Month: October 2008
Suntec – OCBC
Defensive focus
Steady 4Q, no surprises. Suntec REIT (Suntec) posted a 20.3% YoY and a 3.7% QoQ gain in 4Q gross revenue to S$61.4m. Results were as expected. The REIT will distribute 2.85 S cents per unit, up 2.2% QoQ1. Portfolio performance was largely stable with Suntec’s office and retail portfolios enjoying occupancy rates of 99.3% and 99.6% respectively. Leases at Suntec City office were secured at an average rent of S$12.57 psf per month in 4Q. Retail rentals edged up slightly QoQ. Suntec’s properties have been revalued, leading to a marginal revaluation surplus of S$11.9m for 4Q ex One Raffles Quay, which is classified separately. Implied cap rates (up around 25 basis points since last year according to management) still feel a little low to us. Due to the change in financial year end, Suntec will revalue its properties again in December.
Defensive focus. Suntec announced yesterday it acquired 12,023 square feet (sf) of strata space at Suntec City Office Towers for S$26.3m. The buy was funded with the proceeds from a Nov 2006 private placement earmarked for this purpose. Suntec has about S$40m in unused proceeds left. However, management guided it is taking a step back and has relaxed its ‘proactive’ acquisition strategy. Suntec also said that the major asset enhancement plans for Park Mall have been shelved for now.
Unknowns priced in. Suntec will see about S$825m of debt coming up for refinancing in the next 15 months (Exhibit 2). In our view, the cost of debt achieved (versus the current all-in cost of 3.19%) will be the key risk here. Our focus is primarily on the uncertainty from the rental and occupancy front. On the office side, about 30% of the tenant mix is from the financial services industry. Suntec sees 32.7% of its office portfolio up for renewal over the next 15 months. Industry data shows that office rentals have peaked, as we had expected, and we could see office rents back in single digits going forwards. Still, the average rent for expiring leases in 2009 is at a very low S$5.32 psf pm – which is a nice hedge even in the face of rental declines. We feel these risks have been more than factored in at current price levels. Our revised RNAV estimate of S$1.05 prices in a 38% decline in asset values. Our fair value estimate for Suntec is 90 S cents, at a 15% discount to our RNAV estimate. Maintain BUY.
a-iTrust – BT
Stable result
Story: Ascendas India Trust (AiT) reported 2Q08 results in line with expectations. Gross revenues increased 18% yoy to S$29.8m, mainly due to an expanded portfolio (Addition of Vega and Crest in 2H08). Net property income grew a lower 2% due to higher marketing fees and utilities costs. Distributable income grew by 24% yoy to S$13.8m, translating to a DPU of 1.82 cts. For the 1st half of the year, unitholders will receive a total DPU of 3.47cts.
Gearing remains low at 5% currently but is expected to increase to 13.5% after drawing down its loan as construction of its 3 new buildings commences.
Point: Construction schedule is on track with completion targeted in March’10. Of the 3 buildings being constructed, other than a BTS facility, pre-leasing activities, for the other 2, will usually start 6 months prior completion, as guided by management.
On the back of a global slowdown, we view that demand for AiT’s space at its IT parks could soften. As such, we moderate our occupancy and rental rates moving forward; we are now expecting occupancies to decline 5% on the top of a 5% drop in asking rents for AiT’s properties in FY10F.
Relevance: While valuations remain attractive at 0.5x P/BV with an attractive DPU yield of 15-16%, AiT is not unique among the S-REITs, that trade at an average of 0.4x P/BV. As such, we maintain our HOLD call on AiT, with a target price of 0.52 based on 10% discount to our RNAV.
Suntec – DBS
No surprises
Story: Suntec’s 20% yoy jump in topline to $61.4m was in line with street estimates, lifted by positive rental growth and contributions from ORQ. NPI grew by a stronger 25% thanks to a lower expense ratio of c26% during the quarter. As a result, distribution income surged to $43.9m (DPU: 2.85cts). The group revalued its properties up by 6.5%, translating to a book NAV of $2.26. Its 1/3 share in ORQ was also revised up to $2719psf.
Point: The group continued to enjoy positive rental reversions from its new and renewal office leases at Suntec and Park Mall as average passing rents are still significantly below current asking levels. Meanwhile, retail rents have also continued trending up on the back of AEIs and organic improvements. Going forward, the office leasing market has grown more challenging with moderating demand and slower economic growth. An estimated 30% and 24% of portfolio NLA is due to be renewed over FY09-10. While rents and occupancy are likely to come under pressure, the large gap between new and previous levels should partially offset the slack in income. With retail operations anticipated to be increasingly competitive and with c42% of retail leases up for renewal in FY09, we believe growth in retail revenue, which accounts for 57% of topline, is likely to decelerate. In tandem with the slower environment, plans to redevelop Park Mall are shelved in view of the dampened industry and credit environment, as is the move to acquire additional strata units at Suntec office. While gearing is not high at 32%, refinancing activities will be focused on with $825m of debt (44% of total) maturing next year, largely at Dec 2009.
Relevance: Suntec is offering FY09 and FY10 DPU yield of 14-16% and 0.3x P/bk NAV, in line with other office and retail S-reits. While valuations are compelling, given the lack of near term drivers, we maintain our Hold call with a target price of $0.88, based on a 20% discount to RNAV of $1.10.
