Cambridge – Phillip
Cambridge Industrial Trust (“CIT”) is the first independent industrial real estate investment trust (REIT) in Singapore, established with the objective of investing directly or indirectly in income-producing real estate related assets, which are used mainly for industrial (including warehousing) purposes. CIT’s initial portfolio comprised 27 properties, which are all located in Singapore. CIT’s key financial objectives are to deliver stable and regular distributions to unitholders, in addition to long-term growth in distribution per unit, by acquiring high yielding properties both locally and overseas.
Diverse Industrial Portfolio. CIT’s initial portfolio comprised 27 properties with approximately 426,725 sq m of lettable area. Majority of the properties are located close to current and future transport infrastructure and designed with building specification that can cater to a wide range of tenant mix. As at Dec 06, the total appraised value of the whole portfolio amounted to S$531m, leading to an annualised gross revenue for FY06A of S$43.2m. All the leases of the properties are structured under a built-in rental escalation model, providing a stable income rise for CIT. The weighted average term of the leases by acquisition value for the properties is approximately 7.9 years.
Positive Industrial Outlook. According to Urban Redevelopment Authority (URA), prices of multiple-user factory space increased by 6.8% and rentals increased by 4.1% for 2006. In addition, occupancy rates improved to 90%. We expect to continue to see more rental and capital growth in the industrial sector. Currently, Singapore has rises to the 20th position in industrial space cost- six places higher than last year.This is due to the strong manufacturing sector as well as the spillover effect from the surging office market. The timing of CIT’s acquisitions is well planned with the upturn of the industrial market. The recent acquistions done after IPO are focused on light industrial buildings. We expect the current high rental rate in the commerical sector to divert some attention to light industrial sector. Moreover, we view the rental escalation model structured into the long leases of CIT positively, due to the expected stability in rental rate .
First independent industrial REIT. Both CIT and its manager are not controlled by or dependent on any property developer. CIT will be viewed more positively when it approaches property owners who are also property developers, as they would not be perceived as being in competition with the property owner’s property related development businesses. Moreover, some of the property owners themselves will become unitholders as well as tenants of CIT. This aligned interest creates advantages and flexibility for CIT to access a large pool of potential properties located locally or overseas.
Stable and high distribution. At the current share price of S$0.81, our forecasted annual yield is 6.8% and 7.5% for FY07 and FY08 respectively. This is much higher than the Singapore REITs average yield. FY07F yield represents a healthy spread of 3.73% as compared to a risk free rate of 3.07% (Singapore 10-year bond as of 12 March 2007), and is above the market average spread of 1.10%. Compared to the other listed REITs in Singapore as well as other major REITs markets, CIT REIT offers an attractive risk adjusted investment with high distribution.
Valuation. Using Dividend Discount Model (DDM), our derived fair value for CIT is S$0.95. This translates to a 5.7% yield and a price to net asset value of 1.43x for FY07F. In our relative comparison, our fair value is above the average S-REITs/industrial yield and below the average price to net asset value. At the current price of S$0.81, we recommend a Buy for CIT with a 18% return.
FirstREIT – ML
Initiating with a Buy rating, PO of S$0.88/share
We are initiating coverage on First REIT with a Buy rating and a 12-month price objective of S$0.88/share, which implies a total return of 25%. Our price objective is based on a 5% premium to our DCF valuation, which is calculated using a discount rate of 11.3%. Further upside could come from acquisition growth.
Healthcare focus
First REIT is the only Singapore REIT (S-REIT) focusing on the Asian healthcare industry. We are positive on the outlook for the Asian healthcare industry. The strong fundamentals reflect rising disposable income, growth in elective surgeries, rising new investment, and the need for REITs to assist industry growth.
Strong acquisition pipeline
We believe First REIT is in a strong position to double its IPO investment portfolio from S$257mn to over S$500mn in the next three years. First REIT has a conservative gearing level, and can benefit from sponsor Lippo Karawaci’s regional contacts in the healthcare industry.
Investment risks
A sustained downturn in hospital operations, which may reduce the ability of Lippo Karawaci (87% tenant) to pay rental commitments to First REIT. Any deterioration in the Indonesian economic environment may also restrict the ability of special purpose companies domiciled in Indonesia to repatriate funds to Singapore.
