K-REIT – Lehman
Organic Growth via Rental Revision
Investment Conclusion
We initiate coverage of K-REIT with a 1-Overweight investment rating on the shares and a
12-month dividend discount model–derived price target of S$3.42. Based on our FY08E distribution yield projection of 4%, 120bp above the Singapore Government 10-year bond, we estimate K-REIT offers potential return of 36% at the current price. (This is an excerpt from our full initiation report – “Robust Organic Growth via Rental Revision”.
Summary
CDLHTrust – UOBKH
Ride on the rising tourism in Singapore
CDL Hospitality Trusts (CDREIT) is a key beneficiary of rising tourism in Singapore, with 2,324 hotel rooms or 6.2% of total hotel room inventory. Its hotel portfolio is located strategically close to the CBD and Orchard Road area, which allows it to cater to both business and leisure travellers. The supply of hotel rooms in Singapore will increase only 3% and 4% in 2007 and 2008 respectively, compared with an estimated 6% annual increase in tourist arrival. We believe the hotel occupancy in Singapore will likely remain at a high 80% level, which could further spike up room rates in the next two years.
Room for growth via acquisitions. Since its listing in Jul 06, CDREIT has made two acquisitions valued at S$344m in total, increasing asset under management (AUM) by 35% to S$1.4b. With a low gearing (3Q07: 23%), the trust currently has a debt capacity of S$550m for asset acquisitions, assuming a 45% optimal gearing ratio. Given CDREIT’s acquisition track record and strong sponsor (Millennium & Copthorne Hotel plc), we are forecasting S$300m asset acquisition per year with an initial yield of 5.5% in FY08 and FY09.
Maintain BUY with target price raised to S$2.77, based on DCF (WACC: 6.1%; terminal growth rate: 1.5%). We expect DPU to grow at a CAGR of 16.7% from FY07 to FY09, underpinned by both acquisitions and organic growth. Acquisition growth contributes S$0.66/share or 24% of our fair value estimate. Following its recent share price correction, CDREIT now is trading at FY08 DPU yield of 4.8%. Yield accretive-acquisitions and RevPAR growth will be the key positive share price catalysts.
Key risks include an economic downturn, higher interest rates and slower-than expected
asset growth.
Cambridge – Phillip
We met up with management recently for an update on the investment portfolio as well as the plans going forward.
Investment portfolio. CIT’s portfolio has grown from 27 properties worth $531.0 million at the time of IPO to 40 properties with an asset value of $862.7 million currently. The properties are located in Singapore and are spread across a diversified range of sub-sectors. All the properties enjoy 100% occupancies with a WALE of 7.0 years based on FY07 gross revenue. As at 30 Oct 2007, CIT has signed $94.0 million worth of MOUs.
Equity fund raising (EFR). CIT completed its first EFR in October, succesfully raising $193.9 million. 277 million units were placed out to institutional investors. Gearing currently stands at 38%. CIT is able to gear up to 60% according to the property funds guideline. However most REITs tend to bring down their gearing once they hit the 45%-50% range.
Acquisitions. CIT remains focused on the local industrial market in the near term, and highlights that there are still approximately 96.0 million sqf of investment grade stock in the market. However management has hinted possible in-road into the Malaysian or Chinese markets. Although being independent in status and lacking a developer sponsor, CIT maintains a strategic partnership with CWT Limited and Mitsui & Co. through a joint investment in CITM, the Manager of CIT. Thus CIT will be able to leverage on its partners’ strength.
Valuation. We project FY08 DPU of 5.94 cents and based on the closing price of $0.685, this translates to a yield of 8.67%. Our projections are conservative and we have not factored in contributions from further acquisitions. Therefore we believe that accretive acquisitions carried out in the coming periods will drive the dividend payout even higher. The high yield alone is compelling enough to warrant our attention. Maintain BUY.
MI-REIT – Phillip
A String Of Purchases
Developments to-date. MI-REIT added 6 properties to its portfolio following our last report on 25 Oct.. Additionally, MIREIT made its first overseas foray into the Japanese industrial market with the purchase of the Asahi Ohmiya warehouse located in the Saitama Prefecture, in the Greater Tokyo area.
With the acquisition, MI-REIT effectively entered into a strategic alliance with Atlas Partners Japan (APJ), a Japanese real estate fund and asset management firm, as asset management of the property will be outsourced to APJ. This further strengthens MI-REIT’s presence in Japan as APJ will also source for acquisition opportunities and provide asset management support for MI-REIT’s future Japanese acquisitions.
Annual revaluations on six properties resulted in an increase of $9.8 million to book value. Together with an earlier revaluation carried out in September on another six properties, total revaluation added $47.6 million to its book over its initial value at listing. Including all annouced
acquisitions, MI-REIT counts 22 properties in its portfolio with an asset value of $646.9 million and average lease term to expiry of 6.64 years. All the acquisitions are expected to be funded by debt and this will bring gearing up to 39% for FY08.
MI-REIT will steer its portfolio towards an allocation of 50% in Singapore, 20% in Japan and the remainder spread across other Asian markets.
Valuation. With the 6 acquisitions, we raise our FY08 DPU assumption by 4.7% from 7.41 cents to 7.76 cents and a 3 years DPU CAGR of 9.78% At the closing price of $1.13, these translate to a yield of 6.7% for FY08 and 8.1% for FY09. We increase our 12 month forward fair value from $1.39 to $1.43. Cost of debt assumption is reduced slightly to 3.8% as the Japanese denominated borrowing has a lower cost of funding. Our projected earnings remain conservative as we do not factor in unannouced acquisitions. Maintain BUY.
Shipping Trusts – UOBKH
Singapore Shipping Trusts
Last week we hosted a roadshow for Rickmers Maritime (RMT) in Singapore and Malaysia. One of the key points raised during the roadshow was whether part of RMT’s dividend yield of 9-10% p.a. was a return of investor capital. Management disagreed with this general perception as RMT is retaining 25% of distributable cash for reinvestment. This differs from First Ship Lease Trust (FSLT) and Pacific Shipping Trust’s (PST) which pay out 100% of distributable cash.
RMT’s management said if the trust were a closed-end fund with no further equity injection, its equity would be intact (and would remain the same as the equity at beginning of the trust) when its initial fleet expires at the end of its economic life, some 30 years hence. By retaining 25% of its distributable cash, RMT’s equity will self-sustaining and invested into new ships. The retention of part of its distributable cash flow will ensure the perpetuity of RMT. We believe at current price, RMT offers great value as investors are effectively investing in a perpetual entity that pays a high dividend yield of 9-10% p.a.
Meanwhile, the other two trusts, PST and FSLT are forging ahead with ship acquisitions. PST recently announced the acquisition of two 1,800 TEU containerships from its sponsor. Pacific International Lines (PIL). These ships will be chartered back to PIL on a bareboat basis for eight years. This acquisition will enlarge PST’s fleet by 16%. FSLT recently acquired two 47,496 dwt product tankers from the Groda Shipping & Transportation group and were concurrently leased back to the sellers on a bareboat basis for a base term of seven years.
We remain positive on Singapore shipping trusts and have included them among our top defensive stock picks for 2008. Their defensive earnings are underpinned by long-term ship charter contracts of fixed charter rates for 5-12 years. Shipping trusts offer net yields of 9-12% p.a. and potential upside from accretive ship acquisitions. Maintain BUY on RMT (Target: US$1.19/S$1.72), PST (Target: US$0.50) and FSLT (Target: US$1.22/S$1.76).