MP REIT – BT
Reit sponsors and their lucrative exit strategies
MACQUARIE Group, which on Tuesday said it would sell its entire stake in Macquarie Prime Reit and the Reit’s manager to Malaysia’s YTL Corporation for $285 million, is certainly making a neat exit from its investment. However, the interests of minority shareholders, some of whom were waiting for a similar offer for their units, have not been as well served.
When the real estate investment trust (Reit) announced a strategic review in February, the management said it would sponsor the review with the specific objective of enhancing value for all unitholders. ‘The review will consider both corporate and asset-level strategies, including the potential to provide unitholders with a proposal to acquire 100 per cent of (the Reit’s) units,’ management said then.
On Tuesday, Macquarie qualified that, while the review considered the potential to provide unitholders with a proposal to acquire 100 per cent of units, ‘no firm offer was received in the current challenging capital markets environment’.
Having failed to find a buyer for all the units in the Reit, Macquarie decided to sell just its 26 per cent stake in the Reit as well as its 50 per cent interest in the Reit’s manager. The bank wants to redeploy capital in new growth areas. But the deal sells other unitholders – who could have been waiting for a general offer since the February announcement – short.
It is debatable whether Macquarie could have got an offer for all the units in the Reit if it had been willing to accept a much lower price. Some unitholders BT spoke to, at least, are convinced that the bank could have. YTL is paying 82 cents a unit for 247.1 million shares in the Reit. The price is a 52 per cent premium over the last traded price of 54 cents last Friday, the last day of trading before the deal was announced on Tuesday.
The sale has also resulted in a change of sponsor and a fundamental change in terms of strategy and expertise. This should also have been an incentive for management to obtain the same terms for all the unitholders.
YTL’s managing director Francis Yeoh has said that Macquarie Prime will be rebranded as Starhill Global Reit and will be YTL’s main vehicle for acquiring prime retail space in Asia and the West. The YTL group also controls Bursa Malaysia-listed Starhill Reit, the country’s largest Reit with four properties in Kuala Lumpur worth about US$430 million in all. Mr Yeoh has not ruled out the merger of the two Reits – which could change the profile of Macquarie Prime Reit, which currently owns $2.2 billion of retail and office properties in Singapore, China and Japan.
The deal is not the first such transaction this year. In July, Frasers Centrepoint purchased Allco Finance’s 17.7 per cent stake in the then-Allco Commercial Trust (now Frasers Commercial Trust) at a 17 per cent premium to the last traded price – also bringing about a change of sponsor. But the difference between that deal and the Macquarie- YTL deal is that in the case of the latter, there was an implication that a proposal to acquire 100 per cent of the Reit’s units could be forthcoming. A statement between February and October to the effect that no offer for 100 per cent of the units was likely and that Macquarie was now looking to sell its own stake could have avoided this mix-up.
Taking a wider view, there also appears to be a flaw in Singapore’s Reit structure, which allows sponsors to charge high management fees for running the Reit and then obtain superior terms should they decide to exit their investments. Unitholders, who could have bought into a Reit because of the sponsor’s brand name and pipeline, are then left holding a slightly different product. Perhaps there should be a moratorium of several years for sponsors before they can exit the Reit they promoted in the first place.
Suntec – BT
Refinancing tops Suntec Reit agenda
Q4 distribution income surges 44.5% to $43.9m
WITH credit concerns looming over the market, refinancing is now top of the agenda for Suntec Real Estate Investment Trust (Reit).
‘While we have no major financing needs in the next 12 months, we are keenly aware of the current global financing crisis and liquidity crunch,’ said Yeo See Kiat, CEO of Suntec Reit manager ARA Trust Management (Suntec).
‘Refinancing of our $700 million CMBS loan due in December 2009 is one of our key priorities.’
For FY2009, Suntec Reit has debts of $40 million, $85 million and $700 million maturing in April, May and December respectively. Its gearing ratio at Sept 30 was 31.9 per cent.
But refinancing should not pose a major problem, Mr Yeo said. ‘We have got a good partner in Cheung Kong. The financial institutions know who we are.’
ARA Trust Management (Suntec) is linked to Cheung Kong Group, a major Hong Kong conglomerate.
Mr Yeo was addressing financing concerns at a briefing on Suntec Reit’s results for its fourth quarter ended Sept 30.
It reported a 44.5 per cent year-on-year surge in distribution income to $43.9 million. This drove a 34.6 per cent jump in distribution per unit (DPU) to 2.854 cents.
With an annualised DPU of 11.353 cents, Suntec Reit’s distribution yield was 17.6 per cent based on the closing unit price of 64.5 cents on Oct 29.
According to Suntec Reit, its office portfolio continued to enjoy positive rental reversion during the quarter. The committed occupancy rate at Sept 30 was 99.3 per cent.
Suntec Reit has acquired about 61,500 sq ft of Suntec City strata-titled office space, but is likely to put such growth on hold given today’s business climate, Mr Yeo said.
Also shelved is the redevelopment of Park Mall, he added.
The project could be postponed for one to two years and reviewed when conditions change.
Suntec Reit’s retail portfolio enjoyed an occupancy rate of 99.6 per cent at Sept 30.
Suntec City Mall, Park Mall and Chijmes all saw higher committed passing rents compared with a year earlier.
Investors pushed Suntec Reit’s unit price up 4.5 cents yesterday to close at 69 cents.