Citi raises target prices for Reits (BT: 06 Jan 2007)

Citi raises target prices for Reits

It rates CMT a 'buy', but rates A-Reit a 'hold', CCT a 'sell'

By MATTHEW PHAN

HAVING lowered its projections for 10-year government bond rates from 3.5 per cent to 3 per cent, Citigroup has upgraded the target prices of the real estate investment trusts (Reits) it covers.

However, while CapitaMall Trust Management (CMT) continues to be favoured as a 'buy', Ascendas Reit (A-Reit) has been downgraded to a 'hold', owing to its top price performance in the last quarter. Citi maintains a 'sell' on CapitaCommercial Trust (CCT), arguing that a couple of the trust's major tenants could be subject to rental caps.

Asset enhancement is the key force behind value creation at CMT, said analyst Wendy Koh, who raised her target price for the Reit from $2.69 to $3.21. CMT's stock price closed at $2.85 yesterday.

CMT has started asset enhancement at Bugis Junction, which is expected to add $4 million - or 10 per cent - to net income, she said. Asset enhancement at Raffles City could also add 25 per cent to net income and value, where CMT plans to add 150,000-200,000 square feet of retail space.

Asset enhancement is also ongoing at IMM, and other assets with potential include Sembawang Shopping Centre, Hougang Plaza and Jurong Entertainment Centre. Through such programmes, CMT has raised the value of some properties by 30-75 per cent, said Ms Koh.

It is Citi's top pick among Singapore Reits, with the highest expected total return of 15 per cent, comprising a 10.7 per cent share price return and a 4.3 per cent expected dividend yield.

A-Reit, on the other hand, has seen its stock price rise 27 per cent since October 2006, Ms Koh said in her Jan 4 report. She raised the target price for A-Reit from $2.35 to $2.72, and downgraded the stock to a 'hold'. A-Reit units closed at $2.56 yesterday.

A-Reit registered the highest quarter-on-quarter rise in occupancy rates for its multi-tenanted buildings to 94.3 per cent, while its high-tech industrial parks and science and business parks sectors achieved growth to 96 per cent and 93 per cent respectively.

'A-Reit could also acquire another $400 million worth of yield-accretive assets in FY08 without raising equity as its assets are revalued,' Citi said. However, with increased competition from other industrial Reits, 'the days of rapid growth in DPU (distribution per unit) might be over'.

Despite raising the target price for CCT from $2.04 to $2.30, Ms Koh reiterated a 'sell' on the Reit, citing rich valuations and a risk of DPU disappointment. CCT's price closed at $2.54 yesterday.

'At current price, we estimate CCT offers the lowest yield of just 3 per cent among the listed Reits in Singapore,' she said.

Key tenants at CCT's Capital Tower, with leases expiring in 2007 and 2008, are subject to rental caps. In addition, with more than 90 per cent of the space in the tower to be renewed only in December, it is unlikely to benefit fully from rising rental rates, said Ms Koh.

'We believe we were too optimistic on its rental reversion for 2007 and 2008 previously. DPU growth in 2007 is likely to be just 7.7 per cent. The bulk of growth will likely take place in 2008 with DPU expected to rise by 24 per cent.'

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