Month: December 2008
MP REIT – SGX
Macquarie Pacific Star Prime REIT Management Limited (“the Manager”), as manager of Macquarie Prime Real Estate Investment Trust (“MP REIT”), has been informed by Futuregement K.K. (“Futuregement”), the local asset manager of one of the properties in MP REIT’s Japan portfolio, that its parent company F.L.E.G. International Co., Ltd. (“FLEG”) has filed a petition for commencement of civil rehabilitation with the Tokyo District Court on 18 December 2008. Future Revolution K.K. (“Future Revolution”), another wholly owned subsidiary of FLEG, is the master tenant and local property manager of MP REIT’s seven Tokyo properties. Both Futuregement and Future Revolution have advised that this will not have any direct impact on their business operations.
As at 30 September 2008, MP REIT’s Japan portfolio of seven properties enjoyed 100% occupancy except for Roppongi Primo (86%) and Daikanyama (88%). The portfolio contributed 7.0% (S$6.6 million) and 8.2% (S$5.7 million) to MP REIT’s gross revenue and net property income respectively for the nine months ended 30 September 2008.
Future Revolution and its related entities directly occupy 19,162 sq ft of NLA (33.3% of Japanese portfolio NLA) while the remainder of the Japan portfolio’s NLA is occupied by end tenants that are not related to Future Revolution (or its related entities). At this juncture, Future Revolution and its related entities are current on their rental obligation. In the event of rent arrears, MP REIT may draw on security deposits provided for the properties, amounting to approximately six months of rent for each property to offset any potential negative impact on MP REIT’s financial results in the near term.
The properties are all relatively new, ranging from 1 to 4 years old. They are located in prime Tokyo areas of Roppongi, Aoyama, Jingumae, Ebisu, Daikanyama and Nakameguro and are all within five minutes’ walk from the nearest sub-way station. Subject to prevailing market conditions, the prime locations of the assets should be advantageous to re-letting should there be a need.
The Manager is in close consultation with its legal advisors, to assess the potential impact of FLEG’s filing on Future Revolution’s and Futuregement’s ability to continue to meet their obligations in relation to MP REIT’s portfolio of Japan properties. The Manager will also look into the possibility of replacing Future Revolution and Futuregement in their respective roles if necessary.
The Manager will closely monitor the situation and will take necessary actions to mitigate MP REIT’s risk exposure.
CCT – CIMB
Bear rally still has legs
• Doomsday scenario: office rents fall to S$2.40psf. We stress-test our model for CCT assuming that average prime office rents in the market will fall by 60% over 2009-10, reaching S$2.40psf in 2010, or 40% below the S$4psf in the last trough. This would drive DPU declines of 5% in 2009 and 27% in 2010. Our target price also falls about 30% from S$1.17 to S$0.81.
• Buffer for CCT. Although the negative macro environment and large impending new supply bode ill for office rents and occupancy levels, we believe that any negative impact on CCT would be mitigated by: 1) low portfolio average rents of S$7psf/month vs. the market average of S$16psf/month; 2) long weighted average lease terms to expiry of 6.7 years for its top 10 tenants, more than twice the typical commercial lease term of three years; 3) rental caps and long lease options for its GLC tenants (in Capital Tower and Raffles City); and 4) 5-year income support for One George Street by CapitaLand.
• Maintain Outperform with lower target price of S$1.08 (from S$1.17), still based on DDM. We refine our assumptions, now assuming flat average portfolio rents vs. our earlier assumption of 1.3% growth from 2009. Our DPU estimates have been trimmed by 1.4-2.7% for FY09-10. Despite its recent price rally, CCT remains the cheapest REIT under our coverage at 0.29x P/NAV with forward yields of 12%.
REITs – DBS
A tale of two Rs
Sector debt refinancing and recapitalising issues are likely to be the major drivers of the S-reit sector in 2009. As credit markets remain tight, access to credit takes priority over cost of funding. We see recapitalising prospects gathering momentum when asset writedowns begin. We see this as necessary to the sector but size and timing is uncertain under current market conditions. Valuationwise, these developments appear to have been largely anticipated in the share price, however, the uncertainty could hamper share price outperformance in the near
term. In terms of strategy, we prefer well-sponsored reits with good access to capital as well as those in the more resilient sectors such as retail, industrial and healthcare. Maintain buy on Parkway Life Reit and Areit and upgrade FCT on the back of attractive valuations.
