Singapore REITs - UOB Kay Hian 2016-10-31: 3Q16 Results Of SGREIT, CDREIT And FHT In Line With Expectations

SGinvestors.io

Singapore REITs STARHILL GLOBAL REIT P40U.SI FRASERS HOSPITALITY TRUST ACV.SI CDL HOSPITALITY TRUSTS J85.SI

Singapore REITs - 3Q16 Results Of SGREIT, CDREIT And FHT In Line With Expectations

• Starhill Global REIT (SGREIT) saw contributions from Singapore and Malaysia mitigate weaker overseas performance in the quarter. Maintain BUY with a lower target price of S$0.97 (down from S$1.00). 
• CDL Hospitality Trust (CDREIT) saw continued weakness on waning corporate demand and renovation disruption. Maintain HOLD with a reduced target price of S$1.46 (down from S$1.55). 
• Frasers Hospitality Trust (FHT) saw DPU dilution from October’s rights issue. Maintain BUY with a reduced target price of S$0.80 (down from S$0.81). 
• Maintain OVERWEIGHT.

WHAT’S NEW

• Starhill Global REIT (SGREIT), CDL Hospitality Trust (CDREIT) and Frasers Hospitality Trust (FHT) reported their latest quarterly results.

Starhill Global REIT (SGREIT SP/BUY/S$0.81/Target: S$0.97)

Results in line; maintain BUY with reduced target price of S$0.97

• Results in line; maintain BUY with reduced target price of S$0.97 (from S$1.00), based on DDM (required rate of return: 6.7%, terminal growth: 1.2%). 
• SGREIT reported 1QFY17 DPU of 1.30 S cents, down 0.8% yoy. The quarter saw gross revenue and NPI decline 2.7% yoy and 1.7% yoy respectively due to lower contributions from Australia, China and Japan, slightly mitigated by higher contributions from Singapore and Malaysia. 
• Results were in line with expectation, coming in at 24.5% of our full-year estimate. 
• We have reduced our terminal growth assumptions by 25bp based on the decline in the long run inflation rate.

Retail update. 

• Wisma Atria saw 1QFY17 retail revenue increase 4.0% yoy, outpaced by its NPI growth of 8.1% yoy, which was mainly due to S$1.9m in compensation from a pre-termination. Committed occupancy inched up to 99.5% (from 97.7%) in 1QFY17 with new tenants starting operations. Tenant sales decreased 5.4% yoy during the quarter despite the 6.6% yoy increase in shopper traffic. Ngee Ann City (retail) maintained full occupancy.

Increased contribution from Ngee Ann property

• Increased contribution from Ngee Ann property, with the asset’s retail NPI up 5.7% yoy. The triennial upward-only rental review under Toshin master lease agreement with Starhill concluded in Jun 16. Up for renewal every three years, this renewal represented the second exercise since Toshin renewed its master lease agreement for 12 years (commencing 8 Jun 13). 
• Toshin, which is also Starhill's largest tenant, accounted for about 20.7% of SGREIT’s portfolio gross rent in 1QFY17.

Singapore office portfolio’s NPI decreased 5.9% yoy

• Singapore office portfolio’s NPI decreased 5.9% yoy in 1QFY17 due to lower demand as occupancy dipped 0.9ppt qoq to 94.7% (from 95.6% in 4QFY16). 
• Proactive leasing efforts saw forward renewal of about 28% of the office leases by gross rent due for expiry in FY16/17.

Lower contributions from Australia and China

• Lower contributions from Australia and China due to refurbishment and tenant transition. 
• Australia 1QFY17 NPI was down 13.2% due to Myer Adelaide office vacancy and disruption from the S$10m asset enhancement at Plaza Arcade (new anchor tenant has been secured), which should increase floor area by over 33% and be completed in 1Q18. 
• The transitional vacancy in China was due to tenant replacement, with the REIT manager securing a 10-year anchor lease (Markor International Home) on fixed rent, which should de-risk the asset somewhat (previously 100% on gross turnover rent).

Orchard Road rents continue to slacken

• Orchard Road rents continue to slacken for the seventh consecutive quarter, reaching S$32.35psf/month in 3Q16 (-3.6% yoy, -0.5% qoq), according to industry consultant CBRE. 
• Comparatively, suburban rents, which only started to register a decline from 4Q15, have been relatively more resilient, shrinking by a smaller 0.2% qoq (-3.0% yoy) to S$29.40psf/month.

Better positioned in a challenging retail environment. 

• Starhill Global is likely to display more resilience in an otherwise lacklustre sector, with its diversification across geographies and asset classes. 1QFY17 saw overseas assets comprise 34.6% of NPI.
• Bearing in mind the lack of office supply in Orchard Road, the office component (100% occupied) contributed to 11.9% of 1QFY17 NPI.
• Increased retail space, rising labour costs and threats from alternative retail channels have in part prompted retail landlords CapitaLand Mall Trust (CMT) and Frasers Centrepoint Trust (FCT) to guide for a moderation in rental reversions.

CDL Hospitality Trust (CDREIT SP/HOLD/ S$1.325/Target: S$1.46)

Results in line with expectations; Maintain HOLD with a reduced target price of S$1.46

• Results in line with expectations; Maintain HOLD with a reduced target price of S$1.46 (from S$1.55), based on two-stage DDM (required rate of return: 7.4% and terminal growth rate: 1.4%). 
• 3Q16 DPU of 2.44 S cents increased 3.4% yoy. 
• Both gross revenue and NPI saw respective increase of 10.5% and 5.3% yoy on contributions from the recent UK acquisition (Hilton Cambridge) and improved performance from its New Zealand asset (Grand Millennium Auckland). 
• Excluding capital distributions, 9M16 core DPU of 6.81 S cents came in within expectations at 75% of our full-year estimate.
• We have reduced our terminal growth assumptions by 25bp based on the decline in the long run inflation rate. 
• We retain FY16 DPU estimate but reduce FY17-18 estimates by 2.0% and 2.5%, factoring in a 16% and 19% drop in RevPAR for the Maldives operation.

