Month: February 2013
Industrial REITs – DMG
Change in game rule by JTC
Since the beginning of the year, JTC has indicated that property funds, such as REITs, have to pay land premium upfront for all industrial buildings acquisitions from sellers on JTC-leased sites, instead of paying in terms of a monthly land rental. Through this change in rule, REITs will have to set aside a sum of capital for the payment of upfront land premium; thus essentially raising the acquisition costs of industrial buildings. Having said that, we expect some of the REITs to counter this measure via i) lower acquisition price on the property to make up for the upfront land premium and/or ii) requesting the seller of the property to pay a higher leaseback rental to compensate for the land premium having been paid (i.e., a double net versus a triple net rental). Although the long term impact of this change in policy remains to be seen, we believe there will be pressure in the industrial property prices and rentals in the short term.
Minimal change expected to tenants expenditure. Before the change in policy, tenants of industrial properties have been paying the land rental through triple-net tenant agreements. We expect tenants that lease space in newly acquired industrial buildings will have to pay a higher rental rate to make up for the upfront land premium. However, on a net basis, there is little difference in the total amount of rental expenses incurred by tenants, as the amount previously paid for land rental in a triple-net tenant agreements forms part of the new double-net tenant agreements.
REITs may find it trickier to buy new properties. With the change in this policy, industrial REITs will be facing a hurdle in terms of future acquisitions as the capital involved in buying new properties rise. As REITs try to crawl back or offset a portion of these upfront charges (whether through lump sum pro rata basis or discount in acquisition price), there is a likelihood that building owners may choose to sell their buildings to industrialists since it is possible that they can sell the property at a higher price (given that industrialists can continue to pay a monthly land rental under the new policy). In our view, we believe this option to be limited to i) smaller buildings, as industrialists are unlikely to buy over a larger property than they require; ii) when owners of the buildings do not seek to sell and lease back the property for their own use.
Impact of change in policy may not be all bad. After the change in policy, REIT managers will have to factor in the additional capital expenditure into the IRR for any acquisitions. In our view, as long as the IRR can meet each REIT’s requirement, REITs will continue to acquire buildings; particularly on the back of low interest rate and relative ease in financing. In addition, although paying the land premium upfront may translate to a higher initial acquisition cost, this may prove to be cheaper in the long run as land rent paid on a monthly basis are subjected to a 5.5% annual escalation cap. Lastly, it is important to note that this change in policy do not affect BTS projects that some REITs plan to undertake this year.
K-REIT – CIMB
Opportunistic placement
KREIT’s capital raising is no surprise as we expected its recent purchase of Old Treasury Building to be 50:50 debt-equity funded. The dilution should be muted at about 1%, given the good pricing and small share issuance.
Adjusting for the timing of the placement vs. our earlier assumption of a more backend loaded placement for Old Treasury Building, we trim our FY13-15 DPU estimates but maintain our DDM-based target price. We reiterate our Neutral call as we see higher headline yields compensating for higher asset leverage and income support.
What Happened
KREIT has announced a small private placement of new units and a sale of existing units by Keppel Corp. The private placement of 40m new units (1.5% of previous unit base) raises S$53.2m while the latter pares down 75m of KepCorp’s units (2.8% of previous unit base). The price for both the placement shares and KepCorp’s sale was S$1.33 per unit, representing a discount of 0.6% to the adjusted VWAP and a 2.3% premium over NAV per share. KREIT intends to use most of the placement proceeds to pare down borrowings.
What We Think
KREIT’s capital raising is not a surprise. We flagged the possibility of capital raising by more REITs in our 7 Feb note “REIT – Equity-raising back in vogue”. Our numbers have also factored in a 50:50 debt-equity funded S$211m acquisition of Old Treasury Building though we expected it to be more backend loaded. The S$53m placement proceeds should cover 50% of the initial payment (50% of purchase price) due in Mar 2013 and keep asset leverage well within 45% even as more payments are drawn down.
The move was probably opportunistic, driven by its share price performance YTD, tight placement pricing and sale-and-purchase agreement with the banker involved. After this placement and recent distribution-in-specie of KREIT’s shares by KepCorp, KREIT’s free float should improve to about 42%, with KepCorp retaining an estimated direct stake of about 15%.
What You Should Do
The dilutive impact is muted at about 0.9% in FY13. We reiterate our Neutral call as we see higher headline yields compensating for higher asset leverage and income support.
MGCCT – Kim Eng
Riding on China's consumption story
Attractive Yields. Mapletree Greater China Commercial Trust (MGCCT) is slated for listing on 12 Mar 2013, with market cap of SGD2.3-2.5bn (Offering Price of SGD0.88-0.93 per unit). Its initial portfolio comprises the Festival Walk (NLA: 794k sqft; Valuation: SGD3.4bn; Avg NPI yield-on-cost: c.4.2%) in HK and Gateway Plaza (NLA: 1,146k sqft; Valuation: SGD1bn; Avg NPI yield-on-cost: c.4.9%) in Beijing, According to the preliminary prospectus, MGCCT is offering DPU yields of 5.6%-6% for FY3/14 and 6.1%-6.5% for FY3/15, to be paid semi-annually. This compares favorably with other listed China based landlords such as CRCT (5.2% yield), Fortune REIT (5.1% yield) and PCRT (6% yield).
