Singapore REITs - UOB Kay Hian 2016-07-21: 2Q16 Results Of CCT And Cache (In Line), ART (Below Expectations)

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REIT CAPITALAND COMMERCIAL TRUST C61U.SI  ASCOTT RESIDENCE TRUST A68U.SI  CACHE LOGISTICS TRUST K2LU.SI 

REITs − Singapore: 2Q16: Results Of CCT And Cache (In Line), ART (Below Expectations)

• CCT reported positive rental reversions, with the bulk of 2016 expiring leases forward renewed. Fresh contributions from CapitaGreen and retained cash will tide CCT through supply headwinds. Maintain BUY on CCT with an unchanged target price of S$1.93. 
• ART saw a healthy performance in Japan despite the drag from China. Maintain BUY on ART with a reduced target price of S$1.37 (from S$1.39). 
• Cache saw maiden contributions from the DHL built-to-suit project in the quarter. Maintain BUY on Cache with an unchanged target of S$1.21. 
• Maintain OVERWEIGHT.

WHAT’S NEW

• CapitaLand Commercial Trust (CCT), Ascott REIT (ART) and Cache Logistics Trust (Cache) have reported their quarterly results.

ACTION

CapitaLand Commercial Trust (CCT SP/BUY/S$1.56/Target: S$1.93)

Results in line with expectations. 

• Maintain BUY with a target price of S$1.93, based on a two-stage dividend discount model (required rate of return: 6.7%, terminal growth rate: 1.7%). 2Q16 DPU of 2.20 S cents increased 0.5% yoy, due to a 9.4% yoy increase from JV profits (CCT's 40% stake in CapitaGreen and 60% stake in Raffles City). Results came in within our expectations, with 1H16 DPU representing 48.1% of full-year forecast.
• 2Q16 saw gross revenue decline 2.2% yoy on the back of lower occupancy at Capital Tower, One George Street and Golden Shoe Car Park. The quarter also saw NPI decline 4.5% yoy, which was attributable to higher property tax and leasing commissions paid. Management clarified that its leasing commission rates were in line with market rates.

Bulk of office leases expiring in 2016 forward renewed; however, expect rental pressure for 2017-18 leases. 

• 2Q16 saw 2016’s expiring office leases reduced to 4% by NLA, with overall positive rental reversions. This leaves a respective 10% and 17% of office leases by NLA due for renewal in 2017 and 2018, with respective average passing rents of S$10.77 psf and S$10.64 psf. 
• We note that these passing rents are above that of CBRE spot Grade-A office rents of S$9.50 psf, with management has acknowledged the likelihood of negative reversions next year.

Fresh contributions from CapitaGreen to tide CCT through. 

• Full contribution from CapitaGreen is expected in 4Q16, post completion of the acquisition in 3Q16. Management estimates DPU accretion of 2.3% based on current occupancy of 94.6%, as CapitaGreen’s 2Q16 income contribution only reflects 80.4% in rental occupancy with tenants fitting out. 
• The REIT manager has also retained about S$15.5m (about 0.5 S cents) in tax-exempt income, largely from its 17.7% stake in MQREIT, a Malaysian commercial REIT, which could also tide distributions through the more challenging operating environment.

Capital values holding up. 

• Despite declining Grade-A rents (16.6% drop in rentals from 1Q15’s peak of S$11.40 psf pm), CCT still reported a 0.4% increase in portfolio value. 
• Capitalisation rates are also relatively unchanged, with the exception of HSBC Building. Management has opined that its portfolio valuation remains conservative, with the valuer assuming steady state rental growth of 3.8%. (URA: 3.5%).

Ascott Residence Trust (ART SP/BUY/S$1.145/Target:S$1.37)

Results below expectations; maintain BUY with a reduced target price of S$1.37 (from S$1.39), based on a two-stage dividend discount model (required rate of return: 7.7%, terminal growth rate: 1.7%). 

• ART reported 2Q16 DPU of 2.13 S cents (+1.9% yoy). 2Q16 Gross revenue and gross profit increased 21% and 17% yoy respectively, mainly due to acquisitions in 2015 and 2016. On a same-store basis, 2Q16 gross profit declined 4% yoy. 
• The results were below our and consensus expectations, coming in at 46.3% of full-year estimates. This was mainly due to higher-than-anticipated direct expenses from acquisitions in 2015/16, such as staff costs. 
• We increase our operating expenses by 1- 2%, reducing our 2016 and 2017 DPU estimates by 1.3-2.6% to better reflect the higher costs.

Sector outlook. 

