FCT – DBS
Paving the way for the next quantum leap
• Resilient suburban portfolio
• Two pronged re-rating catalyst from improving size and liquidity to drive growth
• Potential for upside earnings surprise
• Reiterate Buy with TP of $1.25
Resilient portfolio to withstand economic downturn. FCT’s well-positioned portfolio of suburban retail assets, within huge population catchment areas, offers investors DPU and portfolio value resilience in the current moderated economic environment. Rents are still reverting positively with occupancy remaining close to full.
Twin growth drivers. FCT holds significant potential for organic and inorganic growth. Within its current portfolio, enhancement works at Northpoint I has resulted in a 20% hike in average rents, which should impact earnings positively from FY10. New contribution potential from unlocking value at Causeway Point, which should be significant, has not been included into our existing forecast, thus raising the possibility of further earnings upside surprise in the longer run. Planned injection of its pipeline assets; namely Northpoint II and YewTee Point, are expected to expand asset base significantly, in view of the low base effect, while the current lower cost of capital would mean accretive additions even through using equity as currency.
BUY for sustained yields, TP S$1.25. The investment case for FCT lies in its portfolio resilience, good long-term earnings, valuation growth potential and potential rerating from expanding its asset size and improving liquidity and free float. Our target price of $1.25 based on an adjusted WACC of 6.5% and beta of 0.7x offers potential 17% absolute return over the next 12 months.
MapleTree – OCBC
Likely to turn to inorganic growth
Waiting for stabilization. We expect Mapletree Logistics Trust (MLT) to report 3Q results in three weeks’ time and are keen to get an update on occupancy levels (prev: 98.3%). We will also focus on the tone of guidance versus 2Q, where the manager cautioned that “the environment remains challenging and occupancy and rental rates may be under pressure”. Business conditions have improved since then and this may ease downward pressure on rents and capital values, in our view. Still, there is a big difference between stabilization and recovery.
Turning to inorganic growth. We believe tenant retention, as opposed to positive rent reversion, continues to be a key priority for the existing portfolio. As such, MLT may turn to acquisitions to support and grow DPU. MLT is geared at 37.8% debt-to-assets. At 2Q results, the manager said it would not raise equity solely to reduce gearing. But it did indicate interest in third-party acquisitions, provided these buys are coupled with an equity issue to at least maintain (or reduce) current gearing levels. MLT’s rerating (up 114% YTD) and relatively looser credit conditions are conducive to this stance. The sticking point is property yields, which would have to be fairly high for the transaction to be DPU accretive. Third-party buys are more likely to clear this hurdle than the S$300m development pipeline from MLT’s sponsor in our view.
Prefer top-tier industrial names. We find a large divergence in value among the industrial REIT space. Price to book range is wide: MacarthurCook Industrial REIT [NOT RATED] trades at the low of 0.36x 2Q CY09 NAV but A-REIT [NR] trades at 1.21x book. The sub-sector is highly geared, with an average leverage of 39.7%. A-REIT has raised equity twice, and Cambridge Industrial Trust [NR] has raised funds once. This space offers some of the highest yield opportunities but gearing levels and an uncertain outlook continue to concern us. Consequently, we prefer to focus on the top-tier industrial names for now.
Attractive total return. We find MLT’s valuations (0.84x book, 7.4% estimated FY09 yield) fairly attractive. We also like the quality and diversification of its portfolio. We have not made any changes to our earnings estimates but have lowered our discount and cap rate assumptions to less rigorous levels. We revise our fair value estimate for MLT to S$0.78 from S$0.52 previously. While upside of 5% to current price is limited, total return of 12% is attractive (in our view). Upgrade to BUY.
ART – OCBC
Exploit the gap
Performance lags CDL-HT. Ascott Residence Trust (ART) has re-rated 15% since our July upgrade and has achieved our prior S$0.97 fair value. However, its performance lags closest peer CDL-Hospitality Trusts [CDLHT, NOT RATED]. Using end-June 2007 as a base, both S-REITs saw a roughly 83% decline to trough values. But CDL-HT has recovered 260% from its trough versus ART’s 177% recovery. A similar discrepancy plays out in price to book; CDL-HT is trading at 1.08x 2Q09 NAV while ART trades only at 0.71x 2Q09 NAV. There is also a 227 basis point trailing yield differential between the two.
Exploit the gap. Key drivers of this discrepancy, in our view: 1) CDL-HT is an earlier beneficiary of economic stabilization and any nascent recovery (shorter-stay hotels versus extended-stay serviced residences); 2) it is a purer IR play; 3) its balance sheet is stronger, with 19.3% leverage versus ART’s 40.7% leverage; which has led to 4) the market pricing in the possibility of a cash call. We believe value can be extracted from the gap between the two hospitality REITs even when those balance sheet risks are quantified.