Strong cornerstone investors Interest. MGCCT has garnered strong support from 11 cornerstone investors that will subscribe for 953m units (36% total units). Notable names include AIA, CBRE Clarion, Columbia Wanger, Henderson, Morgan Stanley, Norges Bank, Asdew Acquisitions etc. We view this as a testament to MGCCT's asset quality (best in class properties in strategic locations) and attractive yields. The Manager believes that Festival Walk will deliver stable and sustainable growth, supported by an established Hong Kong retail market while Gateway Plaza offers significant rental growth upside, driven by robust supply and demand dynamics in the Beijing office market.
Fee structure promotes DPU growth – Alignment with Unitholders. We noted that the REIT manager will be paid a base management fee of 10% of distributable income, as opposed to the conventional 0.1%-0.5% of AUM. Its performance fees is also pegged to the difference in DPU (25%) with the preceding FY, rather than a function of deposited property or gross revenue/NPI (if over a benchmark). We think MGCCT has one of the most "equitable" management fees structures amongst S-REITs, which in the past tend to promote an asset growth bias rather than unitholders' interest. Making fees contingent on actual performance such as relative share price performance or DPU will better align interests and decrease potential agency problems, in our view.
Expect strong take-up. Given the heightened investors' interest in China's growth story, we expect MGCCT to be priced at the high end of its offering price (SGD0.93). Our top concern is that MGCCT will be one of the highest-geared S-REITs (~43% aggregate leverage with SGD1.9bn gross borrowings; provisional credit rating of Baa1 from Moody's) post-listing, and this may constrained its inorganic growth in the initial years. Nonetheless, we expect its favorable lease profile (WALE of 2.4 yrs by gross rental income) to drive organic growth via rental reversions in the next two years. From our estimates, the implied cap rate for MGCCT (based on FY3/14 NPI) is c4.3% and average borrowing cost stands at 2%. If we take this cap rate as the floor for FY3/14 DPU yield, we believe yields can still be compressed by another 130bps from its forecasted FY3/14 DPU yield of 5.6%. We expect the share price to perform well and will advise investors to subscribe to its Public Offer (265m units) when it opens for application on 28 Feb.
Starhill Global – OCBC
EXPECT EXTRA DPU IN 1Q13
- Favourable rent review outcome
- Net rental arrears to be distributed
- New rate used as base rent for Jun lease Renewal
10% rent increase for Toshin master lease
Starhill Global REIT (SGREIT) announced that the rent review process relating to Toshin master lease at Ngee Ann City has been completed on last Thursday and that it has been awarded a 10.0% increase in base rent. The new rate was based on the average of three market rental valuations undertaken by independent licensed valuers, in accordance with the Court of Appeal’s directions, and will be retrospectively applied for the term commencing 8 Jun 2011.
Impact on SGREIT’s DPU
Toshin is the master tenant occupying all the retail areas except level 5 of Ngee Ann City. For Dec 2012, Toshin lease contributed to 85.3% of the property’s gross rent and 18.8% of SGREIT’s portfolio gross rent. Assuming the accumulated rental arrears owing as a result of the rental increase from 8 Jun 2011 to 31 Dec 2012 were paid in FY12 (after deducting expenses), management estimates the net rental arrears to be ~S$3.8m. This works out to an estimated increase of 0.19 S cent or 4.3% in its FY12 DPU. SGREIT intends to distribute substantially the net arrears received from Toshin in 1Q13, on top of the regular distributable income generated for the quarter. This is in line with our view as per our 5 Feb report that SGREIT may possibly get a boost in its DPU should the outcome from the rent review turns out to be favourable.
Maintain BUY
We also understand that the new rate will serve as the base rent for the next lease renewal exercise in Jun. As a recap, Toshin has on 18 Apr 2012 indicated its intention to exercise its option to renew the master lease for another 12 years starting 8 Jun 2013. Management expects the renewal rent to be determined before the commencement of the lease period. We believe further upside in rent is still possible. However, we choose to incorporate only the new rate and distribution for now. This raises our fair value from S$0.95 to S$0.98. Maintain BUY.
Starhill Global – DBSV
Bonus from Toshin
Positive rent review outcome for Toshin. Starhill Global Reit (SG Reit) announced that the Toshin rent review process has been completed with a 10% increase in rent compared to our expectation of no increase in rentals.
Expect a bumper payout in 1Q13. Based on the new rent review, the base rent for Toshin will be adjusted upward by 10% from 8 June 2011 and will serve as the base rent until the next lease renewal in June 2013. Upon the adjustment, SG Reit will reap accumulated rental arrears of an estimated S$5m over the 18 month period (8 June 2011 to 31 Dec 2012). Subject to the receipts, the manager intends to distribute S$3.8m of the rental arrears after netting off expenses including leasing commissions to the unitholders in 1Q13. The higher rental will have a positive impact on earnings as the Toshin lease contributed 18.8% to SG Reit’s FY12 topline.
Positive impact on earnings. With the upward rental adjustment, FY13/14F DPU will increase 6% and 2% respectively, while TP will rise to S$0.92. We are maintaining our BUY Call.
We continue to like SG Reit for its pro-active efforts in restructuring its portfolio including its recent divestment of one of its non- core assets in Japan. We expect positive rental reversions, step-up rents in Malaysia and its acquisition of the Perth property to drive earnings growth. Re-rating catalysts could come from potential acquisitions supported by healthy gearing of 32% and further upside from rent negotiations for Toshin’s lease, which will expire in Jun13. We expect that there will be no downward rental reversion and have assumed zero growth.