PLife – CIMB
Steady performer
• Maintain Outperform. PLife’s exposure to the resilient healthcare sector, long lease structures of up to 15 years and built-in rent increases pegged to the CPI give greater clarity to its income streams than the other REITs under our coverage. Downside risks to the topline are almost zero for its Singapore portfolio which contributes 80% to PLife’s revenue. With low asset leverage of 23% and the absence of debt maturity till 2H10, PLife is positioned for stable growth even in a difficult financial climate.
• Acquisition rationale and strategies. While short-term acquisitions are likely to remain opportunistic, medium-term targets will likely come from low-risk countries with quality healthcare assets and transparency in government regulations. Management will also attempt to keep similar leasing arrangements for future acquisitions so as not to erode the defensiveness of the REIT. In the longer term, management intends to cut down concentration risks from its major tenant and sponsor Parkway Holdings to 60%. As offers from cash-strapped healthcare operators continue to grow and capital markets seem to be opening up again, we expect acquisitions to be a kicker for PLife.
• DDM-derived target price raised to S$1.24 from S$1.20. This is based on a lower discount rate of 7.9% from 8.1% earlier due to a lower risk-free rate of 4.8% applied across our REIT universe.
MLT – CIMB
Fully valued
• Downgrade to Neutral from Outperform. The outlook for the manufacturing and logistics industries remains weak and we expect new demand for logistics space to ease further. Nonetheless, MLT’s long weighted average lease to expiry of five years and geographical diversification should ensure visible income over the medium term. Occupancy of 98% as at Mar 09 remained materially higher than the islandwide warehouse occupancy rate of 92.8%.
• Lacking catalysts in the short term. MLT’s strategy of growth via acquisitions looks set to take a backseat in the short term, while upward rental reversions are limited by weak demand.
• DDM-derived target price raised to S$0.62 (from S$0.60). We maintain our estimates but use a lower discount rate of 9.4% (from 9.6%) based on a lower riskfree rate of 4.8% applied across our REIT universe. P/BV for MLT has risen to 0.6x, in line with the sector average. At this level, we believe MLT is fully valued, and downgrade it to Neutral.
FCT – CIMB
Suburban malls to stay resilient
• Maintain Outperform. Our site visits to FCT’s three properties show occupancy and traffic count remaining high. Only finishing touches to asset enhancement works for North Point are left, with most of the tenants in the fitting-out stage now. Retail space is 94% committed despite expectations of weak retail sales growth, while renewed rents and new leases in Northpoint were up 14% in 1H09.
• Outlook for FCT’s properties remains positive. Despite a negative macro environment, we believe that suburban retail malls such as FCT’s will be resilient with no significant new supply in the suburbs, limited lease expiries in 2009 and stepped-up rents incorporated in 86% of its leases.
• Changes in estimates. We increase our occupancy estimate for North Point to 85% from 70% in view of full occupancy from 2H09; and rental growth assumptions across the portfolio to 3% in FY11 from 2%, on expectations of improved economic conditions.
• DDM-derived target price of S$1.12 (from S$1.06). Our DPU estimates increase by 5-5.6% for FY09-11. We also use a lower discount rate of 9.2% from 9.4% earlier with the application of a lower risk-free rate of 4.8% across our REIT universe. Our DDM-derived target price rises accordingly to S$1.12.
CMT – CIMB
Resilient but still expensive
• Maintain Underperform. After our last visit to some of CMT’s malls, we remain confident they can stay resilient despite competition, and our assumptions of 0-5% rental growth for 2009-11 remain realistic. Nonetheless, the impact would likely be offset by capital expenditure on Jurong Entertainment Centre as well as Atrium@Orchard, resulting in flat distribution in the next two years.
• Risks to our estimates include: 1) a poorer-than-expected performance from its centrally located malls and the hotel component in RCS; 2) higher-than-expected construction costs for upcoming asset enhancement works at Jurong Entertainment Centre and Atrium@Orchard; and 3) the creation of a higher-than-expected retail NLA for Atrium @ Orchard.
• DDM-derived target price raised to S$1.30 (from S$1.26). We use a lower discount of 9.5%, down from 9.7% earlier, from a lower risk-free rate of 4.8% applied across our REIT universe. This raises our DDM-derived target price to S$1.30 from S$1.26. Against peers in the SREIT space, CMT appears fairly expensive at 0.8x P/BV and yields of 6% vs. the sector average of 11.3%.
Cambridge – CIMB
Room to catch up
• Maintain Outperform. CREIT has a small asset size with tenant concentration risks, unlike its much larger peers, A-REIT and MLT. Nonetheless, we expect its rental income to stay visible in the medium term with all its tenants on long leaseback arrangements with built-in rent increases.
• Concerns remain but limited lease expiries over next four years. Only 30% of its master tenants are end-users of its industrial space. CREIT also has a heavy reliance on its top 10 tenants for gross revenue. Nonetheless, we take comfort that management is managing its tenants and sub-tenants much more tightly, taking steps to ensure tenant sustainability. Limited lease expiries of only 5.4% over the next four years add some certainty to occupancy sustainability.
• DDM-derived target price raised to S$0.48 (from S$0.47). We maintain our estimates but use a lower discount rate of 9.4% (from 9.6%) based on a lower riskfree rate of 4.8% applied across our REIT universe. CIT remains the cheapest industrial REIT under our coverage. P/BV has risen to 0.5x, but still lags behind the REIT sector’s 0.6x average. We believe there is room for price upside.