Singapore REITs - UOB Kay Hian 2017-01-26: 4Q16 Results Of AREIT, Suntec REIT And Parkway Life REIT All In Line With Expectations

REITs − Singapore - UOB Kay Hian 2017-01-26: 4Q16: Results Of AREIT, Suntec REIT And Parkway Life REIT All In Line With Expectations ASCENDAS REAL ESTATE INV TRUST A17U.SI PARKWAYLIFE REIT C2PU.SI SUNTEC REAL ESTATE INV TRUST T82U.SI

REITs − Singapore: 4Q16 Results Of AREIT, Suntec REIT And Parkway Life REIT All In Line With Expectations

  • Ascendas REIT (AREIT)’s rental reversions remained positive, though management remains cautious on rental outlook. Maintain BUY on AREIT with target price of S$2.71.
  • Suntec REIT’s Park Mall redevelopment could see S$12m incremental revenues, though the expected valuation seems to be on the high side. Maintain HOLD on Suntec with a target of S$1.80. 
  • Parkway Life (PREIT)’s management opines that the portfolio's favourable rental lease structure will continue to drive delivery of long-term fundamentals. Maintain HOLD with a target price of S$2.50. 
  • Maintain OVERWEIGHT.



WHAT’S NEW

  • Ascendas REIT (AREIT), Suntec REIT and Parkway Life (PREIT) have reported their quarterly results.


ACTION 


Ascendas REIT (AREIT SP/BUY/S$2.40/Target: S$2.71) 


Results in line with expectations. 

  • Maintain BUY with a target price of S$2.71, based on a two-stage dividend discount model (required rate of return: 6.4%, terminal growth rate: 1.2%). 
  • 3QFY17 DPU of 3.993 S cents was up 1.2% yoy, as conversion of Exchange Collateralised Securities (ECS) into units (1.2% dilution) slightly offset NPI growth. 
  • 3QFY17 gross revenue grew 7.6% yoy, underpinned by recent acquisitions of ONE@Changi City and the Australian portfolio. 
  • NPI increased 9.0% yoy despite higher property opex (+3.9% yoy) related to the aforementioned acquisitions. 
  • The results came in within our expectations, with 9MFY17 DPU representing 76% of full-year forecast.

Positive rental reversion of 3.0% across the portfolio in 3QFY17, higher than in the last quarter (+0.9%). 

  • This was underpinned by Business & Science Parks (+6.1%), Hispecs industrial (+3.5%), Light Industrial (+1.8%) and Logistics & Distribution (+1.1%). The Business & Science Parks segments account for nearly 60% and 40% of overall expiring leases in FY17 and FY18 respectively. 
  • Management continues to expect modest rental reversion (flat or low single digit) for the remainder of FY17 as average passing rents are near spot market rents. AREIT intends to leverage on the parent group’s marketing strength in attracting new MNC leases.
  • Well-spread out lease expiry profile, with 6.0% of assets by rental income due for renewal in FY17, and 19.1% due in FY18. Within the Singapore portfolio, single-user assets only account for 1.4% and 1.0% of expiries respectively in FY17 and FY18. 
  • Management also expects upside upon backfilling of the 11.9% vacant space in its Singapore portfolio.

Potential dilution from ECS conversion. 

  • In 2010, AREIT issued S$300m in ECS to fund a collateral loan taken over 19 assets. In 3QFY17, S$66.5m of the ECS were converted into units. 
  • Following AREIT’s announcement last evening of the acceptance in late conversions, a total of S$62.3m in ECS units will/have been converted post 3QFY17, implying marginal dilution of about 1.1%.

Strategic expansion of business park footprint as the micro-market registers muted supply and healthy pre-commitments. 

  • AREIT is likely to be a beneficiary of tight business park space, with CBRE estimating no known notable uncommitted supply going forward. 
  • In addition, the completion of Dec 16’s announced S$420m Science Park blocks acquisition in 1Q17 will allow AREIT to expand its business/science park exposure to 36% from the current 33%. 
  • Besides increasing its footprint in the relatively more defensive business/science park segment, we also note that the proposed transaction is in line with management's preferred target geography of Singapore. 
  • Gearing is expected to hit 34-35% from the current 32% post completion.

Acquisition strategy. 

  • Management’s preferred target geography remains Singapore. The REIT manager has not ruled out further expansion of its Australian footprint (14% of AUM).

AEI update. 

  • AREIT has embarked on a S$7.7m AEI at the Gemini, due for completion in 3Q17.



