Singapore REITs - UOB Kay Hian 2015-10-23: 3Q15 ~ Results Of AREIT, CMT, FCT, SUN In Line With Expectations


REITs − Singapore 3Q15: Results Of AREIT, CMT, FCT, SUN In Line With Expectations 

  • Maintain BUY on AREIT with a higher target price of S$2.68, mainly factoring in the S$1.01b Australian acquisition. In the retail space, both CMT and FCT reported healthy pick-ups in shopper traffic during the quarter despite the retail environment remaining challenging. 
  • Maintain HOLD on CMT and FCT with unchanged target prices of S$2.05 and S$2.15 respectively. 
  • Suntec REIT has officially opened Suntec City Mall. Maintain BUY and target price of S$1.81. 
  • Maintain OVERWEIGHT. 


  • Ascendas REIT (AREIT), CapitaLand Mall Trust (CT), Frasers Centrepoint Trust (FCT) and Suntec REIT (SUN) reported their quarterly results. 


Ascendas REIT (AREIT SP/BUY/Target: S$2.68) 

• Results in line; maintain BUY with a higher target price of S$2.68. 

  • Excluding the exceptional S$6.5m taxable income, 1HFY16 core DPU of 7.73 S cents was in line with expectations, coming in at 50.6% of full-year estimate. 2QFY16 DPU of 4.16 S cents saw an increase of 13.7% yoy on the back of contributions from newly-acquired Aperia and The Kendall. Maintain BUY with a higher target price of S$2.68 (from S$2.62), mainly factoring the Australian acquisition. Our valuation is based on DDM (required rate of return: 6.9%, terminal growth: 1.5%). 

• Operational highlights. 

  • Portfolio occupancy saw an improvement of 1.1 ppt to reach 89.0% in the latest quarter, underpinned by higher occupancy registered at 40 Penjuru Lane, Aperia and A-REIT City @ Jinqiao. Gearing, currently at 34.6%, should reach 37.8% post completion of the Australian portfolio acquisition in 4Q15. Rental reversions saw growth of 9.1% qoq in 2QFY16, (+6.6% 1QFY16). Borrowing costs remained stable at 2.73% this quarter. 

• Healthy lease expiry, potential for upside. 

  • About 10.2% of leases by rental income are due for renewal over the next two quarters. We note that business parks, hi-specs industrial and logistics buildings which collectively account for 82% of the expiring leases are significantly below market rates. Market rents are 21.1% above logistics (22% of expiring leases) passing rents, 6.4% above the passing rents for business park space (27%) and 5.7% above passing hi-specs (33%) rents. 

• Maiden Australian portfolio acquisition to see completion by 4Q15. 

  • Post completion, the S$1.01b transaction of 26 logistics properties will extend AREIT’s footprint in Australia to about 11% by asset value and total overseas exposure to 14%. 

• AEI update. 

  • Honeywell Building saw the completion of its AEI in Sep 15, with occupancy at 97.7%. 40 Penjuru Lane and 2 Senoko should see their enhancement works complete by 4Q15, with Cintech I to IV (slated to complete in 1Q16), and Acer Building (due for completion 2Q16) rounding up the pack. 

• Industrial sector outlook remained challenging. 

  • Management has highlighted the increased likelihood of muted rental growth in the near term, citing the challenging leasing environment to contend with. JTC’s 3Q15 figures did not provide much cheer as the industrial property price and rental index declined 0.3% and 0.8% qoq respectively. However, JTC’s tweaked sub-anchor tenant requirement (1,000sqm from 1,500sqm) is somewhat comforting, providing greater flexibility to the REIT. 

CapitaMall Trust (CT SP/HOLD/Target: S$2.05) 

• Results in line; maintain HOLD and target price of S$2.05. 

  • 3Q15 DPU of 2.98 S cents was up 9.6% yoy. Gross revenue and NPI saw slight dips of 1.0% and 0.6% respectively, while AEIs at IMM were underway, and JCube and Clark Quay registered lower occupancies. The results are within our expectations, accounting for 75.6% of our fullyear forecast. We maintain HOLD with an unchanged target price of S$2.05 based on DDM (required rate of return: 6.8%, terminal growth: 1.5%). Entry price is at S$1.74. 

• Operational highlights. 

  • Shopper traffic increased 4.2% yoy with new leases/renewals achieving 4.1% positive rental reversion ytd (1H15: 4.6% yoy). Tenants’ sales psf increased by 4.4% yoy. Overall occupancy rate saw a slight uptick to reach 96.8% in the latest quarter (96.4% previous quarter) despite ongoing AEI and reconfiguration work at selected malls. Tampines Mall's AEI was completed with new tenant H&M occupying space there. Gearing and borrowing costs remained relatively stable at 33.8% and 3.3% respectively. 

• Bedok acquisition to increase penetration in heartlands and diversify revenue. 

  • CMT recently announced the acquisition of Bedok Mall from CapitaLand for S$783.1m.The acquisition would extend CMT's heartlands footprint to the heart of Bedok and increase its exposure to necessity spending from 74.5% to 76.2%. 

• AEI Update. 

  • Phase 2 of the ongoing AEI at IMM is still in progress with J-Walk now connecting Jurong East MRT to IMM building and Westgate. 