Singapore operating performance saw further weakness 

• Singapore operating performance saw further weakness due to supply-side pressure, corporate-demand contraction and renovations. Singapore hotels (70.5% of total AUM) saw 3Q16 RevPAR decline 7.2% yoy in 3Q16 as average daily rate declined 7.5% yoy to S$186, while occupancy crept up 0.5ppt yoy to 90.7%. 
• Grand Copthorne Waterfront Hotel and M Hotel continued to see performance impacted by ongoing refurbishment works (slated completion by end-16). For the first 26 days of Oct 16, CDREIT's Singapore hotel portfolio RevPAR declined 13.4% yoy.

Cushioned by overseas assets in the UK and New Zealand. 

• Recently-acquired UK asset Cambridge City Centre (5.4% of AUM) registered RevPAR growth of 10.2% yoy in 3Q16 due to increased corporate demand as renovations were completed last April.
• Management reported that bookings have thus far been unaffected in the wake of the recent Brexit referendum, and expects growth in leisure travel from a weaker GBP. 
• CDREIT’s New Zealand asset registered 22.4% yoy growth in NPI, with the REIT manager commencing a new lease structure in Sep 16, potentially allowing for greater variable income contribution from a thriving hospitality scene.  

Likely indigestion pangs from 2017’s supply glut

• Likely indigestion pangs from 2017’s supply glut, with about 3,857 rooms slated to come on stream, representing a 6.1% increase over 2016’s estimated inventory. 
• Mid-tier (33% of total) and upscale/luxury (47% of overall) room supply would account for about 80% of 2017’s estimated supply of 3,857 rooms, according to consultant Horwath HTL.

Performance in remaining geographies. 

• In the Maldives, 3Q16 RevPAR declined 28.8% yoy as top source market China saw an 11.5% yoy slowdown in visitors for 8M16, amid an austerity clampdown and a weaker renminbi, while the Russian rouble and euro languished against the US dollar. 
• NPI contribution from Australia grew 2.9% yoy, on a stronger A$ (income mostly from fixed rent). 
• Japan hotels saw RevPar down 6.6% yoy in 3Q16 from the stronger yen and unfavourable weather impacting domestic travel. However, translational effects of the stronger yen also led to NPI growth of 1.7% yoy in 3Q16.

Frasers Hospitality Trust (FHT SP/BUY/S$0.69/Target: S$0.80)

Results in line with expectations; maintain BUY with a reduced target of S$0.80

• Results in line with expectations; maintain BUY with a reduced target of S$0.80 (previously $0.81), based on two-stage DDM (required rate of return: 8.0% and terminal growth rate: 1.5%). 
• Gross revenue and net property income grew 8.6% and 11.5% yoy respectively, attributed to the acquisition of Sofitel Sydney Wentworth and maiden contributions from Maritim Hotel Dresden. 
• 4QFY16 distributable income declined 2.6% yoy on weaker performance of the Singapore assets and the UK properties. 
• 4QFY16 DPU fell 9.4% yoy, mainly on unit base expansion (+27.4% yoy) post FHT’s rights issue in Oct 16.
• Including the dilutive impact of the rights issue in 4QFY16, results were line with expectations, with FY16 DPU representing 97.9% of our full-year forecast.
• We have reduced our terminal growth assumptions by 25bp based on the decline in the long run inflation rate, and rolled forward our DPU estimates by a year.

Rosy Australia performance. 

• The Australian portfolio (entirely in Sydney) turned in robust performance, propped up by recently-acquired Sofitel Sydney Wentworth (SSW).
• Australia clocked in visitor arrival growth of 11.7% yoy in 8M16, with a 20.7% yoy increase in Chinese arrivals. Sydney hotels continue to be a beneficiary of both healthy leisure and corporate demand.

Room recovery boosted Singapore performance. 

• Full restoration of room inventory post AEI completion at the Intercontinental Singapore in end-Feb 16 saw 4QFY16 Singapore RevPAR improve on higher occupancy. However, we note that Fraser Suites registered lower RevPar on weaker demand from oil & gas (O&G) corporates, booking in a slight revaluation loss of 1.6%. 
• Intercontinental Singapore could underpin further growth, with management noting that the asset has not reached optimal performance. 
• In Malaysia, The Westin KL saw growth from sectors other than the lacklustre O&G sector, in addition to improved F&B performance. Westin still booked a revaluation loss of 7% in ringgit terms

Cushioning the impact from more tepid geographies. 

• RevPAR in the UK dipped yoy during the quarter, with operating income down 2.9% yoy in 4QFY16. 
• Management attributed this to higher labour costs (minimum wage hike in Apr 16), the recent spate of attacks in Europe, as well as Brexit concerns. 
• The London assets also booked slight revaluation losses. 
• Japan also turned in a weaker performance due to the stronger yen, and lower contribution from conferences and events (MICE).

Asset enhancement. 

• As anticipated, Australia asset Novotel Rockford is scheduled for refurbishment in 1Q17, following AEI completion at Intercontinental. Renovations are expected to encompass the entire property (230 rooms, two F&B outlets, lobby and public areas). 
• Expected to last for nine months, the enhancement exercise is slated for completion in 4Q17. 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/ 2016-10-31

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.97 Down 1.000

UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 1.46 Down 1.55

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.80 Down 0.81