Singapore REITs - UOB Kay Hian 2016-05-03: 1Q16 REITs' Results – MLT (In Line), CDREIT (Below) And FHT (In Line)

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REIT MAPLETREE LOGISTICS TRUST M44U.SI  CDL HOSPITALITY TRUSTS J85.SI  FRASERS HOSPITALITY TRUST ACV.SI 

1Q16: REITs’ Results – MLT (In Line), CDREIT (Below) And FHT (In Line)

• MLT has completed its redevelopment work on 5B Toh Guan and AEI in Japan. Comfortable expiry profile but watch out for expiring SUA leases. Maintain BUY on MLT with an unchanged target price of S$1.28. 
• CDREIT saw continued weakness on weak corporate demand and renovation disruption. Maintain BUY on CDREIT with a reduced target price of S$1.55. 
• FHT saw a slight dip in Singapore RevPAR. AEI at Intercontinental has been completed; expect contributions. We maintain BUY on FHT with an unchanged target price of S$0.97. 
• Maintain OVERWEIGHT on the sector.

WHAT’S NEW

• Mapletree Logistics Trust (MLT), CDL Hospitality Trust (CDREIT) and Frasers Hospitality Trust (FHT) reported their quarterly results.

ACTION

Mapletree Logistics Trust (MLT SP/BUY/S$1.08/Target: S$1.28)

• Results in line; maintain BUY and target price of S$1.28

• Results in line; maintain BUY and target price of S$1.28, based on DDM (required rate of return: 6.9%, terminal growth: 1.5%). 
• MLT reported 4QFY16 DPU of 1.80 S cents. Excluding divestment gains, core DPU of 1.74 S cents declined 4.9% yoy. 
• The quarter saw gross revenue and NPI increase by 4.4% and 3.3% respectively, as full contributions from recent acquisitions were slightly mitigated by higher expenses from multi-tenant conversions. 
• The results were in line with expectations, coming in at 97.6% of our full- year estimates.

• Operational highlights. 

• Overall occupancy rate dipped to 96.2% (3QFY16: 96.9%). 
• Aggregate gearing saw an uptick of 0.6ppt qoq to reach 39.6% in the quarter (3QFY16: 39.0%). 
• Overall financing costs dipped 10bp qoq to 2.3% (3QFY16: 2.4%). About 11% of borrowings are due in FY17. 
• 4QFY16 saw an overall rental reversion of 0.6%. 
• 70% of distributable income for FY17 has been hedged into SGD to mitigate forex fluctuations. 
• 81% of total debt has been fixed at fixed rates. 
• Pro-active leasing efforts resulting in well-spread out lease expiry profile, with approximately 14.6% and 18.7% of leases by NLA due to expire in FY17 and FY18 respectively. However, of the leases due in FY17, we note that 5.1% are single user asset (SUA) leases. Of these, management expects that some of the Singapore and South Korea leases will not be renewed, exerting downward pressure on occupancy and revenue during the downtime. 
• We will be on the lookout for the renewals of the Gyeonggi-do and and Pyeongtaek (formerly KPPC Pyeongtaek) assets, which account for approximately S$8m in distributable income, or about 4.4% of FY16 distributable income.

• Redevelopment/AEI Updates. 

• The redevelopment of 5B Toh Guan and asset enhancement initiatives (AEI) at Moriya Centre, Japan were completed in March. These projects are expected to begin contributing in FY17. 
• Meanwhile, the redevelopment of 76 Pioneer Road is still ongoing and is slated for completion by FY18.

• Two-pronged approach in capital recycling and gearing up  

• MLT’s gearing of 39% should leave the REIT manager with about S$98m of debt headroom, assuming a comfortable gearing level of 40%. 
• Management has stated its preference for capital recycling activities through the divestment of non-performing assets (134 Joo Seng and 20 Tampines) so that potential acquisitions can be internally and debt financed as opposed to raising equity.

• Gloomy domestic outlook. 

