Suntec – UOBKH

Limited Upside From Dilution Impact

Suntec REIT has 56% exposure by net lettable area (NLA) to the office segment, and the rest in retail. Its portfolio includes three properties: Suntec City, Park Mall and Chijmes.

Key driver from office segment. Suntec REIT will ride on the upside of rental reversions for both the office and retail segments. Majority of Suntec REIT’s office leases are expected to expire in FY08 and FY09 (32.6% and 40.4% of NLA respectively). While decent retail rental renewals are expected, retail rental reversions generally increase at a lower rate than office rentals. In addition, asset enhancements of Suntec City Mall are near completion except for the Fashion Zone at Galleria scheduled to complete by this month. This leaves little room for Suntec REIT to do yield enhancements if it does not acquire additional assets, except for Park Mall which pales in impact to Suntec City where comparison with yield is concerned.

Dilution impact from deferred units. Suntec REIT will encounter dilution impact from their 207m deferred new units issued at IPO, which will start in Jun 08 through six equal semi-annual payments of S$34.5m each, and the deferred units are not subjected to any lock-up period.

Formula 1 to affect retail sales. With the Formula 1 race to be staged in Singapore in 2008-12, we expect retail sales in Suntec City to suffer as safety requirements to barricade the street circuit will obstruct access to the mall.

Initiate with HOLD, fair value: S$2.31. We initiate coverage of Suntec REIT with HOLD and a fair value of S$2.31, implying an upside of 10.4% and a total return of 14.33%. In deriving our fair value, we have factored in the full dilution impact from the deferred units. We suggest entry at S$2.00.

June 25, 2007 Suntec No Comments »

K-REIT : UOBKH

Smallest But Purest

Among the office REITs under our coverage, K-REIT Asia (K-REIT) is the smallest in terms of asset size (S$677m). It is, however, a pure office play consisting of four quality office buildings: Prudential Tower (44%), Keppel Towers, GE Tower and Bugis Junction Tower.

Strong rental reversions as key growth driver. With its portfolio consisting of purely prime office assets, K-REIT will benefit from strong rental reversions with its substantial and increasing lease expiries till at least 2010. Lease expiries for 2008-2010 are 14.3%, 24.8% and 27.6% respectively. Committed portfolio occupancy levels have already hit a high of 99.4%. Despite limited upside from occupancy enhancement and little likelihood of any asset-enhancement programmes, we believe upside from rental revisions will drive the stock.

DPU upside from acquisitions. Management has targetted acquisitions of S$2b within the next few years, with initial focus on Singapore because of the great growth potential in the office segment here. In the long term, however, it has a Pan-Asian commercial mandate for its investment portfolio. Its acquisition target of S$2b is achievable for a few reasons: a) K-REIT has been inactive in terms of acquisitions since it was initiated, and b) its parent Keppel Land, whch owns a number of quality office assets, might inject these assets into K-REIT for an assetlight structure.

Initiate coverage with BUY; target price: S$3.39. We initiate coverage of K-REIT with BUY at a target price of S$3.39, implying a 15.9% upside and a total return of 18.4% based on our DCF model. With the recent share price weakness, this is a good opportunity to accumulate the stock. We are conservative on K-REIT’s acquisitions and factor in only about S$150m p.a. in view of risks of delay in its acquisition schedule, in part due to the difficulty of acquiring high-yield assets.

June 25, 2007 KepREIT No Comments »

CCT – UOBKH

More Than An Office Play

With the largest portfolio of prime office properties in Singapore, CapitaCommercial Trust (CCT) has the highest exposure to the Singapore office segment. Its portfolio also consists of office and business park properties in Malaysia through a 30% stake in Quill Capital Trust (QCT) and a 7.4% stake in Malaysian Commercial Development Fund.

Strong rental reversions to drive DPU. CCT will benefit from substantial office lease renewals in the next few years. 70.8% of its portfolio comprises office assets. Of these, 74.6% will see their leases expire between now and FY09. We expect strong positive rental reversions to drive its DPU. Asking rents for 6 Battery Road is already at a high of S$17.5 psf pm, and that the momentum will last well into FY09.

Retail yields to improve from Raffles City asset enhancement. CCT will begin its RCS phase 1 AEI works in 2Q07, which are scheduled for completion by 4Q07. This will add 41,000 sf (+12%) of net lettable area (NLA) and increase net property income (NPI) by S$7.0m p.a. following an increase in average rentals from S$14.55 psf pm to S$15.05 psf pm. Phases 2 and 3 will add another 0.15m-0.2m sf of NLA with the creation of retail space at Basement 2 and 3, with direct access to City Hall MRT station and the new Esplanade MRT station. Estimated net increase in monthly rents for the increased retail NLA is S$10.00-15.00 psf, contributing to a net increase in NPI of S$12.6m-25.2m and yielding an ROI of 20-29%.

Aggressive acquisition trail not without risks. CCT will likely stay focused on office as it targets to grow its asset size to S$5.0b-6.0b by FY09, with QCT as its preferred vehicle for exposure to Malaysia. QCT intends to double its portfolio to RM500m from RM276m by end-07 with the injection of four new assets. Key risk, however, arises from the difficulty of acquiring yield-accretive office assets amid keen competition going after high capital values, which results in lower yields. This could be the fundamental reason for CCT to look to China for potential acquisitions. Also, CCT’s unsuccessful offer for Temasek Tower may suggest limited leverage on its parent CapitaLand for potential yield-accretive injections.

