Singapore REITs - Maybank Kim Eng 2017-06-19: Value Creation Of The Office REIT Managers

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Singapore REITs S-REIT Managers Evaluation Internal Rate of Return CAPITALAND COMMERCIAL TRUST C61U.SI KEPPEL REIT K71U.SI SUNTEC REAL ESTATE INV TRUST T82U.SI

Singapore REITs - Value Creation Of The Office REIT Managers

Reiterate CCT as our preferred Office REIT 

• In this note, we attempt to quantify the performance of Office REIT managers by estimating an aggregate internal rate of return (IRR) for key properties between 2010 and 2016. 
• While these estimates are not forward looking, they do reflect the track record of the managers. 
• We also overlay their performance with the expense ratio of the REITs to examine which platform offers the most favourable returns to unit-holders. 
• The conclusion of this exercise is that CapitaLand Commercial Trust (Rating: BUY, Target Price SGD1.81) offers the best performance at the lowest cost to unit-holders and reinforces our preference for the REIT as our top sector pick.

Value creation for their properties 

• We believe Internal Rate of Return (IRR) achieved is the most objective measure of an asset manager’s performance. 
• A good asset manager should be able to create value for unit-holders by acquiring undervalued assets, divesting overvalued assets and/or improving their underlying property income to achieve higher asset value. All these should be captured by the IRR achieved for their assets over time.

Methodology to calculate aggregate IRR 

• We calculate IRR achieved for major properties, held by office REITs under coverage, by comparing the difference in valuation and estimating their property level cashflows between 2010 and 2016. 
• For properties acquired and divested over this time period, sale and purchase prices are used. Further, for properties that underwent major asset enhancement initiatives (AEI), we apportion the estimated capex spent over the period of renovation. We then aggregate these figures to calculate an overall IRR achieved for each REIT. 
• We also provide a separate IRR figure that strips out the impact of rental support provided to the REITs.

Conclusion: CCT offers best value for money 

• We overlay the performance measures with the expense ratios for the REITs in 2016. 
• We define expense ratio as total asset management fees paid to the managers and other trust expenses incurred in 2016 as a percentage of total assets under management (AUM).

Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-06-19

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 1.810 Same 1.810

BUY Maintain BUY 1.180 Same 1.180

HOLD Maintain HOLD 1.760 Same 1.760