Singapore Industry Focus Refer to important disclosures at the end of this report DBS Group Research. Equity 3 Jul 2015 All systems go! STI : 3,327.84 Modest changes to REIT regime Higher development limits could spark more growth M&A and internalisation a potential catalyst BUY FCT, FCOT, MINT and MAGIC Analyst Derek TAN +65 6682 3716 derektan@dbs.com Mervin SONG CFA +65 6682 3715 mervinsong@dbs.com Rachael TAN +65 6682 3713 rachaeltan@dbs.com Widely anticipated update from MAS. The Monetary Authority of Singapore (MAS) has delivered a firm message in their latest update to the REIT consultation paper that corporate governance and transparency remains high priorities and in the meantime, ensures that interests between unitholders and REIT managers/sponsors are aligned. Our thoughts on key topics of interest to market are: No changes in fee structures. Highly anticipated fee structure tweaks did materialise as MAS has elected to leave it to market to decide. The 1% and 0.5% fees payable to the REIT managers are also maintained, as the alternative proposal to peg on a cost recovery basis might be too hard to justify. We would however prefer to have a reduced fee payable (as per some S-REITs) relating to related party transactions. Gearing limits reduced to 45%. MAS has done away the need for a credit rating and settle for a standardised lower gearing limit of 45%, which might be a little low. S-REITs have on average maintained gearing at c.34%, but we have seen S- REITs acquiring assets overseas and as such, taken higher debt levels as a form of tax shelter and currency hedges. The lower limit could reduce financial flexibility and mean that S-REITs will be more prudent and selective in overseas ventures. We however believe that S-REITs will maintain their credit rating to retain pricing transparency and access to the debt capital markets. Higher development limits of 25% to spark more growth. Development limits are raised to 25% (vs 10% currently) but this allowance is subject to specific approvals from unitholders. We see this as a net positive for S-REITs, given limited acquisition growth prospects. This will enable S- REITs, especially ones with smaller portfolios to embark on development projects to optimise their portfolio returns. M&A; internalisation of REITs. A revised stance that MAS might allow REIT managers to manage two REITs and the internalisation of managers might aid the consolidation of the Singapore market, similar to the more mature US and Australian markets. Neutral impact on REITs. We see limited impact on S-REITs from the conclusions of this consultation paper. We like S- REITs with visible growth and ability to surprise through higher earnings growth potential. Top picks are FCT, FCOT, MINT and MAGIC. STOCKS Frasers Centrepoint Trust Frasers Commercial Trust Mapletree Industrial Trust Mapletree Greater China Commercial Trust Source: DBS Bank Price Mkt Cap Target Price Performance (%) S$ US$m S$ 3 mth 12 mth Rating 2.08 1,409 2.20 3.0 9.5 BUY 1.54 778 1.79 2.7 12.8 BUY 1.56 2,023 1.68 (1.0) 9.1 BUY 1.02 2,060 1.12 (3.3) 17.2 BUY www.dbsvickers.com ed-th / sa- JC
Key Highlights in MAS The Monetary Authority of Singapore (MAS) has responded to feedback received on the proposed regulatory changes regime governing REIT and REIT Managers. To recap, the proposed changes were mainly aimed at (i) improving corporate governance for the Singapore REIT sector, (ii) addressing the perceived agency issue between interests of unitholders and REIT managers. While we note that proposals for improving corporate governance were widely accepted and will be implemented going forward, we saw limited changes to hot topics like fee structures, gearing limits, etc. Summary of key changes to REITs and our thoughts on these hot topics : 1. Fee structure (no changes) Proposed: New performance fee payable