A-REIT : CIMB
Overseas expansion by year-end?
FY03/07 results in line. Full-year DPU of 12.8cts is in line with our forecast but 1.5% below consensus estimate. Gross rental revenue was up 25% yoy to S$283m, driven by acquisitions completed during the year (S$340m) and higher overall occupancy rates (97% as at end-FY03/07, up from 95% a year ago).
On course to meet portfolio target. Areit has a portfolio target of S$5bn by 2010 (current S$3.3bn). Some S$148m worth of acquisitions sealed last year are pending completion (build-to-suit projects that are expected to be completed by 1H08). The potential acquisition pipeline includes S$400m-500m from parent Ascendas, S$600m-700m from JTC asset divestments and a development capacity of S$269m.
Strong demand for suburban office space, as more businesses move their noncore operations away from the CBD on account of surging prime office rents. As a result, rental renewal rates at Areits Business and Science Parks and Hi-Tech Industrial properties rose 13% and 19% respectively during the year. About 74% of Business and Science Parks leases and 65% of Hi-Tech Industrial leases are short term and imply the potential for robust rental reversions going forward.
Decision on regional expansion by year-end. Besides outright acquisitions of overseas assets, Areit could participate in parent Ascendas investments in the region by taking stakes in funds that Ascendas has set up in these countries.
FY10 DPU introduced at 14.6cts, based on a portfolio size of S$4.8bn by end-FY10 (average growth of S$500m a year) and an assumed average cap rate of 7% for potential acquisitions. In addition, our FY08-09 DPU forecasts have been raised by 3.2% and 1.6% respectively after tweaking margin assumptions for the different property segments.
DDM-based target price lifted to S$2.90 from S$2.82, on account of our revised DPU forecasts (cost of equity 6.2%). Our new target price implies an FY08 yield of 4.9% (spread of 200bp over the 10-year government bond), which we believe is reasonable. While the size of Areit makes acquisition-led growth incrementally difficult, above-average projected yields of 6% for the next three years make Areit a good defensive stock. We anticipate newsflow on Areits overseas expansion over the next 12 months to provide catalysts for the stock. Maintain Outperform.
CRCT – BT
CRCTs First Quarter 2007 Income Available for Distribution Exceeds Forecast by 9.5%
Pro-active asset management drives occupancy rates and shopper traffic across the portfolio
CapitaRetail China Trust Management Limited (CRCTML), the manager of CapitaRetail China Trust (CRCT), is pleased to announce a S$7.17 million income available for distribution to unitholders of CRCT (Unitholders) for the period from 1 January 2007 to 31 March 2007 (First Quarter 2007). This is S$0.63 million or 9.5% higher than the forecast income available for distribution of S$6.54 million for First Quarter 2007.
Available Distribution Per Unit in CRCT (DPU) for First Quarter 2007 is 1.51 cents (6.11 cents on an annualised basis), which is 9.5% higher than the forecast available DPU for First Quarter 2007 of 1.38 cents (5.58 cents on an annualised basis).
CRCTs gross revenue of S$17.1 million for First Quarter 2007 was S$1.2 million or 6.4% lower than the forecast1 gross revenue for the same period. Net property income was S$1.05 million or 8.9% lower than the forecast1. However, income available for distribution for First Quarter 2007 exceeded forecast1 by 9.5%, mainly due to net interest savings.
The lower than forecast gross revenue and net property income are mainly attributable to tenants at Wangjing Mall and Qibao Mall taking longer than expected time to obtain approvals from relevant local authorities, as well as some pre-termination of leases at Xinwu Mall. Tenants turnover and changes to tenancy mix are part and parcel of the active asset management process. Despite these slight disruptions, the portfolio occupancy rate registered an increase of 3.2% from 89.9% (as at 31 August 2006) to 93.1% (as at 15 April 2007), with all malls in the portfolio showing an improvement over the same period. Separately, rental from new leases at Wangjing Mall, Qibao Mall and Xinwu Mall outperformed forecast rental rates by 11.8%.
MI-REIT : BT
MacarthurCook Reit paints bullish outlook before S’pore debut
MACARTHURCOOK Industrial real estate investment trust (MacarthurCook Reit) , which starts trading here on Thursday, is upbeat about expanding its portfolio, hoping to take advantage of Asia’s growing industrial property market. The Reit, managed by Australia’s MacarthurCook Ltd, has set a target of adding $500 million worth of assets to its portfolio annually and is optimistic of achieving this within a year of listing.
‘We are confident we can achieve our target,’ MacarthurCook Reit chief executive officer Chris Calvert told XFN-Asia in an interview. Funding for further acquisitions would probably come from the sale of additional shares in the Reit, given the company’s rapid expansion plans. ‘With our IPO our gearing is only going to be about 8 per cent, so we can acquire more properties without raising anymore equity. We can just borrow more money till we get to 35 per cent,’ MacarthurCook Reit managing director and chief investment officer Craig Dunstan said, referring to the gearing level the firm is comfortable with.’But the reality is we would probably have to go to the equity market at least once a year, probably for a very long time,’ Mr Dunstan said.
The Reit is selling 247.33 million shares at $1.20 each at its IPO, and another 6 million shares to MacarthurCook Ltd and 7.1 million shares to MacarthurCook’s partners. In all, MacarthurCook Reit will raise $312.5 million, which it will use to pay for its initial portfolio of 12 properties in Singapore, valued at $316.2 million.
