Month: February 2008
Budget 2008
From Budget 2008. The Key initiatives for REIT and Trust is as followed:
- Allow listed real estate investment trusts (REIT) and registered business trusts to claim input GST on business expenses
MI-REIT – Phillip
3QFY08
MacarthurCook Industrial REIT (MIREIT) reported financial results for 3QFY08. MIREIT reported gross revenue of S$8.4 million and net property income of S$6.3 million. Distributable income amounts $5 million, translating to a DPU of 1.92 cents for the quarter and an annualised DPU of 7.62 cents.
Acquisitions during the quarter contributed to top-line growth. Gross rental revenue increased 14.5% compared to the last quarter and net property income rose 6.5%. However net income dropped 7.1% mainly due to higher management fee, borrowing cost and trust expense associated with an enlarged portfolio size. DPU for the quarter increased from 1.86 cents in 2QFY08 to 1.92 cents in 3QFY08.
MIREIT expanded its portfolio from 12 properties at IPO to 19 properties currently, with a further 3 in progress of completion. Asset size grew from S$316.2 million to S$512.6 million. NAV increased from $1.13 to $1.30. Current gearing stands at 34.4%. We note that gearing will increase to 40% upon completion of in-progress acquisitions.
Capital management. Including the completed acquisitions, MIREIT has debt of $176 million, which has an expected maturity in April 2009. MIREIT has in place derivative instruments to manage its borrowing costs.
If the base rate continues to stay low, we estimate that the effective interest rate will be 2.5%, however we have assumed a cost of debt of 3.5% in our valuation model to stay conservative.
Valuation and recommendations. MIREIT has no short term debt concern and the initial low gearing has given it the capability to expand with debt funding. Although it has delayed a capital raising exercise recently, there is no short term refinancing issue and gearing is within management’s target range of 40%-45%. We retain our revenue estimates at this point with a FY08F DPU of 7.76 cents, which would translate to a yield of 8.21%. We have raised the beta and risk premium used in our DCF model to account for investor’s lower risk appetite and the volatile market condition. Fair value derived from our model is lowered subsequently from $1.43 to $1.13. Maintain buy.
MMP – BT
Macquarie may sell Reit stake after review
MACQUARIE MEAG Prime Reit is expected to undergo a strategic review soon that may result in the Macquarie group selling its 26 per cent stake in the Singapore-listed Reit, industry sources said.
The move is believed to be prompted by the trust trading at a steep discount to its net asset value (NAV). MMP last traded at $1.06, compared with its NAV of $1.61 as at Dec 31, 2007. Among MMP’s current assets are Wisma Atria and Ngee Ann City.
Macquarie, it seems, has floated the ‘strategic review’ proposal to the other two shareholders of the Reit’s manager Macquarie Pacific Star Prime Reit Management – MEAG Munich ERGO Asset Management GmbH and Investmore Enterprises Ltd – both of which are likely to have reservations about the move.
MEAG is part of the Munich Re group, one of the largest reinsurance groups in Germany, while Investmore belongs to the fast-growing Pacific Star group founded by Singaporean entrepreneur Jeff Tay.
Industry observers said that since Macquarie bought into the Reit during the IPO, it has been calling the shots at the Reit and its strategy for growing the Reit’s footprint in Asia does not always agree with those of the other two shareholders.
In the event of a sale, unitholders may raise the question of a potential conflict of interest as Macquarie is the single largest unit holder of the Reit, as well as manager of the Reit and its properties.
Also, some feel that if Macquarie wishes to divest, it should get its own investment bank to carry out a private tender rather than have the Reit manager do so in a public manner that may create uncertainty for tenants, employees and business associates during the review period, expected to take a few months.
MMP – DBS
Who will mine the Orchard Gold ?
Story: According to news reports today, it has been quoted that sponsor Macquarie Group could be reviewing its 26% stake in MMP with a possible divestment in the works. The news report also cited that there could also be potential differences between Macquarie and other main shareholders within the MMP REIT manager in terms of strategic direction that may also see some resistance for any potential divestment.