to REIT manager to be based on a methodology/metrics to foster better alignment of interest, e.g. pegged to NAV growth or DPU growth Response from MAS: Will not prescribe a list of permissible fee computation methodology as long as it meets the principle DBS's thoughts: The proposals were seen prescriptive in the first place, in our view. The REIT market has progressed, in recent listings, to tag performance to growth in DPU and while different structures have their pros and cons, we believe a market-based approach should be sufficient to compel REIT managers to align their fee structure in the best interest of unitholders. 2. Acquisition fees/divestment fees (no changes) Proposed to be pegged on a cost recovery basis Response from MAS: Will not change current calculation (typically fee of 1% of acquisition value; 0.5% of divestment value), given that cost recovery is hard to justify DBS's thoughts: No issues, though we would prefer REIT managers to pay a slightly lower acquisition fee of 0.75% for sponsor-related acquisitions (as per some REITs which have this provision) 3. Gearing limits (lowered to 45%) Proposed a single-tier 45% gearing limit to all REITs, regardless of credit rating Response from MAS: To change limit to 45% (vs 35% for unrated REITs and 60% for REITs with credit rating DBS's thoughts: The lower gearing limit of 45% would limit REITs from over-gearing themselves and result in better financial prudence. However, given that REITs have been acquiring overseas assets to diversify and grow their portfolios, higher debt levels are taken usually as a form of tax shelter and currency hedges. As such, going forward, higher-geared REITs like (K-REIT- 41% gearing, OUEHT - 42% gearing, MAGIC 41% gearing) may need to relook at their capital structures as the market may be more comfortable that REIT managers stay below 40%. In addition, the reduced financial flexibility may limit the growth of the overall S-REIT market by creating an additional hurdle to the establishment of REITs whose assets are mainly located overseas. 4. Increased development limits (from 10% of property value to 45% of property value) Proposed to increase to 25% from 10% of property value currently. The additional 15% allowance is only for assets held by the REIT for at least three years and to hold on to the property for a further three years. Response from MAS: To implement but the use of the additional 15% allowance has to undergo specific unitholder approval DBS's thoughts: While the additional development limits will change the risk profile for REITs, we think the additional headroom will aid the REITs in growing income, given limited opportunities to grow through acquisitions in the current climate. We may see more REITs looking at optimising value/returns of their portfolios by rejuvenating them via active redevelopment. Additionally, REITs with larger portfolios may take on more greenfield projects on top of ongoing redevelopment activities. While most REITs will benefit from this rule, we see the smaller industrial REITs benefitting the most, given the bite-size quantum for individual portfolios. 5. Clarification that enables potential consolidation Following investor feedback, MAS has also clarified that 1. It is now prepared to consider applications from REIT managers to manage more than one REIT 2. REITs can be both internally and externally managed Page 2