FDI expected to bottom in 2009. The United Nations trade and development agency UNCTAD expects global FDI inflows to bottom in 2009 at below US$1.2 trillion and slowly recover to US$1.4t in 2010 and
US$1.8t in 2011. FDI flows are a fair proxy for corporate spend and travel and consequently, the health of the extended-stay business. We believe Pan-Asian markets, where ART operates, will continue to be attractive FDI destinations. We think ART may shine in the coming months as corporate spend and travel gradually return. At 3Q09 results next month, we will look for evidence of occupancy stabilization – the next challenge will be increasing rates, which requires sustained high occupancy levels.
Attractive, even with cash call assumption. We maintain our earnings estimates but lower our discount rate inputs. Our new SOTP value for ART is S$1.40, and we charge a 15% discount to derive a fair value estimate of S$1.19 (prev: S$0.97). Fresh equity could be utilized to support asset enhancement plans and fund acquisitions, but the manager has the luxury/inclination to wait for further re-rating, in our opinion. Note that with a hypothetical equity issue raising S$150m, our SOTP value could fall to S$1.28 (S$0.87 issue price, 10% discount to current price) or to S$1.21 (S$0.68, 30% discount). This still covers our S$1.19 fair value. Maintain BUY (30% total return).
PLife – DBS
Poised to acquire
• Keen interests seen from investors during our conference in New York
• Clear strategies and downside rental protection are key positive attributes, in our view
• Expect acquisitions in near term, capitalizing on debt headroom and low interest rates
• Reiterate Buy, TP: S$1.37 equating to 26% total return upside
Downside rental protection key attribute. We hosted PREIT at our conference in New York earlier this month to good reception with US based fund managers/investors. The downside rental protection and clear strategies presented by management caught on well with investors. Based on the CPI+1% formula, minimum rental for its Singapore Hospitals are set to grow by 4.36% to at least S$52.7m in its third year of lease (23 Aug ‘09 – 22Aug ‘10).
Acquisitions very likely in near term. We expect management to deliver on acquisitions (funded by debt) in the near term for further growth, possibly scale up in Japan, capitalizing on the yield differential between NPI yield and cost of funds, and the aging population. Management has already put in place a diversified source of funding (S$500 MTN facility, S$126m untapped bank facilities and S$50m 3-year revolving Murabaha facility).
Expect to trade towards NAV, Buy (TP: S$1.37). We like PREIT for its defensive features, and its opportunity for growth via acquisitions coupled with strong fundamentals – high interest cover of 6.9x, fixed 100% interest rate for debt and high gearing headroom (up to S$963m). We think PREIT could trade up towards NAV of S$1.34 as the REIT sector further re-rates. Revised DCF TP up to S$1.37 (WACC 6.6%) as we adjust our terminal growth rate to 2%, based on an assumed CPI rate of 1% over the long term – still below the average 10 year historical CPI rate (1.4%).
PLife – Phillip
VALUE + GROWTH
We met up with the management of Parkway Life REIT (Plife) for an update that bolstered our optimistic view on the REIT.
Value. Parkway Life REIT (Plife) has an underlying stable of properties that commands relatively stable cash flows with a growth component. As a reiteration, approximately 80% of gross revenue is contributed from the Singapore portfolio of hospital which grows at an annual rate of CPI + 1%. During the last revision in August 09, this was set at 4.36%. The Japan properties currently account for 20% of gross revenue. Being exposed to the defensive healthcare industry, its portfolio of properties faces little risk of asset devaluation as they are secured by relatively long leases with stable cash flows.
Growth. Besides organic growth from upward revision of rental, Plife has a growth strategy from asset enhancement and acquisition. Management revealed that it has dedicated personnel who are exploring the possibility of maximizing plot ratio of its assets and also efficient utilization of available spaces. In a recent asset enhancement initiative that was completed on the Matsudo property, incremental return of 19% to its gross revenue was achieved against capital spending on the property of 7%. Management also indicated that it is targeting the Singapore, Malaysia, Japan and Australia markets for potential expansion opportunities given the demographic and infrastructure suitabilities.
The other impetus for growth is the low gearing ratio of the REIT. Current gearing is 23% with total debt of $242 million. Assuming a gearing level of 35%, Plife has the capacity of take on an additional $200 million of debt for its expansion. In terms of funding sources, Plife has in-place a $50 million credit facility of Islamic financing and also a $500 million MTM program. The Islamic financing opens up an avenue of funding sources and also potential investor base.
Recommendation and valuation. We feel that the REIT sector has resolved most of the refinancing debacle that has plagued the sector in the past year. With credit issue out of the way, REIT managers should be turning their attentions to their growth strategy. In our opinion, Plife has satisfied all the criteria in carrying out an expansion.