Singapore REITs - UOB Kay Hian 2016-04-25: 1Q16 REITs Results – FCT (In Line), SGREIT(In Line) And Cache (In Line)


REITs − Singapore 1Q16: REITs’ Results – FCT (In Line), SGREIT(In Line) And Cache (In Line) 

  • Results of FCT, SGREIT and Cache were in line with our expectations. 
  • FCT commenced AEI works for Northpoint targeting an ROI of 9%. We maintain HOLD on FCT with an unchanged target price of S$2.15. 
  • For Starhill, we are watching out for the Toshin rent review in Jun 16. We maintain BUY on Starhill with an unchanged target price of S$0.91. 
  • Cache saw maiden contributions from the DHL built-to-suit project during the quarter. We maintain BUY on Cache with an unchanged target of S$1.18. 
  • Maintain OVERWEIGHT on the sector. 


  • Starhill Global (SGREIT), Frasers Centrepoint Trust (FCT) and Cache Logistics (Cache) reported their quarterly results. 


Frasers Centrepoint Trust (FCT SP/HOLD/S$2.00/Target: S$2.15) 

Results in line; maintain HOLD with an unchanged target price of S$2.15. 

  • Frasers Centrepoint Trust (FCT) reported a 2QFY16 DPU of 3.039 S cents, up 2.6% yoy, despite a 0.8% yoy drop in gross revenue as property expenses fell 3.8% yoy due to lower tariff rates and write-back of property tax provisions. 
  • The results are in line with our expectations, with 1HFY16 DPU of 5.909 S cents representing 50.1% of our FY16 forecast. 
  • Maintain HOLD with an unchanged target price of S$2.15 based on DDM (required rate of return: 6.8%, terminal growth: 1.5%). Entry price is S$1.83. 

Operational highlights. 

  • 2QFY16 gross revenue dipped 0.8% yoy, as gross revenue from Bedok Point declined 17.7% yoy. 
  • Net property income (NPI) increased 0.4% yoy due to a 3.8% decrease in property expenses largely due to lower utilities tariff rates and write-back of provisions for property tax as a result of resolved property tax appeals and objections. 
  • Portfolio occupancy edged down 2.5ppt qoq to 92%, weighed down by the decline in Northpoint's occupancy to 81.7% from 96.2% in the previous quarter due to the commencement of the asset enhancement initiative (AEI) in March. 
  • Gearing remained stable at 28.3% while average cost of borrowing dropped marginally to 2.286% (1QFY16: 2.36%). 74% of total debt has been fixed. 
  • Rental reversions growth slowed to 5.6% compared with 13.7% in the previous quarter as the higher reversion seen at Northpoint in the previous quarter was mostly due to one single tenant. However, 1HFY16 reversions remained strong at 12%. FCT has about 142,758 sf of space (or about 13.8% by gross rental) due in 2HFY16. 

Northpoint AEI targeting 9% ROI. 

  • The Northpoint AEI commenced in March this year, and will be completed in phases over 18 months with the mall set to remain open throughout the period. 
  • Management projects occupancy would drop to a low of 72% due to the ongoing AEI works that could create some volatility in rentals for the next few quarters. However, this will improve retail offerings and shopping experiences, in addition to priming it for integration into the Northpoint City integrated development by the sponsor. 
  • Management aims to improve the average gross rental rate of Northpoint by about 9% upon the completion of the AEI. The capex of $60m will be funded by borrowings and internal resources. 
  • Low debt points north to inorganic growth. FCT's very comfortable gearing level places it in prime position for inorganic growth. Assuming gearing of 40%, we estimate debt headroom at S$498.5m. Medium-term growth will likely come from the acquisition of the NorthPoint extension from its parent and Waterway Point, once the malls are completed and stabilised. 

Starhill Global REIT (SGREIT SP/BUY/S$0.79/Target: S$0.91) 

• Results in line; maintain BUY with an unchanged target price of S$0.91. 

  • Starhill Global REIT (Starhill) reported a 3QFY16 DPU of 1.26 S cents, (0% yoy). 
  • Revenue and NPI rose 12% and 7% yoy respectively, driven by contribution from Myer Centre Adelaide (MAC), but this was partially offset by lower contributions from Wisma Atria and China and Japan properties. 
  • Distributable income (DI) dipped 1.5% yoy due to higher finance costs (33.5% up yoy), on interest costs from borrowings to fund the MAC acquisition. DPU was flat despite the fall in DI due to higher payout to unitholders post conversion of the convertible preferred units last June. 
  • Results were in line with expectations, coming in at 73.9% of our full-year estimate. 
  • Maintain BUY and target price of S$0.91, based on the dividend discount model (required rate of return: 7.0%, terminal growth: 1.5%). 

• Operational highlights. 

  • Singapore offices saw positive rental reversions of 8.5% for leases committed respectively during the quarter. 
  • Overall occupancy showed a 2.4ppt qoq drop to 95.6% in 3QFY16, mainly due to the Australian properties. 
  • Gearing slightly dipped to 35.4% (2QFY16: 35.7%) with borrowing costs flat at 3.15%. 
  • Across the portfolio, about 2.4% of leases by NLA (3.8% by gross rent) and 8.7% by NLA (14.5% by gross rent) are due in FY16 and FY17 respectively. 

• Retail update. 

