Month: November 2008
REIT – Phillips
From the schedule above, there is approximately $x billion of debt refinancing due within the next year. With the credit crisis affecting all regions of the world, there is much concern over whether the REITS are able to roll over their debts. From our understanding, bank term loans usually have a tenor of 2 years or less so the debts that are maturing within the next year were contracted in either 2006 or 2007. Before the credit crisis manifested, borrowers were paying margins of double-digit bps spread above the reference rate. Most borrowers had also fixed a portion of their debt to a fixed rate through various derivative instruments, so an all-in interest cost would approximately be in the range of 2.5-3.5%. We believe REITS will be able to secure or extend their credit facility, the only drawback will be a substantially higher margin on the loans. The indication of the new margin will be in the range of 200- 250basis points. If we take the October 3-month SOR as the reference rate, new loans will cost 3.5-4.0%. And not ruling out fluctuations in the interest rate environment, if the borrowers did not hedge their reference cost, they may be subjected to even higher interest expense if the reference rate increases.
Conclusion. The SREIT sector is operating in a trying environment with no shortterm catalyst in sight. Falling rentals coupled with higher interest expense are going to impact distributions. We are of the view that DPU will be impacted, however there is a net-off effect from positive rental reversion with the softening market rates and higher interest expenses. Because of the unusual situation; refinancing requirement at a time of tight credit environment and worsening economy, the confluence of factors has resulted in very depressed share prices and historically high dividend yields. We do not think share price to rebound to the level at the beginning of the
year, and advise investing in REITs for the long term investor who is willing to sit out the recession to take advantage of the high dividend yield.
Link – Table
MI-REIT – Phillip
Latest 2QFY09 results were within expectations without much surprise. MacarthurCook Industrial REIT (MIREIT) reported gross rental revenue of S$12.4m (68.8% YoY, 0% QoQ), distributable income of S$6.9m (44.2% yoY, +5.6% QoQ) and DPU of 2.35 cents (26.3% YoY, 0% QoQ).
Since 1QFY09, MIREIT has paid out approximately 90.16% of the distributable income and had maintained the same quantum of 2.35 cents for both 1QFY09 and 2QFY09. The REIT Manager has indicated that it will pay out all retained amounts for the full year and therefore we do not expect much variant of the DPU amount for the second half of the year.
MIREIT has 91% of its debt due in April 2009. Negotiations are underway and our general view is refinancing will take place with a much higher margin. The remaining of its debt relate to the Japanese debt that is due in Dec 2009. MIREIT will also face significant financing requirement in Dec 2009 for the purchase of the business park development at Plot 4A, IBP.
The property portfolio maintains 100% occupancy and is fairly well diverse across the sub sectors. The biggest tenant contributes 20.3% of rental income and top ten tenants account for 66.6% of total income, contrasting with the 33.6% and 94.2% at the time of IPO. The portfolio registered an S$1.5m accretion in asset value from a property valuation done on 13 of the properties on 6 Nov 2008.
Valuation and recommendation. Our revenue projections remained intact because there is a built-in rental escalation component. We have however increased our borrowing cost assumptions and reduced our DPU projections from FY10F onwards. We adjusted our DCF parameters to factor in higher risk premium and our DCF derived fair value is lowered to S$0.60 from S$1.18 previously. Maintain Buy with a long-term view.
Cambridge – Phillip
There is no change to the story. Revenue growth comes from acquisitions and rental increases. There should not be any significant acquisitions in the near term given the faltering sources of capital from the dismay capital market and tight credit environment. CIT current gearing is 38% and it would be wise not to push the to make acquisitions.
3QFY08 results. CIT reported 3QFY08 results with gross revenue of S$18.3 million (+35.8% YoY), net property income of S$16.2 million (+40.4% YoY) and distributable income of S$11.8 million (+35.5% YoY). DPU however dropped from 1.70 cents to 1.49 cents (-12.4%).
Top concern is refinancing. CIT has S$337 million of debt (91%) that is due in Feb 2009. We are expecting borrowing terms to be a lot more critical and borrowing cost to escalate. We raise our interest cost assumption to an effective rate of 4.78%
Drop in DPU. The main reason for the fall in DPU in this quarter is because management fee was paid out entirely in cash. Although there isn’t a fixed policy on the payout method, this was in contrast to the approximately 63% of fees paid out of new issuance in units in the previous two quarters. On the flip side, management reasoned that new units are dilutive and even more so at depressed price level where a greater number of units have to be issued.