AllCo – DBS
Well positioned here and Down Under
FY06 distribution slightly below expections. Allco has reported FY06 results slightly below expectations, delivering DPU of 1.52 cents for 4Q06 and 4.58 cents for the full year which is 5.3% above the REIT manager’s forecast. This translates to annualised distribution yield of 4.8% for FY06. Rental revenue grew 40% y-oy, mainly attributed to higher contributions from Central Park (Perth). Allco also reported higher assessment of revaluation of its asset portfolio which brings about accretion to asset values by S$125.3m or rise of 17.9% to S$823.6m which raised NAV per unit to S$1.17. The increase in portfolio asset value is mainly contributed by revaluation of Central Park by 32.5%, with the rest of the Singapore properties bringing about increase in value averaging 10.6%.
Upward revaluation reflects strength of physical market. The upward valuation of its assets come as no surprise as rental growth provides the lead-up to rise in capital values. This is exemplified by the Perth asset – the long lease secured with Hamersley Iron increased in rentals by 20% to A$360 psm, topped with stepped rental increments. We would expect the strength of the office market to lead to continual trend of rising capital values, thereby increasing Allco’s debt capacity and is well-positioned for acquisitions moving forward.
Asset enhancement delayed. We previously expected retail asset enhancement for China Square Central to commence this year. However, we understand the time line for the enhancement is delayed, with possibly more updates by 3Q07. To recap, China Square Central is under a master lease expiring in 2012 with yearly income support of S$17.55m with Allco attributing 40% of any upside in excess of the rental support. Despite the delay for the asset enhancement, we expect office rental reversions to be strong with 70% expiring in FY07 and FY08 and NPI to exceed the income support by FY08. Leasing activities for maiden acquisition 55 Market Street is on-going and currently about 50% committed.
Maintain Buy, TP upgraded to S$ 1.45 on higher expectations of office rental growth. We continue to be positive on Allco’s rental growth prospects, with assets well leveraged to strong fundamentals in the Singapore and Australian office markets. With 70% of China Square Central’s office leases up for renewal in the next two years, Allco is poised to benefit from the rising Singapore office market. We are maintaining our Buy recommendation for Allco with raised target price of S$ 1.45 after raising our office rental assumptions.
ART – DBS
Equity Raising
Equity fund raising. ART has proposed to raise gross proceeds of S$199m to part finance a target acquisition of five properties. Certain part of the proceeds will also be used to re-finance loans drawn for the acquisition of a 26.8% effective interest in the Vietnam Target Property, which was completed in Jan 2007 as well as other general corporate and working capital purposes. With the completion of the equity fund raising, the trust’s annualised 2007 forecast DPU will rise from 6.53 cents to 7.14 cents, an increase of 9.4%.
Maintain Buy with target price of S$2.20. As ART is the only pan-Asian serviced apartment trust, there’s little competition in acquiring properties to enhance their portfolio. We have revised our 2007 DPU estimates upwards from 5.2 cents to 6.7 cents due to lower provision of income tax from 18% to 15%. Projected MI is also reduced following management’s guidance in the latest circular. We expect earnings to continue to grow given the management’s plan to achieve property portfolio of S$2b by 2008. We maintain our fair value of S$2.20, backed by our DCF calculations. Maintain Buy.
MMP – BT
Macquarie Reit in talks to buy assets worth US$1b
SINGAPORE – Singapore’s Macquarie MEAG Prime Real Estate Investment Trust (Reit) said on Monday that it is in talks to buy assets worth over US$1 billion in total, and expects to make the first deal since its 2005 listing by June.
The trust — controlled by Australia’s Macquarie Bank and MEAG, the asset management arm of German reinsurer Munich Re ERGG.DE — is also in talks to take a stake in a non-Singaporean property trust.
The deals would be the first acquisitions for Macquarie MEAG which listed two years ago with just two office-mall complexes in its portfolio. These two properties are now valued at $1.5 billion (US$78.5 million).
‘We are confident we can announce something by the first half,’ Franklin Heng, chief executive officer of Macquarie Pacific Star Prime Reit Management told Reuters in an interview. Mr Heng said the trust was in talks to buy properties in Malaysia, Japan and China, ranging in value from US$10 million to US$1 billion. ‘I’ve got different balls in the air for each country. But (our first acquisition) is very unlikely to be in Singapore,’ he said.
The trust has a current gearing of about 26 per cent but this could be raised to 45 per cent as the trust plans to borrow about $530 million from banks to fund its acquisitions. ‘Our long-term optimal gearing ratio is between 40-45 per cent but there’s no stopping us to leverage us to 50-55 per cent if we find the right deal. But if that happens, I will put in a bridging loan and issue new equity to bring the gearing back down,’ he said.
He added that the trust would focus on growth outside of Singapore because competition for commercial assets in the city-state was intense. — REUTERS