Initiate with BUY; target price S$3.72. We initiate coverage of CCT with BUY at a target price of S$3.72, implying a 17.0% upside and a total return of 23.9%. We factor in acquisitions of S$500m-800m p.a. to reach an investment portfolio size of S$5.6b by end-09.

June 25, 2007 CCT No Comments »

Cambridge Reits – CL
CAMBRIDGE REITS, cl remains a BUY with target price $1.14 (from $1.04)

– As the property sector continues to outperform the market year-to-date, we believe there is still value in the industrial space, which has been lagging the whole property sector in general. Cambridge Industrial Trust (CReit) remains our top pick in the industrial space, offering good acquisition growth domestically as well as overseas; and it also offers an added M&A angle of being a good potential target going forward. BUY.

– 7th acquisition announced since listing. CReit has announced another acquisition this month. Though a relatively small asset worth only S$5.8m, this is CReit.s seventh acquisition since listing boosting its portfolio value from S$520m at listing to S$686m (+32%). This is an industrial and warehouse asset that sits on 4,958sqm of land with a rentable area of 4,705 sqm. We estimate the asset yield to be 7.3%. The lease terms are 10 years with the typical 5% rental escalation on the commencement of the third, fifth, seventh and ninth year. Presscrete Engineering Pte Ltd, which provides specialist engineering servises will be the tenant for the asset.

– Industrial segment a laggard to the property sector . The industrial space remains a laggard to the property sector largely due to the nature of its rental reversions, which are limited to 1.5-2.5% growth YoY; unlike office or retail rents which have risen from between 10% to 60% YoY. However, we believe CReit is still a strong buy because of its acquisition potential. It has CWT, C&P, YCH and Mitsui as strong credible partners to feed its pipeline both locally as well as overseas.

– Growth via acquisitions; expect equity raising . Additionally, Cambridge has signed a total of S$108m MOU.s (Memorandum Of Understanding). The Reit has obtained a credit rating of BBB- from S&P, which allows it to gear up to 60%. Post the latest acquisition, Cambridge.s gearing stands at 50%. It can acquire another S$90m of assets before its gearing hits 56%, at which point we would expect Cambridge to raise new equity to achieve its targeted S$500m worth of acquisitions in 2007.

– Valuations undemanding . a laggard to Industrial Reit peers . Our target price of S$1.14, which gives 19% upside, is derived from pegging a 5.5% required return on CReit.s FY08CL DPU of 6.26c. CReit trades at a about 25% discount to MapleTree Logistics (MLT). We believe it deserves to trade at least on par with MLT given its acquisition pipeline domestically and overseas. It is our top pick in the industrial space.

June 22, 2007 ESR No Comments »

Ascott Reits – CL
ASCOTT REITS, cl remains a BUY with target price $2.41 (from $2.16)

  • The recent announcement of the F1 Grand Prix in Singapore has propelled Singapore into a tourist receipts magnet. The government.s ambitious target of attracting 17 million visitors by 2015 is underpinned by strong FDI inflows, the two integrated resorts, MICE activities, medical tourism hub status, leisure travel as well as the F1 Grand Prix. Tourist arrivals are expected to outstrip supply of hotels rooms and we remain convicted that ART.s Revpar is set to increase further in Singapore. Maintain BUY
  • Grand Prix spillover . The Singapore government announced on 11 May 2007 that the city state will host the first street circuit F1 race in Asia. Flag off is expected to commenced in 4Q08 and generate receipts estimated at S$100m annually. Consequently, this has seen hotel rates and even some serviced apartment rates increasing by at least 50% during race periods and 20% annually. Given that these races can stretch as long as a week, we expect some spillover demand for serviced apartments which is currently regulated for stays longer than seven days.
  • Robust FDI inflows . The increasing FDI inflows into the Asia region reaffirm our bullish view on ART, especially in Singapore where FDI inflows are estimated to reach US$19.9bn in 2007. Coupled with the government.s efforts to draw 17 million visitors by 2015 through the slew of massive projects, we expect positive impact on the Revpar for serviced apartments and hotels. Accordingly, Revpar in Singapore is at record highs of S$176.8 and we have assumed S$191 in our model. Despite new supply for hotels and serviced apartments in the pipeline, we expect demand to outstrip supply given the timing lag of oncoming supply.
  • Diversified revenue base . Strong FDI inflows into Asia and ART.s diversified asset base across the Pan Asian region in our view are the pillars of growth and stability for the reit. Currently, Singapore contributes 24% of ART.s revenue and we expect the strong demand for hotel rooms and serviced apartments in Singapore should continue to bode well for its Singapore operations.
  • Maintain BUY. In tandem with the narrowing yield gap of S-Reits with the Singapore 10yr bond yields, we have lowered our required yield by 50bps to 4.5% from the previous 5%. This implies a 20% upside from our target price of S$2.41 based on FY08’s DPU of 10.8c and a 4.6% dividend yield for FY07.

June 22, 2007 ART No Comments »