Valuation and recommendation. We do not foresee near term acquisition activities and our gross revenue assumptions remain intact for now, bolstered by built-in rent escalation. We reduce our DPU estimations by 5.2% and 17.6% for FY08F and FY09F respectively mainly due to higher borrowing expenses. Currently CIT trade at close to 65% discount to NAV, which we believe is a reflection of market’s perception to the inherent refinancing risk. Our DCF derived fair value is $0.48 ($0.92 previously). Maintain BUY on valuation basis. Risk to our projections would be falling occupancy level.
FCOT – Phillip
Strategic review takes a twist. The new management has decided to ditch the divestment plan of the Australian assets. Previous asset enhancement projects at Keypoint and China Square Central were put on hold. It has also dropped plans for a hotel development at China Square Central with a view of rising construction cost and lower tourist arrivals. It will instead focus on recapitalizing the balance sheet and active asset management to retain tenants and maximizes lease renewals.
No catalyst in sight. Fraser Commercial Trust (FCOT) faces significant headwind and sees some pressing issues it needs to address.
Key issue 1: Asset revaluation a risk to breaching gearing limit. FCOT latest valuation of its properties recorded an S$126.2million (-6.6%) loss to its asset value. NAV per unit is cut from $1.39 to 1.21. We see further risk in cap rate expansion resulting in lower property values, which might increase the gearing ratio. It has one of the highest gearing ratio among the SREIT. FCOT current gearing is 48.6%. We think it is stuck in a difficult position to reduce the gearing, as the plausible ways are not favorable. Judging by the strategic review outcome, an asset sale was already ruled out. An equity fund raising (EFR) might not be able to raise the expected amount due to the weak equity market climate. At the current price level, a pure EFR would be highly dilutive as well.
Key issue 2: FCOT has S$70 million debt due on 22nd Nov 2008. This is supposed to be repaid with the redemption proceeds from AWPF, however management has mentioned there will be no redemption. We believe FCOT should be able to secure refinancing given its sponsor relationship. However we have also assumed a higher interest margin along with the refinancing.
Valuation and recommendation. FCOT is trading at approximately 80% discount to its NAV. Although cheap on a relative basis, we are of the view that sentiments may not pick up in the short term. Our concern stem from the following points; 1) high gearing ratio, 2) probable dilution from EFR, 3) high borrowing cost, 4) worsening rental outlook and asset value. We are downgrading our call to Hold with a fair value of $0.21.
CitySpring – OCBC
2Q09 cash earnings hit by timing lags and one-offs
Cash earnings hit in 2Q09. CitySpring Infrastructure Trust (CitySpring) posted a 31.7% YoY gain in 2Q09 revenue to almost S$101m, and a net loss of S$36.7m, largely due to non-cash items such as fair value losses and depreciation charges. To track CitySpring’s performance, we typically look to cash earnings, which came in at S$1.1m, or 90.2% lower than the trust had projected in its January unitholders circular. In contrast, the trust had earned S$14.1m in 2Q08 and S$17.7m in 1Q09.
Timing lags and one-offs. The biggest hit to cash earnings came from the payment of a one-time upfront fee of S$7.8m for the recently secured S$370m loan. We estimate another S$4m hit is due to a timing lag between tariffs (which are adjusted quarterly) and actual fuel costs at City Gas. City Gas expects to recoup the under-recovered fuel costs in 3Q09. Lower facility fees, which will be partially recouped, and S$2.5m in negative CRSM payments at Basslink also impacted cash earnings. The trust will maintain its 1.75 S cents quarterly payout by utilizing retained cash. CitySpring estimates its accumulated cash surplus as at 30 Sept is about 3.7x the current quarterly distribution – a nice cushion against any further one-offs or lags.
Same investment case. The investment case for CitySpring is unchanged – its strong sponsor (Temasek) and its basket of defensive assets. The trust’s assets feature (1) a monopolistic market position or strategic consideration; (2) fairly stable and predictable cash flows that are fairly non-cyclical; (3) CPI-linked revenue escalations that act as a hedge against inflation or regulator-controlled returns; (4) fairly inelastic demand or availability-based revenues; and (5) a long investment horizon. The noncyclical nature of CitySpring’s cash flows is also a major differentiator against other yield plays like shipping trusts and REITs who have run into industry downturns.
Same concerns. Our concerns have been accentuated, rather than assuaged, by the 28% decline in CitySpring’s share price since our last report. Basslink, CitySpring’s S$1.5bn acquisition, is currently 100% debt financed. This approach allowed the trust to bypass shaky equity markets but it is not a sustainable or permanent solution in our view. Additionally, we feel CitySpring’s current portfolio lacks critical mass and should grow through further acquisitions. An equity cash call would be a necessary next step – but it would be highly dilutive at current price levels. We retain our HOLD rating with new fair value of S$0.57 (previously S$0.80). We have also adjusted our earnings estimates to reflect a weaker AUD.