• The retail environment is expected to remain challenging

  • The retail environment is expected to remain challenging from the increased supply, rising costs and threat from alternative retail channels. Portfolio rental reversion, at 4.1% continued to stay below the 5% level (first time in five years last quarter). This was underpinned by negative reversions from JCube (-14.1%), and poorer performance from Junction 8, Clark Quay and Bukit Panjang. 

Frasers Centrepoint Trust (FCT SP/HOLD/Target: S$2.15) 

• Results in line; maintain HOLD and target price of S$2.15, based on DDM (required rate of return: 6.8%, terminal growth: 1.5%). 

  • FY15 DPU of 11.608 S cents is within our expectations at 99.8% of full-year forecast. 4QFY15 DPU of 2.859 S cents increased 2.7% yoy as gross revenue and NPI saw slight increases of 1.7% and 1.2% yoy respectively. Entry price is S$1.83.

• Operational highlights. 

  • 4QFY15 saw average rental reversions at 7.1%, with average reversions for full year FY15 at 6.3% Overall occupancy rate saw a dip, reaching 96.0% in the latest quarter (96.5% previous quarter). This was mainly attributable to Changi City Point and Bedok Point, where tenant remixing is underway. Tenant sales and shopper traffic saw growth. Tenant sales were up 2.1% yoy (as of end-Aug 15) while shopper traffic grew 8.2% yoy in the quarter, mainly attributable to Causeway Point and Northpoint. Gearing showed signs of improvement shedding 0.5ppt qoq to reach 28.2%. Borrowing costs remained relatively stable at 2.4% (2.3% 3QFY15) respectively.
  • Management remains concerned over slowing retail sales growth, coupled with increasing manpower shortages. In addition, the suburban space will see a particularly large supply of shopping malls coming up soon. 

• AEI plans in Northpoint underway, facilitating Yishun’s transition into a vibrant hub. 

  • FCT is expected to commence its AEI for Northpoint Shopping Centre in Mar 16, which will be completed in phases over 18 months with the mall to remain open throughout the period. This will improve retail offerings and shopping experience, in addition to priming it for integration into the Northpoint City integrated development by the sponsor. 

• Acquisitions to drive growth. 

  • FCT’s very comfortable gearing level places in it in prime position for inorganic growth. Assuming gearing of 40%, we estimate debt headroom at S$468.6m. Medium-term growth will likely come from the acquisition of Waterway Point and NorthPoint extension from its parent once the malls are completed and stabilised. 

Suntec REIT (SUN SP/BUY/Target: S$1.81) 

• Results in line with expectations; maintain BUY and target price of S$1.81, based on DDM (required rate of return: 7.1%, terminal growth: 1.7%). 

  • Suntec REIT reported 3Q15 DPU of 2.522 S cents, up 8.3% yoy mainly to the higher revenue and net property income from the completion of Suntec City Phase 3. Distributable income included a S$4.6m payment from capital (sales proceeds from Chijmes). 9M15 DPU of 7.252 S cents is in line with our expectations, accounting for 73.4% of our full-year estimate. 

• Operational highlights. 

  • Office portfolio occupancies stood at 98.9% (-0.1ppt qoq) with signing rents for Suntec office leases in the quarter at S$9.21psf/month (+0.8% qoq). The overall committed occupancy for the retail portfolio stood at 96.5% with the committed occupancy for Suntec City at 96.4% (2Q15: 94.7%) while the committed occupancy for Park Mall was 97.8%. The debt-to-asset ratio stood at 35.8% while the average all-in financing cost was 2.74% for 3Q15. 

• Official opening 

  • Suntec City mall yesterday was graced by Mr Tan Chuan-Jin, Minister for Social and Family Development. Suntec retail asset enhancement ROI was about 9% although the overall committed passing rent of S$12.03psf fell short of the initial guidance of S$12.59psf pm due to a challenging retail climate. 

• Expect healthy moderation before pick-up. 

  • According to CBRE, Grade-A office rentals eased a further 3.6% qoq in 3Q15 to S$10.90psf pm (2Q15: -0.9% qoq). Marina One (1.9m sf), which is slated to hit the market in 2016, has yet to see any pre-commitment although industry consultant DTZ posited that Marina Bay rents fell 5.5% qoq to S$13psf pm in 3Q15. 
  • The next surge in office supply will only arrive in 2H16-2017, which could result in a further 5-10% correction in rents. 
  • Beyond 2017, the supply remains meagre at below 0.6m sf and this should lead to a pick-up in rental growth. The bulk of KREIT's lease expiries (about 70% by NLA) are due in 2018 when supply remains tight. 

• Unlocking value from Park Mall. 

  • Suntec REIT earlier announced the S$411.8m divestment of Park Mall (total cost S$245m) and entry into a JV for redevelopment of the property of which Suntec REIT has a 30% interest. 
  • Management believes the redevelopment will unlock the underlying value of the property by further enhancing the GFA of the site, taking advantage of the two strips of land acquired and the bonus plot ratio for sites near to MRT stations. 

Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2015-10-23
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 2.68 Up 2.62
HOLD Maintain HOLD 2.15 Same 2.15
HOLD Maintain HOLD 2.05 Same 2.05
BUY Maintain BUY 1.81 Same 1.81