Month: August 2009
LMIR – OCBC
Highlights from malls visit
‘Tis the season to spend. We visited seven of LMIR Trust’s retail malls in Greater Jakarta and Bandung earlier this week and found a healthy, vibrant portfolio carrying on despite a weak retail sector. Both LMIR and retailers are gearing up for a seasonal up-tick in spending during the Ramadan fasting month. Spending typically spikes two weeks before Idul Fitri, when Indonesian companies pay out a mandatory employee bonus of one-month salary (Tunjangan Hari Raya). The manager also seemed optimistic about the Christmas spending season. Our 2H09 DPU estimate is 2.75 S cents, up 3.4% HoH.
Casual leasing back in play. A tight retailer budget for advertising & promotions activities had dampened casual leasing demand in 1H09. Such prudence was very much lacking during our visit. The overwhelming majority of the malls’ atriums and corridors were well populated with island kiosks, exhibitions and sales as retailers positioned themselves for the festive season. Operational control has also tightened with LMIR dealing directly with casual tenants or demanding up-front payments from wholesalers.
Tenant turnover is painful. Some retailers including three anchor tenants that we know of have vacated or downsized space at the malls. The market remains soft with retailers hesitant to invest in new stores. LMIR’s portfolio occupancy is above-market and, in our opinion, the manager has done a credible job in re-populating the space. Still, the turnover process (offer, lease negotiation, fit-out) takes time, affecting occupancy and revenue during the transition. Just fitting out a large anchor tenant can take three to four months. We noticed that the manager is using temporary leasing to support the rent gap between tenants now that A&P demand has picked up. In fact, we found retailers such as BreadTalk; Times bookstore; and Matahari eager to capitalize on the season by utilizing casual leasing while their units get fitted out.
Still compelling. We understand the malls that were part of the acquisition pipeline at IPO have completed works but occupancy levels have yet to stabilize. The manager had earlier guided that the timing or size of any acquisition would depend on availability of funding. In our view, any acquisition scenario is more realistic on a six to 12 months time horizon. If the manager employs SGD-denominated debt, we believe the likelihood of a concurrent equity issue increases due to cautious lender sentiment. Slight variance in estimates edges our fair value estimate up to S$0.51 (prev: S$0.50). Maintain BUY (16% total return).
Saizen – BT
Saizen to resume payouts in Q4 FY’10
It posts 19% fall in distributable income to 1.37 billion yen for FY2009
SAIZEN Real Estate Investment Trust (Reit), which has suspended distribution of income for the financial year ended June 30, 2009 (FY2009) to conserve cash, said that it aims to resume distribution from the last quarter of FY2010 or the first quarter of FY2011.
This comment came in its financial report for FY2009, which saw it posting a 19 per cent fall in distributable income to 1.37 billion yen (S$20.37 million).
Its net property income, however, grew 17.2 per cent to 2.9 billion yen as it recognised contributions from 166 properties for the full fiscal year. In fiscal 2008, some 65 properties were added gradually across the year.
Saizen also completed its divestment of UI Building for 274.68 million yen yesterday.
‘While the real estate transaction market is expected to remain difficult, the management team expects property operations to be stable in the coming financial year,’ the trust said in its financial statement.
It noted that property operations in the regional mass residential market that it operates in have not been adversely affected, while occupancy rate and rental reversions are expected to be stable with proactive management.
The Reit, which has suspended distribution payments since its fiscal second quarter, said that the decision to stall paying out distribution was made after careful consideration of the credit situation.
‘The board endeavours to resume distribution as soon as the financial position of Saizen Reit allows,’ it said.
It noted that the availability of financing continues to be limited, citing a Fitch Ratings report in April, which projected a surge in default rate on commercial mortgage-backed securities (CMBS). All of its 14.9 billion yen loans are funded by CMBS.
The trust will use its operational cashflow, proceeds from its $41.3 million rights issue and short-term bridging loan of 400 million yen to repay the loans of YK Kokkei, YK Shingen and YK Keizan that are due in November 2009, December 2009 and January 2010 respectively.
Thereafter, it will use its operational cashflow to repay the short-term bridging loan as soon as possible, given its high interest costs. After these repayments, cashflow from operations will be distributed to unitholders, Saizen Reit said.
It had earlier proposed to pay dividends for its second fiscal quarter in Reit units instead of cash, but abandoned the scrip-only plan after talks with the Singapore Exchange.