• This quarter saw reversions from Singapore coming in at a meagre 0.2%, as management continues to guide for moderate rental reversions. 
• The bleak outlook in Singapore should be somewhat mitigated as MLT continues along the footpath beyond domestic shores.

• ... for overseas drive. 

• MLT currently derives about 65.6% of overall asset value from overseas assets, post the recent completion of three overseas acquisitions in Australia, South Korea and Vietnam (about S$295m). 
• Management intends to continue pursuing growth beyond domestic shores and eventually increase its overseas exposure to 75%. 
• Management also highlighted target markets such as Japan and South Korea, pointing out strong demand for leasing space in the lead-up to the Olympics in Japan, and thirst for Grade-A warehousing among South Korea’s retailers.

CDL Hospitality Trust (CDREIT SP/BUY/ S$1.395/Target: S$1.55)

• Results below expectations; maintain BUY with a reduced target price of S$1.55

• Results below expectations; maintain BUY with a reduced target price of S$1.55 (previously S$1.64) based on two-stage DDM (required rate of return: 7.9% and terminal growth rate: 1.6%). 
• 1Q16 DPU of 2.22 S cents decreased 9.0% yoy. 
• Gross revenue saw an increase of 5.8% yoy, mainly attributable to a full quarter's maiden contribution from newly acquired Hilton Cambridge in the UK. 
• Distributable income fell 8.5% yoy, attributable to the weaker Singapore performance, higher opex for the Jumeirah, Japan and Hilton Cambridge assets, and higher net finance costs (up 61.1% yoy). 
• 1Q16 DPU came in below our and consensus expectations at 21.8% of our full-year estimates.

• Operational highlights. 

• Occupancy among CDREIT’s Singapore hotel portfolio saw a 2.6ppt qoq decline to reach 83.9% while average daily rates (ADR) declined 4% qoq to reach S$191 in the latest quarter. 
• On the whole, 1Q16 saw Singapore hotel RevPAR decline 6.4% qoq to reach S$161. 
• Gearing saw an uptick of 0.3 ppt qoq to reach 36.7% in 1Q16 (4Q15: 36.4%). 
• Borrowing costs were stable at 2.5% (4Q15: 2.5%). Fixed rate borrowings continue to make up 60% of total debt.

• Portfolio performance. 

• The Singapore portfolio saw 1Q16 RevPAR decline 6.9% yoy to S$161, as both occupancy and average daily rate registered yoy declines of 3.0% and 3.8 ppt respectively. Management attributed this to the ongoing refurbishment at Grand Copthorne and M Hotel, weak corporate demand and supply side pressure. 
• The Easter holiday falling in March this year as opposed to April in 2015 also affected trading performance, with corporate demand slowing during holidays. 
• In the Maldives, RevPAR declined 28.7% yoy, as top source market China saw a 10.8% slowdown in visitors amidst an austerity clampdown and weak Chinese renminbi, while the rouble and euro languished against the US dollar. 
• NPI contribution from Australia came in below expectation, declining 18.7% yoy, on a weaker AUD and slowing mining sector. 
• The sole bright spot was New Zealand, which saw NPI growth of 12.4% yoy, on full-year maiden variable income contributions and robust hospitality scene.

• Capitalising on Japan. 

• 4Q15 saw the Japan portfolio post RevPAR growth of 7.5% yoy, with same-store NPI growing 9.0% yoy in the quarter. This was attributed to the high influx of Chinese tourists, bolstered by the weaker yen and visa exemptions. 
• Distributions from Japan will be paid out in 2Q16 as they will be distributed bi-annually, at a six-month interval.

• Short-term pain from revitalising existing assets. 

• As mentioned, the Singapore portfolio saw disruption from ongoing enhancement projects. 
• Grand Copthorne Waterfront commenced refurbishment of its lobby and reception areas in Nov 15, and is slated for completion come 2H16. 
• Also due for completion in 2H16 is the refreshment of 115 club rooms at M Hotel, which is set to begin in 2Q16.

• Cautious domestic outlook. 