DBS's thoughts: We believe MAS s response to the consultation paper will aid any potential consolidation of the REIT sector. A key hurdle for a merger between two REITs in the past was the inability of a REIT manager to manage more than one REIT in a sector. MAS has clarified that it will now be prepared to consider applications from REIT managers to manager more than one REIT. This is on the proviso that the REIT manager has the necessary expertise and it can properly mitigate any potential conflicts of interest that may arise. The only time MAS intervened in such a case was in 2009, when it indicated that it would not approve the Cambridge REIT Manager s attempts to install itself as Manager of AIMS AMP Capital Industrial REIT (then MacarthurCook Industrial REIT), citing potential conflicts of interest as a reason. Furthermore, as MAS has clarified that REITs can be both managed internally and externally, this will place additional pressure on existing sponsors/reit managers to perform. Otherwise, unitholders have the option of voting out a manager and hiring executives to internally manage the REIT. Page 3
Summary of REIT gearing levels and potential upside from changes in development limits Deposited Properties @ 31Mar15 (S$m) Estimated value of development at 10% limit (S$m) Estimated value of development at 25% limit (S$m) REIT Market Cap (S$b) Gearing Rating Sponsor Office CapitaCommercial Trust 4.6 29.9 A3 4,886 489 1,222 CapitaLand Frasers Commercial Trust 1.1 37.2 BB 1,787 179 447 FCL Keppel REIT 3.6 42.4 Baa2 3,589 359 897 Keppel Corp Retail CapitaRetail China Trust 1.4 28.6 n/a 2,251 225 563 CapitaLand CapitaMall Trust 7.3 33.8 A2 7,516 752 1,879 CapitaLand Croesus Retail Trust 0.5 50.4 n/a 941 94 235 Croesus Group Frasers Centrepoint Trust 1.9 28.6 Baa1 2,400 240 600 FCL SPH REIT 2.7 26.0 n/a 3,164 316 791 SPH Commercial Mapletree Commercial Trust 3.1 36.4 Baa1 4,199 420 1,050 Mapletree Investments Mapletree Greater China Commercial Trust 2.8 36.2 Baa1 5,349 535 1,337 Mapletree Investments Starhill Global Reit 1.9 28.7 BBB+ 2,847 285 712 YTL Corporation Suntec REIT 4.3 34.8 Baa2 5,974 597 1,493 ARA Industrial Ascendas India Trust 0.8 25.0 n/a 1,012 101 253 Ascendas Ascendas REIT 5.8 33.5 A3 7,868 787 1,967 Ascendas Cache Logistics Trust 0.9 36.6 Baa3 1,221 122 305 CWT, ARA Cambridge Industrial Trust 0.9 36.4 BBB- 1,391 139 348 NAB Mapletree Industrial Trust 2.7 30.6 BBB+ 3,267 327 817 Mapletree Investments Mapletree Logistics Trust 2.8 34.3 Baa1 4,631 463 1,158 Mapletree Investments Soilbuild Business Space REIT 0.8 38.5 BBB- 1,088 109 272 Soilbuild Group Hospitality Ascendas Hospitality Trust 0.8 37.2 n/a 618 62 155 Ascendas Ascott Residence Trust 2.0 38.7 Baa3 3,751 375 938 CapitaLand CDL Hospitality Trusts 1.6 32.3 BBB- 2,298 230 575 M&C, City Developments Far East Hospitality Trust 1.4 31.5 BBB- 2,479 248 620 Far East Organisation Frasers Hospitality Trust 1.0 38.4 n/a 1,661 166 415 FCL OUE Hospitality Trust 1.2 42.1 n/a 2,049 205 512 OUE Healthcare Parkway Life REIT 1.5 34.4 BBB 1,616 162 404 IHH Religare Health Trust 0.8 13.6 n/a 824 82 206 Religare Others Keppel DC REIT 0.9 26.7 n/a 1,020 102 255 Keppel Corp REITS not covered by DBS AIMS AMP Capital Industrial REIT 0.0 31.4 BBB- 1,233 123 308 AIMS and AMP Lippo Malls Indonesia Retail Trust 1.0 31.6 Baa3 1,786 179 447 Lippo Group Sabana Shari'ah Compliant REIT 0.6 38.0 BBB- 1,260 126 315 Vibrant Group Saizen REIT 0.2 37.0 Ba3 480 48 120 J apan Regional Assets Manager V iva Industrial REIT 0.6 43.4 n/a 853 85 213 Ho Lee Group and Kim Seng Holdings FIRST Reit 1.0 32.6 n/a 1,172 117 293 Lippo Group * Ascendas India Trust and Croesus Retail Trust are business trust which are not impacted by the REIT gearing limits Source: REIT Managers, DBS Bank Source: REIT Managers, DBS Bank Page 4