The 12 properties are currently 100 per cent-leased and are expected to generate a combined rental income of $24.47 million in the year to March 2008 and $25.82 million in the following financial year. With these assets, Mr Calvert believes the Reit has gained good traction on the industrial property market here, with more opportunities to make further acquisitions. ‘At this stage it is still not a very highly securitised market and we see ample opportunities (for growth),’ he said, adding, ‘we are very busy behind the scenes’.
MacarthurCook Reit will compete with other industrial Reits in Singapore including Ascendas Reit, Mapletree Logistics Trust, and Cambridge Industrial Trust, but the firm believes there is enough room for all players to continue to make yield-accretive acquisitions. ‘There are so few Reits focused on industrial property and so much industrial property out there, we actually don’t come across each other that often,’ Mr Dunstan said. ‘Ascendas Reit is focused on office parks, Mapletree just logistical facilities, whereas our portfolio looks at office parks, logistic facilities and also manufacturing facilities. So we have a broader scope of investment.
‘MacarthurCook Reit is also actively looking for properties in Japan, Malaysia and Hong Kong. And further down the road, it intends to acquire industrial properties in China, South Korea and the Philippines. The firm aims to keep 40 per cent of its assets located in Singapore to provide the Reit with stable returns.
A-REIT : OCBC
Focus on asset size guidance
DPU growth likely to slow. Ascendas REIT (AREIT) will report its 4Q07 results on 18th April after market closes. We are expecting AREIT to report 4Q07 DPU of 3.45 cents, giving full year DPU of 12.90 cents. While FY DPU growth is about 10.3%, this is less than half of the 21.9% growth in FY06. This slowdown is best seen on a sequential basis, with DPU growth of about 7.8%. The growth deceleration reflects the slower rate of acquisition compared to previous years and at much lower yields from the assets bought.
Keep an eye on guidance for acquisition in FY08. As AREIT’s earnings growth has been on the back of acquisition of domestic assets, the key issue is whether the slower pace of acquisition is a one-off or a structural slowdown. Over the last few years, AREIT’s asset size has grown fairly large. It grew by about S$420m in FY04, by S$1000m in FY05 and by S$656m in FY06. For FY07, AREIT is likely to report that it has achieved about S$500m of acquisitions. For the FY07 results, the key would be to focus on management’s guidance (if any) of expected acquisition in FY08.
Market competition is intensifying. The market is definitely getting more competitive. Presently, there are three industrial REIT players in the market, i.e. AREIT, Mapletree Logistics Trust and Cambridge Industrial Trust. A fourth player, MacarthurCook Industrial REIT, is currently being offered and JTC REIT could be listed in 2008. Growth strategies vary very little among the industrial REIT players. They all adopt the same acquisition led growth strategy. Hence we do not anticipate competitive pressures to buy assets and grow earnings to get any easier.
Maintain HOLD. The key worry is AREIT’s high price-to-book ratio of about 1.7 times. This implies that the market continues to believe that rapid growth is still possible. With the industrial REIT space getting very crowded, we see a high probability of disappointment. Hence AREIT has to either moderate expectation or alternatively propose a new approach to growth. There are a few possibilities, one is to venture overseas and another is to try to buy out a rival REIT that is trading at a much higher yield. We value AREIT at S$2.31 based on an asset size of S$4.0bn (S$2.9bn as at 3Q07). We maintain our HOLD rating.
K-REIT : DBS
The future growth will come
Leverage on rental growth in secondary locations. We continue to see bullish rental growth with tight vacancy and bullish rentals in the CBD spilling over to secondary locations. We have noted from property brokers that current asking rents for Keppel Towers is now at S$7.80, up by about 40% from S$5.50 within half a year.
1Q07 DPU below expectations,however, evident of lagged recovery. K-REIT delivered 1Q07 DPU of 1.77 cents, with modest growth of 0.6% sequentially compared to 4Q06. This translates into annualised DPU of 7.18 cents and yield of 2.24%, below our expectations. However, with 72% of NLA expected to be renewed from 2007 to 2010 (11% already renewed in 1Q07), we maintain the view that positive rent reversions from Keppel Towers and the remaining portfolio should flow through to distribution income eventually.
Billion dollar deal reflects rents lagging behind capital values. We highlight the recent landmark deal for office transaction with Capitaland unlocking value through the sale of Temasek Tower for S$1.039bn, or S$1,550 psf to Macquarie Global Property Advisors illustrating lagged effect of rental reversions. We understand from market sources that the yield based on the transaction is only about 2%, which implies unit capital values are pricing in strong growth in later years by market players. We find great disparity between our range of RNAV estimate for K-Reit based on i) Income method (FY08 NPI yield, 4.5% cap rate) which derives RNAV of S$2.04 per unit; ii) market comparison methodology (S$2,172 psf for Prudential Tower; S$1,550 psf for KT/GE and Bugis Junction) accordingly derives S$4.57 per unit which is
consistent with this view.
Upgrade to Buy, raising DCF assumptions. With raised rental assumptions for Keppel Towers (44% NPI contribution) and terminal discount proxied by cap rate of 4.5%, we raise our DCF based target price to S$3.70 on the premise that K-REIT’s assets would continue to flush out under-rented space moving forward and rental growth to be reflected by flow through to
distribution income. Upgrade to Buy.