Month: April 2010
ART – OCBC
Mixed operating performance; DPU sub-expectation
1Q10 in line with our estimates. Ascott Residence Trust (ART) posted S$43.5m in 1Q revenue, up 3.2% YoY but down 5.6% QoQ. Overall RevPAU1 for the quarter was S$120 a day compared to S$120 in 1Q09 (flat) and S$124 in 4Q09 (down 3.2%). Distributable amount for 1Q was S$10.3m, down 5.3% YoY and down 10.9% QoQ. This is equivalent to 1.66 S cents DPU2, 11.3% below than our estimate of 1.87 S cents. However, revenue and gross profit were within 4% of our estimates. The large discrepancy in distributable income was due to one-off variances in the tax line. Ex one-offs, distributable income would be up 2% YoY.
Performance mixed by market. We understand that while occupancies continue to hold, ART has not been able to achieve significant room rate growth (an industry-wide issue). This means that while the top-line is growing, it is not flowing through fully – gross profit margin declined 106 basis points YoY to 46.2%. Performance was also mixed by market – while RevPAUs in Singapore, Australia and the Philippines were up strongly YoY; Indonesia, Vietnam and Japan (serviced residences only) recorded RevPAU declines ranging from -7% to -16.1%.
Guidance cautiously optimistic. The manager said that the “differing pace of economic recovery” in the markets where it operates will “continue to provide income stability” (which we take to mean a net flat to mildly positive performance). ART also said it “remains confident of the longer term growth in the markets in which it operates and the operating performance in 2010 is expected to remain profitable.” ART is currently leveraged at 42.1% debt-to-assets. ART’s manager has previously said it was comfortable going up to 45-50% debtto-assets. Asset works are ongoing in an attempt to optimize the yield of the portfolio. The manager said it was also considering asset divestments and yield accretive acquisitions.
Valuation. We are revising our gross profit margin estimate for FY10 down and our tax estimates for FY10-11 up. Our distributable income estimates consequently fall 6.4% and 3.6% for FY10 and FY11 respectively. This translates to a FY10F yield of 6.4%. We will also keep a careful eye on how actual performance matches up against our RevPAU growth estimates over the next quarter. We revise our fair value estimate down 4.3% to S$1.32 from S$1.38 previously. This still offers an estimated total return of 18.8% and we maintain our BUY rating. Key risks to our thesis are macroeconomic / regional economy risk and a slower-than-expected pick-up in corporate travel.
REITs – BT
Sticking a foot in investors’ eyes
FOOTNOTES, which have gained widespread disrepute in investment product brochures, seem to have found a new refuge in the press releases and financial statements of some real estate investment trusts (Reits).
Most Reits which carried out rights issues last year have been most generous in providing shelter to these tiny characters. These trusts have had quite a bit of explaining to do about their shrinking distributions per unit (DPUs), and the footnotes help clear the air just fine.
Or do they? Most investors wouldn’t think so.
What tends to happen is this. The Reit reports the DPUs for its latest financial quarter and for the year-ago quarter in its press release. The numbers invariably show a year-on-year growth in DPU, and there will be a paragraph or two of text reinforcing this achievement.
But look closer, and there is usually a footnote linked to the year-ago DPU. Turns out that this is not the actual DPU that the Reit raked in last year, but what the DPU would have been if the rights issue had happened then. This means that the number is smaller than it should be because of a restated larger unit base.
In other words, an unvarnished press release would have reflected a year-on-year fall in DPU. When a Reit issues new units to raise cash during the year, the unit base grows, and this dilutes the amount of distributable income each unitholder receives. But this effect has been downplayed by the footnotes.
If every company was as liberal with assumptions, reported bottom lines would never drop. Let’s take this approach further for illustration purposes. Technically, a firm could assume that the recession never happened, post higher projected profits, but add a footnote to say that the actual profit was lower because the downturn did come.
If it sounds illogical for a company to report its finances in such a way, why should it be acceptable for some Reits to publicise DPUs laden with restatements and what-ifs?
Granted, there is nothing wrong with dressing up the presentation of numbers in press releases. But this happens even in the financial statements of some Reits, where figures are supposed to be as bare as possible. The actual year-ago DPUs are usually hidden deep in an obscure section of the report, if investors care to look for them.
Yes, there is full disclosure, but this way of reporting numbers has made it hard for the implications of rights issues to surface. First, investors have to be diligent enough to read the footnotes appended to the DPUs last year. Next, they have to understand the fine print – not an easy task given that it is peppered with terms such as ‘pursuant’ and ‘proforma’.
Then, investors have to comb through the financial statements to find out what the DPU really was a year ago, before they can calculate just how much lower this year’s DPU is.
Reits which made cash calls last year should do unitholders the small favour of explaining just what happened – that the unit base expanded and DPUs had to fall. And they should let footnotes return to where they belong – in the realms of academia rather than in reams of financial statements.
Suntec – Phillip
1QFY10 Results
• 1QFY10 of $62.5 million, net property income of $47.8 million, distributable income of $45.4 million
• 1QFY10 DPU of 2.513 cents
• Rebound in office reversionary rent
• Maintain hold recommendation with fair value of $1.34
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Results within expectations
Suntec REIT recorded 1Q10 revenue of $62.5 million (-3.8% y-y, +1.1% q-q), net property income of $47.8 million (-2.7% y-y, +1.3% q-q) and distributable income of $45.4 million (-2.1% y-y, -5.1% q-q). 1Q10 DPU was 2.513 cents (-13.9% y-y, -13.0% q-q). The decrease in DPU was mainly attributed to the larger share base in 1Q10 from the issuance of the deferred units. Although there was a general drop from a year ago, however the revenue trends showed that things have stabilized over the last 3 quarters. The office portfolio is showing signs of improvement. Office occupancy has inched up slightly to 96.9% and reversionary rent has also increased from $7.11 achieved in 4Q09 to $7.34 in 1Q10. For the retail portfolio, revenue contribution remained stable, but occupancy fell slightly to 97.2%. On the overall, the office portfolio contributed 47% to total revenue while the retail portfolio accounted for the rest at 53%.
