City Developments - Strong fundamentals this time round

Selective landbank acquisition strategy. Management mentioned that the current landbank of about 4.5m sqf (65% in the mass market to mid-tier segments and 35% in the high-end segment) is quite healthy and that it would acquire more land only if the price is right. It believes the reserve price of S$844psf ppr is high for the Laguna Park collective sale site. CDL was recently awarded the Chestnut Avenue site from the government reserve list for its top bid of S$280psf ppr, which makes it the fourth highest bidder out of 13 bids in total put in for the just-announced Dakota Residences site. Management noted good interest in two other sites (Yio Chu Kang Road and Serangoon Avenue 3 sites) that were triggered for launch from the Government Land Sales programme.

Upcoming projects. CDL will launch 396 units in the former Hong Leong Gardens site during the last week of this month with indicative average selling prices (ASP) of above S$900psf. Following this, it will launch 160 units at The Albany in 4Q09 with indicative ASPs of S$1,100-1,200psf. Management has been receiving inquiries from many foreign buyers for its high-end 228- unit The Quayside Isle project at Sentosa Cove and will be launching this in 1Q10 soon after the opening of the Sentosa integrated resort (IR) with indicative ASPs of S$1,800-2,200psf, depending on market conditions.

Strong fundamentals this time round. Management highlighted that the recovery in the residential segment is sustainable with buying interest filtering up from the mass market and mid-tier segments to the high-end segment compared with the top-down filtering seen during the previous property boom. It believes current demand is well supported by fundamentals, with pent-up demand, low interest rates, Asian growth story and turnaround in market sentiment acting as the key catalysts. It expects demand to remain strong for the rest of the year. It also added that speculation levels are not high enough at the moment for the government to take drastic measures.

Hotel occupancy levels expected to improve in 2H09. CDL said hotel occupancy levels have been picking up slowly after 2Q09, although advance booking for F1 games has been slightly disappointing. It expects demand to pick up as the event draws closer. Management expects hotel occupancy levels to firm up with marginal improvements in average daily rate (ADR) supported by the IR openings and other events like the APEC conference.

Positive rental reversion seen in commercial segment. Revenue and profits from the commercial segment increased 17% and 25% respectively due to positive rental reversions despite the steep fall in office rentals as passing rentals were still below spot rentals. The occupancy levels for its Grade A space are still above 90% and management expects occupancy levels to remain healthy for the current financial year.

Construction work for South Beach project to begin by 2010. CDL has completed its financing arrangement for its much-awaited South Beach project in June and is finalising its design. The project will comprise of 40% office space and 30% hotel space, and the remaining 30% will be white space with primarily residential developments. Management noted that construction costs have eased and expects to award the construction contract next year. There could be some write-downs booked towards the end of the year due to declines in the overall property value mostly in the office segment.

Easing financing concerns. Management noted that with the property market looking up, banks are more than willing to lend again. CDL is able to finance its loans at an attractive interest rate of 3.25%. The company’s net gearing came down to 0.46x in 2Q09 and has a healthy interest cover ratio of 10.1x.

We continue to see good value in CDL and maintain our BUY recommendation with a target price of S$12.70 pegged at a 15% premium to 2009 RNAV of S$11.04.

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CDL HOSPITALITY TRUST - A Satisfying Stay

We initiate coverage on CDL Hospitality Trust (CDL HT) with a BUY recommendation and fair value of $1.72. CDL HT currently owns hospitality related properties in Singapore and New Zealand. We believe the Trust is poised to benefit from the economic recovery coupled with the government efforts to boost the local tourism industry.

Tail-end of economic recession? Singapore technically exited the recession in 2Q09 with a q-q SAAR GDP of 20.7%. The official forecast from MTI is a contraction of 4% to 6% for 2009. That being said, the share price of CDL HT has re-rated from 0.3 times book value seen in March this year to approximately 1 times book value currently, on optimism of the recovering economy. We believe that CDL HT will continue to re-rate to its historical average of above 1.5 times book value seen during the economic boom of 2007 if the cards are lined up properly.

Tourism 2015. The Singapore government has set a target to achieve 17 million tourist arrivals and tourist revenue of $30 billion by 2015. Hospitality operators like CDL HT will stand to benefit from the government initiatives.

Healthy balance sheet. CDL HT has one of the lowest gearing among the S-REITs. We view this as prudence on management part in managing capital usage well. CDL HT has gearing of 19% and total debt of $287 million. We believe with the backing of a strong sponsor, it has better access to funding sources.
Strong sponsor, benefits aplenty. The sponsor of CDL HT is M&C Hotels plc which is majority owned by City Development Ltd. With a right of first refusal from the sponsor, there are ample acquisition opportunities for CDL HT to expand its portfolio. Furthermore, management has indicated that it has the expertise to operate its hotels if any of its lessees decides to terminate their leases.

Fortune Real Estate Investment Trust - Proceeding with acquisition and rights issue

FRT will proceed with acquisition and rights issue: All resolutions for the proposed acquisition of the three properties and one-for-one rights issue were duly passed at the EGM held on 11 September.

One-for-one rights issue at HK$2.29: Book closure date for rights entitlement is set at 17 September 5pm. The commencement of "nilpaid rights" trading period is yet to be determined but is expected to be no later than 23 Sept. (see Table 1 for indicative timetable).

Under-gearing still better than over-paying: The three new assets would be acquired at an average net yield of 5.1%, which looks fair. We believe this acquisition is much better than previous acquisitions done by other REITs where the sponsor sells assets at a high price into the REIT and uses a combination of financial engineering and aggressive gearing to initially maintain a high yield –it only delays the pain of overpaying for assets. Fortune REIT's proposed acquisition is simple and straightforward, though the gearing level might even be considered a bit too conservative, in our view. The blended yield post acquisition would be still be high at 7.5% for FY10E and 7.3% for FY11E. Theoretically, investors could gear up externally (and buy more of the REITs) to engineer a higher yield on equity, though it may not be a viable option in reality.

Maintain OW, Jun-10 PT HK$3.4: In our previous note dated 24 Aug 2009, we had already incorporated the contributions from new assets and also the dilution from the rights issue. Our Jun-10 NPV post acquisition and rights issue is HK$3.4/share. We maintain our ex-rights PT at HK$3.4/share, which is on par with the new NPV. Our price target is based on a discount rate of 6.57% and LT growth rate of 0.4%. Risks to our PT include higher than expected vacancy rates and prolonged economic recession.