SUNTEC REIT (SUN SP/HOLD/S$1.695/Target: S$1.80) 


Results in line with expectations, maintain HOLD with DDM-based target price of S$1.80 (required rate of return: 6.7%, terminal growth: 1.4%). 

  • 4Q16 DPU of 2.60 S cents was down 5.6% yoy, mainly due to divestment of Park Mall and cessation of income support for MBFC properties. 
  • 4Q16 gross revenue was up 1.6% yoy, mainly due to contributions from 177 Pacific Highway while net property income declined 2.9% yoy on lower income contribution from Suntec City and Suntec Singapore as well as the divestment of Park Mall. 
  • The results were within expectations, with FY16 accounting for 99% of full-year estimates.

Plans to re-develop Park Mall into new Grade-A commercial building unveiled. 

  • The 10-storey building consists of two wings with an approximate net lettable area of 352,000 sf of office space across eight floors and 15,000 sf of retail space on one floor. 
  • The development cost is estimated at S$800m with scheduled completion by end-19, which implies a breakeven cost of S$2,180 psf and expected valuation of above S$2,500 psf including development margin, which seems on the high side. However, assuming S$8-10 psf pm for rents would mean an incremental revenue stream of S$11.9m p.a. for Suntec’s 30% share.

Retail rentals expected to stabilise going forward. 

  • Overall committed portfolio rents stood at S$11.20 psf pm, similar to the previous quarter, exhibiting early signs of stabilisation. 
  • Management focus on driving shopper traffic and tenant sales bore fruits with a 16.1% jump in shopper traffic to 39.9m in 2016. 
  • Management remains cautiously optimistic on capitalising on the increased shopper traffic and noted some new leases signed at above S$12 psf pm in 4Q16.

Positive leasing newsflow and office absorption. 

  • Pre-leasing at Marina One and Duo are reportedly currently at about 30% and 35% respectively. According to media sources, Facebook is taking up more than 250,000 sf of space (about 13% of total) at Marina One, which will bring pre-commitment to about 43%. 
  • According to CBRE, leasing demand at DUO Tower and Guoco Tower led to a second consecutive quarter of positive island-wide take-up of 0.54m sf in office space for 4Q16, compared with the previous four consecutive quarters of negative space absorption (average -0.23m sf). 

Grade-A office rentals declined 2.2% qoq in 4Q16 to hit S$9.10 psf pm (20% decline from 1Q15’s peak of S$11.40 psf pm).

  • We opine that Grade-A rental decline could be fast approaching a bottom, especially as qoq declines have been slowing since 3Q16 (-2.1% qoq), vs qoq declines during 3Q15-2Q16 (- 3.5% to -4.8%). 
  • Suntec’s office leases were signed at $8.65 psf/mth vs overall CBD rent of S$8.54 psf/mth. Retention rate for the full year was 80%. 
  • Management guided for the Singapore office market to remain under pressure, given the supply coming on-stream.



Parkway Life REIT Trust (PREIT SP/HOLD/S$2.40/Target:S$2.50) 


Results in line with expectations; maintain HOLD with an unchanged target price of S$2.50, based on a two-stage dividend discount model (required rate of return: 5.9%, terminal growth rate: 1.2%). 

  • PREIT reported 4Q16 DPU of 3.06 S cents, down 9.2% yoy due to the absence of divestment gains paid out in 4Q15. 
  • Recurring DPU actually grew 2.3% yoy in 4Q16, upon stripping out the effect of capital distributions last year. 
  • 4Q16 gross revenue and NPI both saw respective increases of 5.4% and 4.0% yoy, on an acquisition in Mar 16, higher rent from its properties in Singapore, and an appreciating JPY. 
  • Results are in line with expectations, with FY16 DPU accounting for 102% of our full-year estimates.
  • Divestment gains of S$5.3m to be equally distributed in FY17, following completion of the divestment of four Japan assets in Dec 16.

Resilient portfolio performance. 

  • Overall occupancy rate remained stable at around 100%, with only the Malaysia asset 95% occupied (merely 0.3% of NPI).
  • Gearing declined 1.9ppt qoq, to reach 36.3% in 4Q16 (3Q16: 38.2%), while borrowing costs remained stable at 1.4% (3Q16: 1.4%). 4Q16 also saw portfolio revaluation gains of S$18.2m.

Cautious optimism. 

  • Management opines that the portfolio's favourable rental lease structures (61% pegged to CPI-linked revision) will continue to drive delivery of long-term fundamentals.




Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2017-01-26
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 2.710 Same 2.710
HOLD Maintain HOLD 2.500 Same 2.500
HOLD Maintain HOLD 1.800 Same 1.800



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