Suntec REIT has total debt of $1.752 billion. Gearing is 33.4%. $532.5 million is due in 2011.
We are raising our revenue estimates as Suntec REIT portfolio is showing better resiliency than we had previously thought. Both Park Mall and Chijmes had achieved 100% occupancy for the past 3 quarters running. Previously we were concerned on the performance of Suntec City Office Tower, but the latest 1Q10 results showed that occupancy has improved and overall revenue trend shows stabilization. Our attention is now shifted to Suntec City Mall, which has registered slight drop in occupancy. Our estimates revisions reflect 1-3% increase in revenue and 2-7% increase in DPU for forecast years 2010E-2012E. We raised our fair value from $1.21 to $1.34 and maintain our Hold recommendation.
Suntec – DMG
Value not fully appreciated; BUY
1Q10 earnings in-line. Suntec REIT reported 1Q10 results DPU of 2.51¢ (-13.9% YoY; -12.9% QoQ), representing 25% of our FY10 DPU forecast of 10.1¢. 1Q10 annualised DPU was inline with ours but 12% above street’s forecast. Net property income fell 2.7% YoY on the back of negative rental reversion. We adjust our FY10 DPU forecast to 9.6¢ as we assume slightly higher negative rental reversions for the next few quarters. Suntec will trade ex-1Q10 distribution on 3 May. Maintain BUY, DDM-based TP of S$1.56.
Suntec retail occupancy slipped marginally. Suntec REIT’s portfolio office occupancy remained stable at 96.9%. Both Park Mall and One Raffles Quay remain 100% occupied while Suntec City office registered a 0.2ppt QoQ improvement in occupancy to 95.5%. In contrast, Suntec’s retail occupancy saw a slight occupancy decline of 0.9ppt to 97.2%, due largely to the 1.2ppt decrease in Suntec City mall’s occupancy, which now stands at 96.4%. Management indicated that this is due to temporary frictional vacancy.
Office rents will bottom by end-2010 and may stay flat till 2012. Whilst there is every sign that office rents have stabilised, it may be premature to make a call on an early return to rental growth. We expect prime office rents to fall to the S$6/sqft level by end-2010 and remain at that level till 2012. We believe the huge supply of new completions (at only 38% pre-commitment level) as well as the substantial amount of secondary supply from tenants relocating to new mega-schemes may place a brake on rental recovery.
Tenant retention remains key focus in 2010; BUY with TP of S$1.56. The focus on tenant retention remains paramount for Suntec REIT, in view that the bulk of leasing activity currently involves replacement demand, i.e. tenants moving from older office blocks to newer ones. We believe Suntec REIT will likely register negative rental reversion in 2010 in view that expiring leases are higher than current spot rates. Nevertheless, we believe the Singapore office sector is at the point of ‘L’ inflection and long-term rental growth prospects are likely to be robust once excess capacity is absorbed. At our TP, stock still offers an attractive yield of 6.9%, above its heyday yields of 4.6%.
Suntec – CIMB
Starting out right
• DPU in line; maintain Outperform. 1Q10 results met our expectations but were broadly above Street estimates. DPU of 2.51cts forms 26% of our full-year estimate and 28% of the Street’s. Although DPU fell yoy due to poorer occupancy rates and rents, quarterly performance held up well, with offices surprising with moderate occupancy and rental improvements where we had anticipated a fall. With limited office leases due for renewal in the rest of FY10, as well as greater bargaining power in retail rental negotiations with the opening of the Esplanade Circle Line and Marina Bay integrated resort in April, we believe Suntec REIT will be on track to meet our full-year expectations. Our estimates and DDM-based target price of S$1.59 (discount rate 8.1%) are intact. Suntec REIT still trades below book value (0.7x vs. sector average of 1.0x)) while it offers prospective yields of 7%, in line with the sector average. We see stock catalysts from upside for retail rents.
• Weaker yoy performance from fall in occupancy. Distributable income of S$45.4m fell 2.1% yoy mainly due to lower occupancy for the office and retail segments. DPU fell by a steeper 13.9% yoy from an increase in units as deferred payments in units to the original vendors of Suntec Development are paid out every June and December.
• Better office performance over 4Q09 heartening. Qoq, occupancy at Suntec City surprised us, with office occupancy improving to 95.5% (+0.2% pt) while retail occupancy dipped to 96.4% (-1.2% pts), where we had anticipated the opposite. Management explained the fall in retail occupancy as temporary frictional vacancy. Portfolio office leases secured in the quarter improved moderately by 3% to S$7.34 psf while portfolio retail rents improved marginally by 1%.
• Limited office leases due for renewal in FY10. For the rest of FY10, there is less than 100,000sf of office space left for renewal due to successful forward renewals of half of the space due for expiry. There is more retail space for renewal (185,269sf) in the same period. We believe increased traffic in the Marina Bay area with the opening of the Esplanade Circle Line and Marina Bay integrated resort will enhance Suntec management’s bargaining power in retail lease negotiations.