Peer Comparison REIT FYE Price Rec Target Price Mkt Cap Total Return Yield P/NAV (S$) (S$) S$'m (%) FY15/16F FY16/17F FY17/18F FY15/16F Office CCT Dec 1.55 Hold 1.81 4,555 23% 5.9% 6.5% 6.8% 0.89 FCOT Sep 1.54 Buy 1.79 1,052 23% 6.5% 6.7% 6.8% 0.93 KREIT Dec 1.15 Buy 1.32 3,649 21% 6.0% 6.1% 6.3% 0.81 Retail CRCT Dec 1.72 Hold 1.64 1,445 2% 6.4% 6.9% 7.5% 1.08 CMT Dec 2.12 Hold 2.19 7,343 9% 5.4% 5.5% 5.6% 1.17 CRT Jun 0.94 Buy 1.00 486 15% 8.5% 8.0% 7.9% 1.21 FCT Sep 2.08 Buy 2.20 1,906 12% 5.7% 5.8% 5.9% 1.12 SPH REIT Aug 1.05 Hold 1.03 2,652 3% 5.2% 5.2% 5.4% 1.13 Commercial MCT Mar 1.46 Hold 1.63 3,087 17% 5.8% 6.1% 6.3% 1.18 MAGIC Mar 1.02 Buy 1.12 2,787 17% 7.1% 7.4% 7.3% 0.86 SGREIT Dec 0.88 Buy 0.91 1,919 9% 5.9% 6.5% 6.7% 0.93 Suntec Dec 1.72 Hold 1.76 4,306 8% 5.6% 5.9% 6.2% 0.83 Industrial a-itrust Mar 0.91 Buy 0.96 836 12% 6.1% 6.1% 6.7% 1.34 A-REIT Mar 2.41 Hold 2.65 5,803 16% 6.2% 6.3% 6.3% 1.16 Cache Dec 1.15 Buy 1.28 900 19% 7.4% 7.6% 7.8% 1.19 CREIT Dec 0.69 Hold 0.73 888 13% 7.2% 7.3% 7.4% 1.02 MINT Mar 1.56 Buy 1.68 2,738 15% 6.8% 6.9% 7.4% 1.18 MLT Mar 1.13 Buy 1.31 2,798 23% 6.6% 6.9% 7.1% 1.10 SBREIT Dec 0.86 Buy 0.91 795 14% 7.4% 7.6% 7.7% 1.08 Hospitality ASCHT Mar 0.71 Buy 0.76 792 15% 8.4% 8.5% - 0.99 ART Dec 1.30 Buy 1.38 2,002 13% 6.8% 7.1% 7.6% 0.97 CDREIT Dec 1.61 Hold 1.77 1,584 17% 6.9% 7.0% 7.2% 0.98 FEHT Dec 0.79 Hold 0.76 1,398 4% 6.3% 6.3% 6.3% 0.81 FHT Sep 0.835 Buy 0.96 1,007 22% 7.4% 7.6% 7.7% 0.96 OUEHT Dec 0.935 Buy 0.98 1,243 12% 7.3% 7.4% 7.7% 1.04 Healthcare P-Life Dec 2.40 Buy 2.66 1,452 16% 5.0% 5.1% 5.2% 1.40 RHT Mar 1.03 Hold 1.04 822 8% 7.1% 8.2% 9.0% 1.09 Others KDCREIT Dec 1.06 Buy 1.12 936 12% 6.2% 6.7% 7.1% 1.19 Sector Average 62,226 6.4% 6.6% 6.7% 1.07 Source: REIT Managers, DBS Bank Page 5
DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd and DBS Vickers Securities (Singapore) Pte Ltd, its respective connected and associated corporations and affiliates (collectively, the DBS Vickers Group ) only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd., its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the DBS Group )) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. ANALYST CERTIFICATION The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of the date the report is published,the analyst and his/her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in the securities recommended in this report ( interest includes direct or indirect ownership of securities). Page 6
COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd., DBS Vickers Securities (Singapore) Pte Ltd ( DBSVS ), their subsidiaries and/or other affiliates do not have a proprietary position in the securities recommended in this report as of 31 May 2015 except CapitaLand Commercial Trust, Frasers Commercial Trust, Keppel REIT, CapitaLand Retail China Trust, CapitaLand Mall Trust, Croesus Retail Trust, SPH REIT, Mapletree Commercial Trust, Mapletree Greater China Commercial Trust, Starhill Global REIT, Suntec REIT, Ascendas India Trust, Ascendas REIT, Cache Logistics Trust, Cambridge Industrial Trust, Mapletree Industrial Trust, Mapletree Logistics Trust, Soilbuild Business Space Reit, Ascendas Hospitality Trust, Ascott Residence Trust, CDL Hospitality Trusts, Far East Hospitality Trust, Frasers Hospitality Trust, OUE Hospitality Trust, Parkway Life Real Estate Investment Trust, Religare Health Trust, Keppel DC REIT 2. DBS Bank Ltd., DBSVS, DBSVUSA, their subsidiaries and/or other affiliates beneficially own a total of 1% of any class of common equity securities of Croesus Retail Trust, Mapletree Greater China Commercial Trust, Starhill Global REIT, Soilbuild Business Space Reit, Ascott Residence Trust, Far East Hospitality Trust, Frasers Hospitality Trust, Keppel DC REIT and 5% of Croesus Retail Trust mentioned as of 31 May 2015 3. Compensation for investment banking services: DBS Bank Ltd., DBSVS, DBSVUSA, their subsidiaries and/or other affiliates have received compensation, within the past 12 months, and within the next 3 months may receive or intends to seek compensation for investment banking services from Croesus Retail Trust, Frasers Centrepoint Trust, Ascendas REIT, Soilbuild Business Space Reit, Ascott Residence Trust, Frasers Hospitality Trust, Keppel DC REIT DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. 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