income in FY09. Meanwhile, all seven retail spaces are leased to MPP for a term of 10+10 years starting from 2007, and a significant portion of that space is utilized by MDS. The spaces contribute 18% of portfolio income as of 31 Dec.
Implications. We spoke to LMRT’s manager regarding MDS. The sale has no impact on the current lease agreements between MDS and LMRT. We understand that the people running the business are unchanged – so the ground level relationships between LMRT’s leasing team and MDS should remain largely intact. We also note that Lippo Group will continue to have an interest in MDS through MPP’s stake in Meadow Asia. More broadly, we believe the commercial relationship between LMRT and MDS still makes sense – both on a target customer level and also because LMRT has consistently been able to maintain portfolio occupancies significantly above market. Still there could be a risk of tighter negotiations on rents and lease terms. As for the seven retail spaces, MPP is the master lessee and the option to renew the agreements come 2017 still remains with MPP.
Our view on LMRT is unchanged. Issues that adversely impacted FY09 earnings such as early lease terminations and low retailer budgets for advertising & promotion expenditure will be less of a factor in FY10, in our opinion. We also see increasing chances of an acquisition in the next six to 12 months. A strong IDR, which may continue to be a drag on distributions, is a key risk to our estimates. We maintain our BUY rating and S$0.59 fair value.
SREITs – BT
S-Reits outperform peers for total returns in 2009
They posted returns of 85.6%; Asian Reits performed well as a region: study
REAL estate investment trusts (Reits) in Singapore have outperformed their counterparts in other major markets in terms of total returns in 2009, according to a report released yesterday.
Ernst & Young’s study showed that Reits Singapore and Hong Kong posted returns of 85.6 per cent and 64.5 per cent respectively in 2009.
Malaysia (38.6 per cent) and South Korea (28.4 per cent) also put up strong showings.
By contrast, total returns in the more mature Reit markets were much lower. Returns for Australian Reits were 10.4 per cent in 2009, while Japan’s Reits came in at 6.7 per cent. The largest single Reit market in the world, the United States, witnessed returns of 27.9 per cent.
‘Asian Reits performed well as a region because the Asian economies have generally been more resilient to the financial crisis, underpinned to some extent by China’s economic performance and favourable long-term growth outlook,’ said Liew Choon Wai, assurance partner and head of Singapore real estate for Ernst & Young.
The performance of each country’s Reit market appears to reflect the broader economic sentiment, he added: ‘For Singapore, the economy was seen as particularly vulnerable during the financial melt-down, and it was not surprising that we saw a plunge in Reit returns in 2008 to early 2009, which has subsequently rebounded strongly since March as financial markets stabilise.’
But only Singapore recorded a negative three-year rate of return – of minus 4.15 per cent – of the Asian countries outside of Japan. Rates of return for South Korea, Malaysia and Hong Kong are all in positive territory over the last three years. Japan, a mature economy, had a three-year rate of return of minus 19 per cent.
Ernst & Young also noted that since March 2009, many Reit markets around the world have seen significant increases in share prices and Reits have raised billions of dollars by going back to the stock market for secondary (or follow-on) equity offerings to reduce debt, recapitalise their balance sheets and prepare their businesses for the next wave of growth.