PST – UOBKH
Assessing PIL’s Financial Health
Pacific International Lines (Private) Limited (PIL), the parent, sponsor and major customer of Pacific Shipping Trust (PST), owns and operates a fleet of 104 vessels with total capacity of 186,994 TEU. PIL accounted for 70-80% of PST’s 2Q09 revenue.
Strong balance sheet to weather the current shipping downturn. PIL has just filed its 2008 accounts with the Registrar of Companies. End-08 net gearing was at a reasonable level of 32%, but its quick ratio of 0.9x was a tad low. Interest coverage ratio was healthy at 6.2x. Net gearing could rise to 60% with future capex of US$469.2m for 2009-2011.
Increase in debt due to consolidation of PST. PIL’s total group borrowings increased by 36% yoy to US$1.1b in 2008 primarily due to the consolidation of PST’s debt (as of end-08, PST’s total loans were US$230m). Following PST’s 3-for-4 rights issue in Sep 08 with PIL subscribed for 90% of the rights shares, PST changed from a 34.6%-owned associated company to a 59.2%-owned subsidiary of PIL.
Asset value to term loans at 1.5x. Of PIL’s US$1.1b debt, 40% is due in 2009 and the balance 60% due in 2010-2018. PIL’s US$746.5m was collaterised with assets with a net book value of US$1.14b (1.5x of the loans).
Maintain BUY on PST with target price of US$0.37. We forecast PST’s 2009 and 2010 dividend yield of 12.4% and 9.9% respectively after adjusting for the reduction in distribution payout ratio from 90% to 70%. The cash retained will be used to fund acquisitions. Accretive vessel acquisitions will likely drive a rerating of the stock. Our earnings forecasts have not imputed such acquisitions.
StarHill Gbl – UOBKH
Highlights from Company Visit
Benefitting from opening of linkway. Shopper traffic at Wisma Atria increased 48% yoy in Jun 09 after the basement linkway connecting Wisma Atria to Orchard MRT station was reopened on 3 Jun 09 (closure lasted more than two years). Shopper traffic at basement was the heaviest and more than doubled compared to last year. We understand that many basement tenants experienced 10-50% increase in sales since Jun 08.
Worst fear did not materialise. ION Orchard did not affect business at Wisma Atria, confounding most sceptics. Shopper traffic to Wisma Atria actually increased by another 30% after the opening of ION Orchard on 21 Jul 09. Wheelock Place, ION Orchard, Wisma Atria and Ngee Ann City are linked to Orchard MRT station via an underground passageway. The opening of ION Orchard has attracted more shoppers to malls in the vicinity.
Enhancing Wisma Atria. Accessibility to Wisma Atria has improved with escalators from Orchard MRT station linked to new entrance at Wisma Atria Level 2 (new side entrance). Management plans to invest S$100m on asset enhancement initiative for Wisma Atria, which will add 40,000sf of prime retail space fronting Orchard Road. The planned extension is ideal for duplex stores, which are highly visible. Management is also evaluating feasibility of converting some car park space into retail space to further increase lettable area. Starhill Global REIT (SGREIT) needs to liaise with Isetan before finalising its plan.
Neutral impact from opening of IRs. The opening of the two integrated resorts (IRs) will lead to competition for shoppers. Local consumers will likely flock to shop at the IRs, especially during the initial stages. This will be offset by increasing tourist arrivals generated by the IRs. Orchard Road is consistently the most visited attraction in Singapore with 6m visitors each year. This means that three out of every five tourists make a point to shop at Orchard Road. Besides having late night shopping on Saturday till 11pm, Singapore Tourism Board (STB) will also work with Orchard Road Business Association (ORBA) to organise more activities along the pedestrian walkways to attract tourists and Singaporeans to Orchard Road.
New malls well taken up. Over 75% of retail space at Marina Bay Shoppes within Marina Bay Sands has been committed. Marina Bay Shoppes with 800,000sf of retail and restaurant space will offer 300 stores with an international mix of luxury brands when opened in early 2010. At Orchard Road, CapitaLand’s ION Orchard is 94% committed when it opened in Jul 09 while Far East Organisation’s Orchard Central is 80% committed when it opened in Jun 09. 313@Somerset by Land Lease is already 90% committed and is scheduled to open in Nov 09. Therefore, a significant portion of new supply of retail space at Orchard Road and nearby areas is already well taken up, supported by buoyant consumer confidence and domestic consumption.