Refinancing speed bumps linger: An estimated one third of the Sreit total indebtedness or $4.9b is due to be rolled over in 2009. The tight credit market environment would mean that access to funding would be crucial while increasing competition for funds would lead to an increase in cost of debt. Overall interest cost in the Sreit sector would rise above 4% from the present 3.2%. For every 50bps hike in average interest cost, DPU would be eroded by 10-15%.
Resetting the bar: We expect asset writedowns to begin as early as this year-end. Recapitalising issues are likely to gather momentum in the coming year, however, timing is uncertain as Sreits weigh the need to strengthen balance sheet against the commercial perspective of shareholder value dilution and investor appetite. Post funding, average DPU yield is estimated at 9% and P/adjusted book NAV of 0.75x, indicating that this possibility is reflected in the share price. Amongst Sreits, those with gearing closer to the 50% LTV mark and riskier sub-sectors such as office would have greater recapitalisation possibilities. This includes FCOT with a current loan to asset ratio of c49%. In the longer run, the higher geared reits such as CMT, Areit, CCT may look to strengthen balance sheet when equity markets recover.
Be selective: Given the headwinds from refinancing and recapitalisaton rises as asset writedowns, particular in the office segment, filter through, our strategy would be selective. In terms of large cap stock picks, we prefer Areit for its long lease tenure. In the mid cap sphere, we favour Parkway Life Reit and FCT with their resilient business model and attractive
valuations. Strong balance sheet and low gearing also reduces the need for recapitalising.
Link – Tables
HWT – CS
Second asset injection approved by unit holders
● We recently met HWT’s management on its second asset injection, which was passed at its EGM on 16 December.
● With a total purchase price of S$89.7 mn, the five new plants would boost the total capacity by 38% to 580,000 cu m/day. In the circular, management released a more conservative set of projected volume than the initial portfolio presented, in our view. Interest rate was lower with the interest rate swap. With a guided incremental DPU of 0.16 Scts, this brings FY09 DPU to 5.42 Scts.
● We raised our net profit forecasts by 3-65% (from a small base) over next three years to mainly reflect lower opex, lower net interest expense and FX gain, partly offset by lower volumes.
● More importantly, due to higher-than-expected adjustments (-FX gain and -other adj) to distributable income, we lowered our DPU estimates by 3-8%. Our resulting DDM-based target price is S$0.60 (from S$0.74) based on 10% WACC and 5% terminal growth rate (from 6%). The stock remains an attractive yield play, offering 13-15% yield within the water sector and Singapore market.
CMT – MS
Relatively Less Attractive, Better Yield Elsewhere
Better Yield Elsewhere: Maintaining our Equal-weight rating on CapitaMall Trust, we have a new lower price target of S$1.52 (from S$2.05). The lower price target reflects our lower rental assumptions for CMT as well as attempts to capture the risk of our bear case panning out as the macro environment remains fragile. Assigning a 20% probability that our bear case may pan out, we have a new price target of S$1.52 for CMT versus the S$1.66 suggested by our base case DCF-driven NAV. While we like CMT’s relatively defensive suburban retail asset portfolio, we find CapitaCommercial Trust (CACT.SI, EW, S$0.81), our new sector top pick’s risk reward more compelling, offering a higher DPU yield of 14.5% and 13.6% for FY09-2010F versus CMT’s 8.7-8.3% DPU yields.
Suburban retail relatively safer but not immune: Suburban malls constitute 46-49% of CMT’s total asset value and net property income, which are relatively more defensive, as suburban malls are less dependent on tourism and consumer discretionary spending, which has been on a downtrend. Given that management will be putting on hold its asset enhancement plans for Funan Digital Mall, Tampines Mall, Jurong Entertainment Centre and Raffles City’s Phase 3 works due to the current market uncertainties, as management is in cash preservation mode, a number of its assets remain undervalued.
Sector dependent on macro recovery: The market is likely to remain skeptical on the viability of the S-REIT business model given its heavy reliance on credit and will be keeping a watch on the ability and cost of the S-REIT debt refinancing in 2009. For now, we believe S-REITs are likely to trade in line with the STI Index.