Month: July 2008
AllCo – DBS
Strong 2Q 08 earnings
Story: 2Q08 results were within expectation. Gross revenue grew 57.9% y-o-y to S$27.6m, while NPI grew 37.6% to S$20.9m. Distributable income grew 61.4% to S$17.2m, translating into 2.4cts DPU in 2Q08. For 1H08, unitholders are getting 3.99 cts DPU. Allco also recorded a write-down for its investment properties, mainly from Cosmo and Centerlink, of S$29.7m, resulting in NAV falling to S$1.39 per share on 30 Jun 2008 (1Q08: S$1.45).
Point: The better 2Q08 performance was driven by higher rents achieved at Central Park and contributions from properties purchased after 2H07, i.e. Centerlink, the Japanese assets and Keypoint. Moving forward, there are several issues to look at: (i) expiry of S$70m loan in Nov08 that is expected to be repaid from proceeds from the divestment of AWPF, and (ii) strategic review of its Australian assets. Proceeds will be used to pare down existing facilities and for capital re-cycling for asset acquisitions lined up by Frasers Centrepoint Ltd (FCL). In this respect, we remain optimistic about opportunities in the medium term with its new parentage. Allco should benefit given FCL’s established presence in Asia Pacific and a ready pipeline of assets worth S$700m.
Relevance: We have adjusted FY08F and FY09F DPU to 6.9 and 7.0cts, respectively. Our DCF-backed target price is reduced to S$0.93 after imputing higher risk free rate of 3.9%, beta of 0.8 and a lower terminal growth rate of 0.5%. The share price could underperform in the near term, given the uncertainty in terms of the structure and direction of the REIT following the change in parentage. But valuation wise, Allco is trading at attractive 0.6x P/BV and offers FY08-FY09F DPU yields of 8.9% – 9.0%.
Maintain Buy
PLife – UOBKH
Defensive and resilient
Enhancing contributions from Singapore Hospitals. Parkway Life REIT has embarked on asset enhancement initiatives to improve the returns from low revenue yielding space. Space previously occupied by management and support functions has been decanted to create centres of excellence. Renovation works are ongoing to set up Parkway Cancer Centre at Mount Elizabeth Hospital, Parkway Heart Centre and Obstetrics & Gynaecology wards at Gleneagles Hospital and Women Centre at East Shore Hospital. The enhancement allows the hospitals to hire more specialist consultants, thus increasing patient admission and variable rent. Parkway Life REIT does not have to bear cost incurred for refurbishment, as the lessee, Parkway Holdings, is responsible for capex till Dec 09.
Protection against slowdown. CPI was 2.1% in 2007. The minimum rent payable from Singapore hospitals this year would be 3.1% (CPI + 1%) higher than levels in 2007. The downside protection kicks in on 23 Aug 08, a year after listing. Parkway Life REIT is protected against fluctuation in admission of international patients due to slower growth in regional countries. Revenue contribution from Mount Elizabeth, Gleneagles and East Shore hospitals increased by only a marginal 0.8% qoq to S$12m in 2QFY08. This comprises a base rent of S$7.5m and a variable rent of S$4.5m.
Diversification from acquisitions in Japan. Parkway Life REIT has acquired a pharmaceutical production and distribution facility in Matsudo City, Chiba prefecture and two nursing homes located in Yokohama City and Ibaraki City for S$69.4m. In particular, rental income from the two nursing homes is index-linked to inflation with rent reviews every five years. These acquisitions allow Parkway Life REIT to gain exposure to Japan where the population is ageing rapidly. Revenue contribution from the Japan properties was S$0.5m in 2Q08 (1.5- month contribution from Matsuda facility, 1-month contribution from nursing homes). The Japan properties will provide full-quarter contribution in 3Q08.
Low gearing provides significant room for acquisitions. Parkway Life REIT will partner sponsor Parkway Holdings to expand in the region with Parkway Life REIT acquiring third-party hospital buildings and Parkway Holdings taking over as operator. The company’s gearing is low at only 10%. There is headroom of S$570m for growth via acquisitions if it utilises debt capacity for optimal debt level of 45%. Parkway Life REIT targets to double the size of its portfolio to S$1.6b by end-09. It also plans to diversify into medical offices, research & development (R&D) facilities and warehouse and manufacturing facilities for biomedical and pharmaceutical industries.
Reiterate BUY. We like Parkway Life REIT for its healthcare focus. It provides strong defensive qualities as rental income from hospitals in Singapore and nursing homes in Japan is linked to inflation. Our target price is S$1.54 based on the discounted dividend model (required rate of return: 7.6%; terminal growth: 2.8%). The stock is trading at a 12.7% discount to NAV/share of S$1.34. Parkway Life REIT declared DPU of 1.66 cents, which will be paid on 27 Aug 08.
KREIT – DBS
2Q08 led by positive rental reversion
Story: K-reit 2Q08 revenue grew 32% yoy to $13m while NPI rose a more modest 26% yoy to $9.2m as expense ratio increased to 29%. On a qoq basis, NPI was flat despite 13% higher revenue due to greater marketing and leasing costs. Distributable income of $14.2m was almost 2.7x over the previous period and 29% higher qoq with the added associate income from ORQ. There was no revaluation exercise carried out on the properties during the period.