• In the UK (10.4% of AUM), operating performance remained stable post the Brexit referendum, with daily rates and occupancy comparable to that of last year. Management expects an increase in leisure travel, on the back of a depreciating pound. They anticipate the surge in tourist arrivals to the UK to cushion the impact from softening corporate demand, noting that while average length of stay for corporates tends to be higher, leisure travellers are subject to higher room rates in the absence of corporate packages or deals. The UK is also expected to see seasonally higher tourist arrivals in 3Q16, with management deliberately freezing refurbishment to leverage on the increased demand.
• Management expects its largest market Japan (16.5% of AUM) to see higher RevPAU on higher room rates, as occupancy remains stable. In China (second largest market with 16% of total AUM), management expects growth seen in tier-1 cities like Shanghai to cushion the impact from underperforming tier-2 cities like Xi’an (50% occupancy), Wuhan and Shenyang (70-80% occupancy). 
• In Singapore, management expects better operating performance, with 2Q16 weakness from Ascott Raffle Place. Excluding the Raffles Place. Excluding the Raffles Place asset, Singapore RevPAU would have been flat.

Master lease expiries due in 2017. 

• As of Dec 15, ART had 42.7% of master leases by rental income due for renewal in 2017 and 2.9% in 2016. 
• Management has stated that it is entering negotiations to renew leases due in 2017, which include four of its 17 master leased assets in France (10.8% of portfolio value). 
• Management has stressed the underlying stable operating performance of its France assets, expressing the view that the master lessee (the Sponsor) would take a longer term view beyond the recent spate of attacks in France, when negotiating renewal terms.

Ongoing AEI in Vietnam, the Philippines and London. 

• Asset enhancement at Somerset Xu Hui Shanghai was completed in June, with management confident of contributions from the refurbished product. As stated above, the AEI at Citadines Barbican London (estimated cost of S$8.3m), has been deliberately delayed to 1Q17 (previously 3Q16) to capture the anticipated larger visitor crowd in 3Q16. Phase 2 of the AEI project at Somerset Ho Chi Minh City will take place over 1Q16-1Q17. The S$1.5m AEI at Somerset Millennium Makati is set for completion by 1Q17. 
• Meanwhile, Ascott Makati’s ongoing refurbishment is slated for completion in 3Q16 (previously 2Q16). Separately the new Cairnhill Somerset is expected to “soft open” by end-16. The acquisition is likely to be funded through debt and equity.

Cache Logistics Trust (Cache SP/BUY/S$0.875/Target: S$1.21)

Results in line, maintain BUY with unchanged target of S$1.21, based on DDM (required rate of return: 6.6%, terminal growth: 1.3%). 

• Cache reported a 2Q16 DPU of 1.99 S cents, down 7.1% yoy. 
• 2Q16 gross revenue increased 30.3% yoy to S$28.1m from Australian acquisitions and DHL Centre which is 89% occupied, while higher property and finance expenses resulted in slower pace of increase in NPI (up 21.9% yoy to S$22.6m). 
• The decline in DPU was attributable to the 14.3% expansion in share base, post the private placement announced last November. 
• The results came in line with our expectations with 1H16 DPU at 48.3% of our 2016 estimate.

Hi Speed Logistics Centre will be converted from master lease to multi-tenancy. 

• About 210,000 sf (77%) of space is currently under lease documentation with the remainder already pre-committed. The portfolio WALE will be extended from 4.1 years to 4.2 years once completed while the leases due for renewal in 2H16 will be reduced to 6.6% (from 9.6%).

The timeline for dispute resolution on Schenker Megahub remains uncertain. 

• However, there is sufficient buffer in the form of a 12-month rental deposit to safeguard against such a scenario. Management plans to claim double the amount of the rent payable under the master lease, or damages, should Schenker remain on the property after failing to conclude the master lease agreement, or if vacant possession is given after the lease expiry in August. 
• Management highlighted that Schenker has full intention to stay in the property, and will draw from the capex invested, client requirements and consolidated operations. The dispute is mainly on disagreement on the rental levels.

Focus on Australian diversification and growth strategy...  

• 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 six acquisitions across Melbourne, Sydney, Brisbane and Adelaide. This brings its 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 total portfolio value. The REIT manager will continue to seek accretive acquisitions in Australia for income diversification and growth.

... as domestic outlook remains bleak. 

• Management voiced concerns over the lacklustre domestic economy, noting the PMI of 49.6 last month indicates contraction in the manufacturing sector for a consecutive 12 months, adding that the shadow space could aggravate the oversupply situation. 
• Warehouse rents fell by 2.3% and 3% qoq for ground floor and upper floor space according to CBRE. 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/ 2016-07-21

UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 1.37 Down 1.39

BUY Maintain BUY 1.93 Same 1.93

BUY Maintain BUY 1.21 Same 1.12