  • Wisma Atria’s occupancy dipped from 98.1% to 96.8% yoy but rose from 94.9% in the previous quarter. As a result, revenue declined 3.8% yoy while NPI declined 4.8% yoy on the back of lower occupancy. 
  • However, tenant sales increased 1.7% yoy during the quarter, while shopper traffic inched up 0.3% yoy. Isetan's own strata-owned space will progressively reopen after Apr 15's closure. Ngee Ann City (retail) maintained full occupancy. Revenue was up 1.0% yoy and NPI was up 0.2% yoy. 

• Limited office supply in Orchard road saw stable leasing demand for the Singapore office portfolio. 

  • The Singapore office portfolio’s NPI increased 2.6% yoy in 3QFY15/16 with 8.5% positive rental reversion seen for leases committed during the quarter. 
  • Wisma Atria and Ngee Ann City offices were fully occupied in the quarter. About 72% of office leases due for expiry in FY15/16 by gross rent have been committed. 

• Watch out for Toshin rent review in Jun 16. 

  • Expect positive rent reversion from the Toshin masterlease that is due for review in Jun 16, as negotiations have already begun. The Malaysian master tenancy that was due in Jun 16 has already been extended, with a 6.67% increase in rentals. 
  • Lower occupancy from Australian properties, at 89.5% in the quarter, (96.2% in previous quarter) mainly due to lease expiry of one office tenant at Myer Centre Adelaide and leases termination in relation to the planned asset enhancement work for Plaza Arcade. 
  • Management has highlighted that the previously vacant upper floors of Myer Adelaide have been activated for short-term leases. Meanwhile, discussions with prospective tenants to take-up on a more permanent basis are ongoing. 

Cache Logistics Trust (Cache SP/BUY/S$0.89/Target: S$1.18) 

• Results in line, maintain BUY and target of S$1.18, based on DDM (required rate of return: 7.1%, terminal growth: 1.3%). 

  • Cache reported a 1Q16 DPU of 2.039 S cents, down 5.0% yoy. 1Q16 gross revenue increased 32.7% yoy to S$27.9m from Australian acquisitions and DHL Centre, while higher property expenses resulted in slower pace of increase in NPI (up 12% yoy to S$22.1m). 
  • The higher property expenses (up 341.7%) was a result of conversions of assets from masterlease to multi-tenancy, leading to a slight increase in vacancy and property expenses, which was offset by contribution from its Australian acquisitions. 
  • The decline in DPU was also attributable to the 14.3% expansion in share base, post the private placement announced last November. 
  • The results came in line with our expectations at 24% of our 2016 estimate. 

• Operational highlights. 

  • 1Q16 saw overall occupancy rate remain stable at 94.2% (4Q15: 94.9%). Aggregate gearing also remained relatively stable at 39.6% in the quarter (4Q15: 39.8%), while 65.3% of total debt has been hedged against interest rate risk. Overall financing costs inched up 9bp to 3.69% (4Q15: 3.6%). About 14% of borrowings are due in FY17. Forward renewals of leases due in 2016 saw the lease expiries dip by 1.4ppt to 9.6% by NLA. 
  • Management confident of stable occupancies for the masterleases due for renewal in 2016. Cache is in negotiations for renewal of two masterleases (Schenker and HiSpeed) accounting for the bulk of expiries (9.6% by NLA) in 2H16. Located near Changi Airport, management has expressed confidence in the attractiveness of Schenker MegaHub and Hi-Speed Logistics to logistics players. The underlying occupancies are near full for the properties with underlying tenants indicating continuity plans. 
  • Maiden contributions DHL built-to-suit (BTS) development contributions from 1Q16, with DHL commencing rental payments in Jan 16 for Block 1 (717,600 sf by NLA, or 77% of the project NLA) of the Advanced Regional Centre (ARC). Management is on active lookout for suitable tenants for Block 2 (210,500 sf by NLA, or 23% of the project NLA). The DHL project is currently 82% occupied, with Block 1 fully taken up by DHL. 

• Looking to cash in on Australia… 

  • Australia looks particularly attractive to management notwithstanding higher taxes, primarily for its freehold land titles (JTC: 30 years), and transparent policies as opposed to China's. 
  • Over the course of 2015, Cache made a total of 6 acquisitions across Melbourne, Sydney, Brisbane and Adelaide. This brings the Australian portfolio to A$164m, with about 1.45m sf of GFA (about one-fifth of Cache’s portfolio NLA). Australia now accounts for about 13% of portfolio value. 
  • The REIT manager will continue to seek accretive acquisitions in Australia for income diversification and growth. 

• …as domestic outlook continues to look bleak. 

  • Management voiced concerns over the lacklustre domestic economy, noting the PMI of 49.4 last month indicates contraction in the manufacturing sector for a consecutive 9 months, adding that the shadow space could aggravate the oversupply situation. 
  • Prices and rentals of industrial space in Singapore continued to fall in tandem with occupancy rates; over the whole of 2015, prices and rentals fell by 1.7% and 2.1% compared with the previous year. Warehouse rental and occupancy rate fell by 1.6% and 0.4% respectively during the same period. These factors underpin the ongoing push overseas. 
  • Management’s strategy is to retain focus on proactive lease management to optimise portfolio returns.

Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2016-04-25
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 2.15 Same 2.15
BUY Maintain BUY 0.91 Same 0.91
BUY Maintain BUY 1.18 Same 1.18