Point: The improved operating performance was due to positive rental reversion from its office portfolio, largely at Keppel and GE Tower as average passing rents rose to $7.37psf/mth from $6.86psf/mth in Q1. Looking ahead, we believe DPU growth will continue to derive from positive rental renewals as new leases are re-contracted at levels which are higher (but growing at a more modest pace than before) vs expiring rates. It has a total of 36.3% of NLA to be renewed over the next 2 years. In addition, refinancing concerns have abated. The group has obtained a new loan of $391m from Keppel Corp, maturing in Mar 2011. When completed by Sep 08, K-reit’s debt maturity profile would be extended to 2.5 years. Cost of debt is estimated at 3.94% and will raise current overall cost of debt of 2.66% to close to 4% when exercised. With a debt/asset ratio of c28%, K-reit is also well placed to tap acquisition opportunities.
Relevance: We have revised our FY08 and FY09 DPU estimates to 9.9cts and 8.6cts to adjust for dilution from the rights issue units. The stock is currently offering 6.1- 7.1% yield over the next 2 years and is trading at 0.62x of FY09 BV. Maintain Buy with a price target of $1.61.
KREIT – BT
K-Reit’s distributable income up 173% to $14.2m in Q2
K-REIT Asia said yesterday its second-quarter distributable income rose 173 per cent to $14.2 million, from $5.2 million a year ago.
better showing was mainly due to income from its one-third stake in One Raffles Quay, which was absent in Q2 2007. Distribution per unit rose 1.9 per cent to 2.18 cents, from 2.14 cents in Q2 2007.
Net property income for the three months ended June 30, 2008 rose 26 per cent to $9.2 million, from $7.3 million the year before.
K-Reit also saw better rental income, with higher rents achieved for new and renewed leases, as well as improved occupancy. The average gross rental rate for investment property held directly by K-Reit rose to $5.66 per sq ft in June 2008, from $4.28 psf a year earlier.
For the first half of 2008, distributable income rose 169.8 per cent to $25.6 million, from $9.5 million in 2007. DPU for the first six months of the year rose 0.8 per cent to 3.94 cents, from 3.91 cents in 2007.
The trust also reduced its leverage to 27.7 per cent at June 30, 2008, from 53.9 per cent at Dec 31, 2007. Based on a 60 per cent aggregate leverage limit, this provides K-Reit with an additional debt headroom of $680 million to fund acquisitions and for working capital. Based on K-Reit’s existing portfolio, there will be no debt re-financing requirement until 2011, the trust said.
For the longer term, the trust’s manager is establishing a medium-term note programme to allow the Reit to swiftly tap the debt capital market.
K-Reit is upbeat about its prospects, even though the global economy is slowing. Some 35.4 per cent of its tenants are from the banking, insurance and financial services sectors. Most of these tenants have lease terms of six years or more, and ‘provide very stable income going forward’, said Tan Swee Yiow, chief executive of the trust’s manager.
Mr Tan pointed out that despite the weaker external environment, Singapore’s office rents rose slightly in Q2 2008, reflecting the tight supply of space.
‘Office rents will be supported by continued demand for prime office space as Singapore transforms itself into a global city and with spin-off multiplier effects from the two integrated resorts currently under construction,’ K-Reit said in a filing to the Singapore Exchange.
K-Reit’s stock closed unchanged at $1.40 yesterday. The stock has shed 29.6 per cent since the start of the year.
KREIT – UOBKH
2QFY08: Benefitting from positive rental reversion
K-REIT’s 2QFY08 results were better than our expectations. K-REIT reported gross revenue of S$13m in 2QFY08, an increase of 31.8% yoy. Revenue contribution from Prudential Tower, Keppel Towers & GE Tower and Bugis Junction Towers increased 66.4%, 33.1% and 21.7% yoy respectively. Contribution from One Raffles Quay (ORQ) totalled S$10.9m in 2QFY08. Average gross rent increased 7.44% qoq to S$7.37psf pm due positive rental reversion. Committed occupancy was 100% at Jun 08.
Distributable income surged 173% yoy to S$14.2m. K-REIT announced DPU of 1.39 cents for the period 8 May to 30 Jun 08. This will be paid on 28 Aug 08.
Benefiting from positive rent reversions. Growth in rental rates has moderated as the recent escalation in office rentals has forced more companies to alternatives such as transitional office space and relocating support functions outside the Central Business District (CBD). Rentals for Grade A office space within Raffles Place increased by a mild 1.7% qoq to S$17.82psf pm in 2QFY08. Occupancy has also dipped slightly from 99.1% in 1QFY08 to 98.3% in 2QFY08 (Source: Colliers). Impact from positive rental reversion will be muted in 2H08 as only 2% of net lettable area (NLA) will be expiring. Positive rental reversion will resume in 2009 with leases for 16.8% of NLA will expire and another 11.3% of NLA is subjected to rent review. Its average portfolio rental of S$7.37 is also significantly below current market rentals.
Refinancing for bridging loan. K-REIT has secured a new revolving credit facility from ultimate parent company Keppel Corporation with interest rate of 3.94% p.a. and maturity in Mar 2011. The interest rate of 3.94% is lower than our assumed worst-case scenario of 4.2%. The arrangement also provides flexibility for K-REIT to refinance to achieve lower cost of debt if conditions in the credit market improve. K-REIT’s gearing has been reduced from 53.9% to 27.7% after completion of the rights issue.
K-REIT provides attractive FY09 distribution yield of 6.6%, a healthy spread of 3.1% against 10-year government bond yield of 3.5%. Our target price is slightly reduced to S$1.67. The stock is trading at a 36.9% discount to current NAV/share of S$2.22.