Month: August 2008
a-iTrust – DBS
Small but still beautiful
Story: Ascendas India Trust (AiT) announced that they have entered into a sale deed to acquire 96,051.88 sqft of office space in ITPB from Tata Consultancy Services (TCS) for a consideration of Rs 307.8m (S$9.8m). This space has been leased back to TCS concurrently.
Point: The completion of the sale will increase AiT’s ITPB space by 6% to 1.8m sq ft and 2% to its total portfolio. The acquisition is to be funded by debt ( SOR + 70 bps) and is expected to be immediately accretive to current unitholders when completed. As such, we have adjusted our forward DPU estimates in FY09 and FY10 by 0.5% and 1.4% respectively to 6.9cts and 7.7 cts. Moving forward, AiT is currently engaged in the development of 1.5m sqft of SBA (3 buildings) in ITPB and ITPC. Apart form this, further upward earnings surprise hinges on the execution of its (i) two ROFR with Ascendas Land Int and Ascendas India Devt Trust, (ii) 3rd party acquisition opportunities, and (iii) further development of 2.7m sqft SEZ in Bangalore. The above has not been factored in our forecasts.
Relevance: Maintain BUY, TP adjusted to S$0.91 (Previously $1.01). We have chosen to value AiT based on its existing asset portfolio & planned developments, removing valuation attributed to AiT’s future development of its 2.7m sqft SEZ in Bangalore (+S$0.10). AiT is currently trading at a FY09-10 DPU yield of 9.4% – 10.5%. Key risk to our forecast will derive mainly from execution delays from the development of its 1.5m sqft of SBA.
MapleTree – UOBKH
Completed rights issue…
MLT has completed a 3-for-4 rights issue at issue price of S$0.73. Sponsor Mapletree Investments has given an irrevocable undertaking to take up its entire allotment of rights units and will subscribe for all excess rights units not taken up by other unitholders. The rights issue involves issue of 831.1m new units and has raised S$606.7m. Mapletree Investments has increased its stake in MLT from 30.2% to 46.9% after taking up 325m excess rights units.
Impact from dilution. MLT plans to utilise proceeds from the rights issue to acquire 13 properties in Singapore (6), Malaysia (2), China (3), Japan (1) and South Korea (1) worth S$357.1m. Assuming the acquisition of these targeted properties is already completed, DPU for 1H08 will decrease by 25.6% to 2.93 cents. NAV/share at Jun 08 will be reduced from S$0.94 to S$0.84 and gearing from 56.3% to 36.8%.
Prefer A-REIT. Based on pro forma DPU of 2.93 cents, MLT is trading at annualised distribution yield of 8.1%. We prefer A-REIT due to a diversified portfolio and bluechip tenant base. AREIT provides FY09 distribution yield of 6.9%.
FrasersCT – OCBC
Safety in the suburbs
Safety in the suburbs. We are resuming coverage on retail S-REIT Frasers Centrepoint Trust (FCT). We believe that its suburban assets – Causeway Point, Northpoint, and Anchorpoint – are an interesting low beta play in the current uncertain economic environment. We note that occupancy levels have generally held during previous crises and we like the malls’ massmarket consumer focus. These properties are strategically located adjacent to MRT stations and bus interchanges, and enjoy captive markets with strong population catchments and limited alternative shopping choices. FCT also owns a 31.06% stake in Malaysian Hektar REIT [RM 1.03, Notrated] whose retail assets enjoy a similar profile.
Asset enhancement focus. Since its July 2006 listing, FCT’s focus has been on extracting value from its existing portfolio. Asset enhancement works at Anchorpoint over 1Q07 – 1Q08 (year ending Sep 30) yielded a 41% jump in average rentals from S$5.32 psf per month to S$7.50 psf pm. Northpoint is FCT’s current target and management expects average rentals to increase 17% from S$11 psf pm to S$12.91 psf pm after works are completed in 3Q09. FCT’s largest property Causeway Point is next in line but details have yet to be announced.
Strong pipeline but financing a concern. FCT is ready to realize its sponsor-driven pipeline over the next two years. First in its sights is the 83,000 sf extension to Northpoint. Management has told us that 96% of Northpoint 2 is committed or in advanced stages of negotiations. Both the extension and the YewTee Mall could potentially be injected into the REIT in the next 6-9 months. Our major concern here is the lack of clarity about the executing of the portfolio expansion – the timing, pricing, financing and consequently, accretion. FCT is currently geared at a comfortable 29% and could ostensibly absorb Northpoint 2 on debt only. However, we believe a fresh equity injection will be necessary to fund subsequent buys, adding another layer of uncertainty.
Fully valued – resume with HOLD. FCT is trading at a FY09F DPU yield of 5.8% (existing portfolio), which we find expensive versus other SREITs. We like FCT but we believe it is fully valued at current price levels. The various uncertainties attached to acquisitions make us wary of awarding a premium to S-REITs for future external growth. The counter’s low liquidity arising from a small size and high sponsor ownership is another concern in a bear market. We resume coverage on FCT with a HOLD rating and S$1.20 fair value estimate.
AREIT – CIMB
Key takeaways from Singapore Corporate Day
Highlights from Corporate Day
At our recent Corporate Day, A-REIT’s management updated investors on its rent outlook, investments and capital management. Questions thrown to the management mainly related to the impact of a slowing Singapore economy and manufacturing sector, the sustainability of rents and management’s intentions to acquire outside Singapore.