Point: The above piece of news is likely to cast doubts on the cohesiveness of the REIT manager. In the near term, this piece of news may also result some overhang on the unit price. However, this supports our earlier view that M&A could emerge as a positive catalyst for the stock and MMP to be a likely target due to the following : i) MMP has a relatively fragmented ownership structure; ii) its position as an independent REIT without a developer as a sponsor; iii) Attractive yield spreads of c.200 bps compared to its Singapore-listed peers which supports MMP’s attractiveness as a takeover target; and iv) MMP’s portfolio is backed by prime assets in Singapore such as Wisma Atria (41% of portfolio value) and Ngee Ann City (47% of portfolio value) and is currently trading at an attractive 34% discount to NAV.
Relevance: We are maintaining our BUY on MMP which is currently trading at an attractive 7.0% FY08 yield and 7.3% FY09 yield and at an attractive 34% discount to NAV backed by prime retail assets. Target price is S$1.63 based on DCF.
SREIT – DB
Exuberance fades, value endures
Attractive valuations; deep discounts to NAV unsustainable medium term
Recent 4Q results show still firm organic rental growth and resilient income, which should shift focus from slowing acquisitions. With a few exceptions, balance sheets are sound and refinancing risk manageable. Following a 30% decline since mid 2007, 3/4 of the REITs are trading below book (which could drive M&A or capital mgt) and we find valuations compelling at an avg FY08 yield of 6.4% (a 400bps spread above the 10-year gov bond), a level not seen since mid-2003.
Acquisitions not the only DPU growth driver; organic growth still firm
While weak equity markets have made the acquisition growth model difficult, organic growth remains intact as reflected by robust DPU growth in the recent quarter. Passing office rents still lag market rents, retail rents continue to firm, and industrial rents are 40% below the peak. Cash flows are defensive with secured leases (min 3 years) and rental deposits (in the event of tenant default).
Balance sheets resilient, refinancing risk manageable
Average gearing for the sector is 30% with a few exceptions such as K-REIT, MLT, and Allco which have above-average gearing. Refinancing costs have not risen substantially despite weak credit markets as a significant widening of spreads has been offset by 30-110bp decline in swap offer rates. Most REITs can sustain more than 15% decline in asset values without breaching the statutory gearing limit.
NAV discounts unsustainable once capital markets stabilise
Equity issuance is likely to be moderate until discounts to NAV narrow, and M&A or value unlocking exercises (REITs have started share buy backs) could help narrow discounts to NAV. Similar to Australia and US, SREITs could be takeover targets if discounts remain. Private equity real estate funds raised US$79bn last year with a US$21.6bn focusing on Asia/ROW. Despite the uncertainty, two S$0.8- 1bn physical market transactions have been completed in the last month.
Valuations attractive – transparency, strong balance sheets a premium
The SREIT index has declined by nearly 30% since June 07, underperforming both the STI and the developers. Valuations are generally attractive at 5.5% FY07 and 6.4% FY08 yield representing a 400bps FY08 spread on the LT bond and 12% average discount to NAV. Amid uncertainty over acquisition growth, we focus on REITs with stronger organic growth profiles and/or discounts to NAV, with transparent structures and sound balance sheets without funding risk. REITs which have mismatch in overseas assets and S$ denominated liabilities may face NAV erosion given the appreciation in the S$.
Top picks for REIT sector – CapitaMall Trust, A-REIT and Suntec REIT
We continue to recommend CMT for its strong retail franchise and its track record in extracting value from assets through asset enhancements (even during SARs), A-REIT for its leverage on the rising business & science park and hi-tech industrial segments and Suntec REIT for a high yield and discounts to NAV. Risks: protracted economic slowdown affecting leasing demand, further deterioration in credit markets and the inability to refinance.
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