• Despite healthy visitor arrivals in 2M16 and the biennial Singapore Air Show, management’s outlook was less than sanguine, pointing to the expected 6.5% increase (3,930 rooms) in hotel room supply for 2016. 
• It is management’s view that 3Q16 could exhibit signs of slowing decline in its trading performance. 
• We note that for the first 27 days of April, CDREIT saw RevPAR for the Singapore portfolio increase by 1.0% yoy.

• Earnings revision. 

• We have revised our DPU estimates downwards by 4.8% in 2016 to 9.7 S cents and 4.2% in 2017 to 10.0 S cents. 
• Management’s tepid tone on the domestic hospitality scene, and worse-than-anticipated downtime from ongoing refurbishments have spurred us to trim our RevPar estimates by 5.1%. 
• We have also reduced contributions from Australia and the Maldives by about 10% and about 7% respectively, factoring in further weakness, as well as slightly higher finance costs.

Frasers Hospitality Trust (FHT SP/BUY/S$0.815/Target: S$0.97)

• Results in line with expectations; maintain BUY with an unchanged target of S$0.97

• Results in line with expectations; maintain BUY with an unchanged target of S$0.97 based on two-stage DDM (required rate of return: 8.2% and terminal growth rate: 1.6%). 
• 2QFY16 DPU of 1.33 S cents came in line with expectations, with 1HFY16 DPU representing 48.2% of full-year forecast. 
• Gross revenue and NPI saw growth of 12.5% and 17.3% yoy respectively, due to the acquisition of Sofitel Sydney Wentworth. However, dilution from the 14.5% yoy increase in unit base saw DPU fall 3.6% yoy.

• Operational highlights. 

• Excluding the Sofitel Sydney acquisition, Australia registered RevPAR growth of 2.5% yoy (-2.7% qoq), bolstered by slightly higher occupancy and ADR. 
• The Singapore portfolio saw RevPAR decline 2.6% yoy (up 10.5% qoq). 
• In the UK, RevPAR declined 14.1% qoq. 
• Gearing remained relatively stable at 39.3% (38.8% in 4QFY15), while borrowing costs remained stable at 2.6% (1QFY16: 2.6%).

• RevPar updates. 

• The decline in Singapore RevPar was due to the 2.4 ppt fall in occupancy as ADR stayed flat. 
• Performance of the InterContinental Singapore was affected by renovation (completed end-Feb 16) while Malaysia's RevPar stayed flat. 
• Excluding the new acquisition, RevPar for Australia saw growth of about 2.5% yoy (- 2.8% qoq) while the UK RevPAR registered an approximate 8.7% drop yoy (-24.7% qoq), on back of the Paris attacks in November, weaker demand from the banking, O&G sectors and concerns over Brexit. 
• The Japan asset saw RevPAR increase 10.2% yoy (-14.3% qoq) from stronger ADR as the tourism sector continued to grow from strength to strength (record 19.7m visitors in 2015).

• Short-term pain in Singapore and the UK propped up by growth in Australia and Japan. 

• The weak performance of the Singapore portfolio was attributed to the disruption by the AEI at Intercontinental Singapore. 
• Bolstered by the recent Sofitel acquisition, the Australian portfolio registered stellar growth, propped up by a buzzing events calendar. 
• The UK portfolio turned in a weaker set of results, as bookings were cancelled due to the Paris attacks in Nov 15. 
• ANA Crowne Plaza Kobe registered healthy gross operating profit growth of 15.5%, as tourist arrivals in Japan rose 43.7% yoy in 2M16. 
• Management remains cautious on Malaysia as visitor arrivals have slowed, coupled with weak corporate demand from the lacklustre O&G segment.

• Potential AEI. 

• Following the completion of Intercontinental’s AEI at end-Feb 16, the Novotel Rockford, in Australia, could be next in line for refurbishment. 
• We reckon the potential AEI could commence by end-16 or 1H17. This would allow the asset to see potential uplift in conjunction with the completed redevelopment works at the neighbouring Sydney Convention Center.

Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2016-05-03

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.28 Same 1.28

BUY Maintain BUY 1.55 Down 1.64

BUY Maintain BUY 0.97 Same 0.97