Demand for industrial space to stay resilient. A-REIT expects demand for industrial space in the near to medium term to stay resilient even if the economy slows further. Management explained that occupancy costs for industrial tenants typically form not more than 5% of their total operating costs. Moreover, the early termination of leases does not exempt tenants from rent payment for the remaining portions of their leases. Thus, companies typically resort to reducing shift work and labour costs before cutting back on their demand for space. The lag time is typically 18-24 months, from a business slowdown to the pinch on real-estate demand. Hence, it will take a recession exceeding 18 months or so for demand for industrial space to be hurt. Additionally, tenants in manufacturing industries account for only 24% of A-REIT’s portfolio and default payments have been minimal at 0.5% of gross revenue so far (vs. 1.8% during the recession in 2004).
Pre-commitments for projects under development add certainty to earnings. All of A-REIT’s projects under development have been built to suit tenants. To date, more than 75% of pre-commitments have been secured, and construction costs locked in prior to commencement, adding certainty to earnings in the mid-term.
More room for rental reversions in Science & Business Park and Hi-Tech segments. Historically, rents of these two segments (catering to R&D and high-valueadded manufacturing) are about half of prime office rents. With the sharp jump in office rents, rents in these segments are now at less than 25% of prime office rents. Management expects office rents to normalise over the next 1-2 years and the ratio to return to the historical 50%. Thus, even if prime office rents fall to S$10-12psf, there is upside for rents in these segments from their current S$3.50-4.00 psf. Demand is likely to be supported by high-value-added manufacturing (including R&D), which is close to the government’s heart. Growth for light industrial space is expected to be stable with most leases being sale-and-leaseback leases incorporating either a fixed portion of stepped-up rent or rental increases pegged to the CPI. Rental growth for logistics space is expected to be flat as strong upcoming supply is likely to affect rate increases for new take-up.
Expansion plans
Acquisition opportunities in Singapore still available. Management shared that there are still sizeable acquisition opportunities in Singapore, with about 6m sq m of investment-grade industrial space (or 17% of islandwide industrial space supply) not held by REITs. Yields for logistics and light industrial space have trended moderately up to 6.7-7.0%, above A-REIT’s trading yield of 6.7%. Gearing limitations and rising interest rates have attenuated competition for assets from other REITs and opportunistic funds.
Venturing overseas? A-REIT is unlikely to acquire overseas assets in the near term in view of the sufficient domestic opportunities and development projects in progress. In the medium term, if it acquires outside Singapore, it is likely to begin with South- East Asia.
Capital management
Ease of fund access. Management is in the process of completing a S$1bn mediumterm note programme (estimated in October). Short-term debt of S$255.4m forms 14% of its total debt of S$1,841m, and should be refinanced with existing bank lines. AREIT’s weighted average cost of debt had declined from 3.42% in Jun 07 to 3.16% in Jun 08, reflecting its ability to secure favourable rates even in the current environment.
Asset leverage to stay within 45%. Management intends to keep asset leverage at a self-imposed 45% and rules out any rights issue in this financial year.
Valuation and recommendation
No surprises; maintain Outperform. We continue to like A-REIT for its long lease tenures and earnings visibility in the medium term, as well as the relative resilience of the industrial sector to slowing macro conditions. No change to our FY08-10 estimates and DDM-derived target price of S$2.60 (discount rate 9.6%).
PST – OCBC
Equity cash call, as expected
Equity cash call… Pacific Shipping Trust (PST) has announced a nonrenounceable preferential offering (PO) of 252.75m new units, on the basis of three new units for every four existing units. Pacific International Lines (PIL), PST’s sponsor and 34.64% unitholder, has agreed to subscribe for its pro-rated shares as well as any unsubscribed units. An EGM will be held on 27 August to obtain unitholders’ approval. The issue price of 36.5 US cents per new unit is at a 5.2% discount to Friday’s close of 38.5 US cents, and a 18.9% discount to PST’s IPO price of 45 US cents.
…as expected. We had repeatedly stated in our previous reports that an equity cash call was imminent as PST’s 2008 acquisitions and future acquisition plans (it has a soft target of US$200m in new vessel buys per year) stretched its leverage levels uncomfortably. PST estimates it will raise about US$92.3m in gross proceeds from the offering, which will be used to finance and refinance the four new vessels costing US$222.2m slated for acquisition in 2008: Kota Nabil (delivered in March); Kota Naga (delivered in May); CSAV Laja (expected mid-September); and CSAV Lauca (mid-November).
Expect more of the same. Fully debt-funded, the 2008 acquisitions would have bumped PST’s debt-to-equity up to 2.1x by year end; we are now projecting a debt-to-equity level of 0.9x at year end post the PO. We believe debt-to-equity beyond 1x is not sustainable in the long run – for one thing, debt repayment terms and schedules are more unfavorable as leverage increases. This current PO is part of PST’s ongoing debt-first-equity-later business model. If PST spends another US$200m in FY09 as per its acquisition target, we expect its debt-to-equity to again spike to roughly 1.7x by end 2009 – and bring it closer to its next equity injection.
Lowering fair value. We have revised our estimates to take the PO into account with our net profit estimates rising by 7-22% due to reduced interest expenses after the PO. The larger unit base (up 75%) more than offsets the decrease in interest expense, however, and our FY08F and FY09F DPU estimates1 fall 4-30% to 4.27 US cents and 3.87 US cents, implying distribution yields of 11.6% (FY08F) and 10.5% (FY09F). We are lowering our fair value estimate to US$0.41 from US$0.48 previously to take into account a higher cost of capital and a more uncertain industry outlook. Maintain BUY.
1 We assume a 90% payout is maintained