Deteriorating outlook for office portfolio. Office occupancy for Wisma Atria and Ngee Ann City was 92.0% and 94.9% respectively at Jun 09. Occupancy could continue to deteriorate due to tenants relocating to low-cost alternatives offered by business parks. Office rentals are likely to be under pressure as a result of a massive 2.8m sf of office space being completed next year. The two office blocks at Wisma Atria and Ngee Ann City accounted for only 18.4% of total revenue in 2Q09.
China: recovery from Chengdu earthquake. Revenue contribution from Renhe Spring Departmental Store grew 42.6% yoy to S$3.6m in 2Q09 (10.8% of total revenue) due to recovery after Chengdu earthquake in May 08. The high-end mall houses premium foreign brands such as Prada, Dunhill, Bally, Hugo Boss, Ermenegildo Zegna, Chopard, Longines and Rolex and rental is largely based on gross turnover. The mall is fully occupied at Jun 09.
Working on regional expansion. SGREIT is on lookout to acquire retail assets in the region after raising S$337.3m from its recent 1-for-1 rights issue. It is evaluating opportunities to acquire assets in Australia and United Kingdom from distressed sellers as capitalisation rates in both markets had risen significantly. In China, SGREIT has the right of first refusal to acquire two more shopping malls in Chengdu from partner Renhe Spring Group. In Malaysia, SGREIT could acquire Starhill Gallery and Lot 10 in Kuala Lumpur from Starhill REIT listed on Bursa Malaysia but the process is likely to be protracted as this is a related-party transaction.
Major refinancing in 2010. Commercial mortgage-backed securities (CMBS) of S$380m and term loan of S$190m will mature in Sep 2010. Proceeds from its recent rights issue will be utilised to partially repay the term loan. SGREIT plans to stretch debt maturity of new debt facility over several years to prevent lumpy refinancing in the future. Ability to secure refinancing has improved with support from sponsor YTL Corporation. SGREIT has expanded its network of relationship banks through referral from YTL.
Sponsor confident of prospects for SGREIT. YTL has acquired and exercised 45.6m nil-paid rights bought through open market purchases, thus increasing its stake in SGREIT from 26.5% to 28.9%.
REITs – Phillip
Results Review
From the recently concluded financial results for the quarter ended 30th June 2009 (except Saizen REIT which is announcing on 27 August 2009), we observed that on a year-on-year basis, out of the 18 REITs that have announced their results, twelve reported revenue growth, one REIT reported flat revenue growth while five REITs reported negative revenue growth. Accordingly, nine REITs registered DPU growth while the other half have DPU erosion. A closer observation reveals that the hospitality sector fare the worst with both Ascott REIT and CDL Hospitality REIT recording decrease in gross revenue as well as lower DPU. For industrial sector, all four industrial REITs recorded lower DPU although only MacarthurCook Industrial REIT recorded lower gross revenue. The office and retail sectors prove to be more resilient with most of the REITs reporting higher gross revenue as well as DPU. The most stable sector continues to be healthcare.
On a quarter-on-quarter basis, eight REITs reported revenue growth, one REIT reported flat revenue growth while nine REITs reported negative revenue growth. Accordingly, eleven REITs have DPU growth while six have DPU erosion and one with constant DPU.
The sectoral performance came as no surprise to us as we have long espoused the same order of revenue stability. The hospitality sector shows the greatest revenue volatility because revenue is sourced from direct visitor stays and these are mainly short term in nature compared to the tenant leases of the other sectors which are longer term and have locked-in rates. The industrial sector REITs have stepped-up rent escalation while the office sector REITs are still enjoying positive rental reversion from expiring leases. However from the quarter-on-quarter performance, we can see that the gross revenue for the industrial, office and retail sectors have all declined compared to mostly increases for the year-on-year performance. This may indicate higher vacancies or lower reversionary rents. While the hospitality REITs scored the worst performance on year-on-year basis, the quarter-on-quarter results provide some degree of respite. Ascott REIT has turned in a revenue growth and CDLH Trust recorded a much lower percentage of revenue decline. This could indicate that the tourist arrivals are picking up and we believe the hospitality sector would be the first sector to show signs of a recovering economy.