Singapore Reit – BT
Singapore Retail Reits
Credit Suisse, March 25
UNTIL significant improvements in the credit markets, we believe operation performance will be key to S-Reits’ growth.
We like the retail sector for a number of reasons: 1) retail Reits offer another growth engine from asset enhancement initiatives (AEIs); 2) demand is expected to increase with tourism growth, while supply is not excessive; 3) retail rents and suburban occupancy have shown resilience over recessionary periods; and 4) there is room for rental growth given that prime retail rents are at 55.2 per cent discount to those in Hong Kong and retail space per capita is still one of the lowest among major economies.
Share prices have also declined significantly (-28 per cent) in the last six months, and we believe the sector deserves to trade up given the growth outlook.
We are overweight on the retail sector and CapitaMall Trust (CMT) is our top pick given its superior retail mall management franchise. Both CMT and Frasers Centrepoint Trust (FCT) have strong sponsors, with key catalysts from AEIs and acquisition pipelines. We estimate that for every $100 million of AEIs undertaken, DPU accretion is 4.1 per cent for CMT and 23.1 per cent for FCT.
Suntec – OCBC
Solid defensive play
From here to uncertainty. The “REIT as growth” story was birthed by benevolent circumstances. Markets were strong, credit was easy, and the Singapore economy was flying. The property market was booming and the REITs became a surrogate for riding the wave. Suntec REIT (Suntec) itself saw a whopping cumulative S$2.1b in fair value gains on its property assets since its inception. Its share price hit S$2.13 last summer, a 213% gain over its 2004 IPO price. Circumstances are no longer so accommodating. Share prices of retail/office S-REITs have fallen more than 20% since July, reflecting the breakdown in the credit markets and uncertainty about future growth prospects.
Revising our expectations. We are factoring in this uncertainty into our expectations for Suntec. The deteriorating US economy will likely cause Singapore GDP growth to ease. We expect expansion in the financial sector, a key driver for office rentals, to also ease. The property market seems to have already hit a plateau. Our forecasts assume office rentals will peak by 2009. However, the downward correction should be marginal as the rally has been prematurely arrested.
Strongly positioned for DPU growth. What sets Suntec apart is that over 60% of its Park Mall and Suntec office assets are up for renewal in FY08-09. Currently rented at around S$5 psf per month, these assets offer a huge potential for rental upside. Suntec also has other avenues for improving yield via floor space additions to Park Mall and asset enhancements at its retail locations. Suntec City itself is finally set to realize its true potential as the Marina area blossoms with the completion of the Circle Line and the Integrated Resorts in 2010.
Solid defensive play. The de-rating of S-REITs has given investors another opportunity to take a fresh look at Suntec as a defensive vehicle offering stable cash flows and high yields. It is trading at a 34% discount to its 1Q NAV of S$2.2. There is some concern over the expiry of the two bridge loans in 2009 relating to its One Raffles Quay acquisition, which we think is overdone. We estimate Suntec’s DPU at about 9 S cents in FY08, yielding more than 6% or 400bps over 2-yr Singapore government bond. Maintain BUY at fair value S$1.71.
A-Reit – SGX
24 March 2008, Singapore – Ascendas-MGM Funds Management Limited (the “Manager”), the manager of Ascendas Real Estate Investment Trust (“A-REIT”) is pleased to announce that A-REIT has signed a put and call option agreement (“Option Agreement”) today to acquire 8 Loyang Way 1, a light industrial property for S$25.0 million from Seow Khim Polythelene Co Pte Ltd (the “Vendor”).
Mr Tan Ser Ping, Chief Executive Officer of the Manager said, “We are pleased to have the opportunity to acquire 8 Loyang Way 1 from Seow Khim Polythelene, a leading manufacturer of consumer plastic products. Being a sale and leaseback transaction, this acquisition will provide us with a stable and predictable income stream and will contribute positively to the DPU for our unitholders. “ The acquisition of the Property will be accretive to A-REIT’s DPU. The annualised pro forma financial effect of the acquisition on the DPU for the financial year ended 31 March
2007 would be an additional 0.03 cents per unit (1).
(1) Assuming that: A-REIT had purchased, held and operated the properties for the whole of the
financial year ended 31 March 2007 (based on 77 properties); the acquisitions were funded using
the optimal gearing level of 40% debt and 60% equity; and in respect of the Properties, the
Manager had elected to receive its base fee 80% in cash and 20% in units and its performance fee entirely in units.
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Suntec – Merrill Lynch
Suntec REIT has completed the issue of convertible bonds to the value of S$250mn to refinance upcoming debt. The bonds will bear an interest rate of 3.25% and a yield to maturity of 4.25%. The bonds are due for expiry in 2013 with a conversion price of S$1.968/share. The proceeds will be used to pay down the S$180mn bridging loan due in April 08 while the balance is intended to be used towards the bridging loan due in Oct 08.
Reduction in fair value estimate
Our FY08 and FY09 net earnings estimates have been reduced (<1%) to account for the marginally increased interest expense (average financing cost at Dec 07 3.13%). We have reduced our DCF derived fair value estimate from S$1.67 to S$1.56 due to dilution when the bonds are converted in 2013.
Debt refinancing in 2008
In addition to the debt refinanced through the convertible bond issuance, Suntec has $490mn of debt due to mature in Oct 08. Of this S$420mn will need to be refinanced (S$70mn paid down from convertible proceeds). Suntec also has short term debts of S$75mn which will need to be refinanced in 2008.
Maintain Neutral
Valuations for the stock remain undemanding however we remain cautious on REITs with sizable near term debt expiry. With no visible catalyst and possible headwinds due to debt renewal we maintain our Neutral rating. Our preferred exposure to the Singapore office market remains CapitaCommercial Trust (CMIAF; B-1-7; S$1.98).