Month: December 2008
Suntec – MS
Back to Basics
Higher yield required as less superior to CCT: We are maintaining our Equal-weight rating on Suntec REIT on a lower price target of S$0.68 (from S$0.91). In addition to reducing our rental assumptions for its assets, our new price target attempts to capture the risk of our bear case scenario panning out, as the macro environment continues to deteriorate, by assigning a 20% probability to our bear case. A base case DCF-driven NAV suggest a value of S$0.77 for Suntec, on a fully diluted basis. In our view, the risk-reward offered by CapitaCommercial Trust, our new sector top pick with 14.5%-13.6% DPU yield, is more attractive than Suntec’s 13.3%-13.5% yield. We prefer CCT’s higher-quality asset portfolio, leasing track record and balance sheet, backed by its strong parent, CapitaLand.
Too early to ascertain refinancing risk, as its S$700m debt refinancing is only due in December 2009. According to management, banks remain keen to work with Suntec on its refinancing but are reluctant to commit to funding rates ahead of time. On a positive note, our economics team is currently expecting SIBOR to be 0.6% by 2009 year-end and 2.1% by 2010 year-end. If rates remain below 1% in 2009, this would be positive for S-REITs as further increases in required spreads from the current 200-250bp would be cushioned by the lower SIBOR or swap rates. At a current leverage of 33%, Suntec has room to absorb a 200bp to 320bp cap rate expansion before it hits the 50% and 60% marks. This translates to a 35% to 46% devaluation in its asset portfolio respectively. We believe this buffer is sufficient for the next 12 months at least.
Sector dependent on macro recovery: The market is likely to remain skeptical on the viability of the S-REIT business model given its heavy reliance on credit and will be keeping a watch on the ability and cost of the S-REIT debt refinancing in 2009. For now, we believe S-REITs are likely to trade in line with the STI Index.
MapleTree – BT
Moody’s Investors Service on Monday affirmed MapletreeLog’s Baa2 rating and changed the outlook to stable from negative.
‘The affirmation of Mapletree’s Baa2 rating reflects a significant improvement in the group’s leverage and liquidity position following a rights offering that is largely supported by its sponsor, MapletreeInvestments Pte Ltd,’ says Kathleen Lee, a Moody’s VP/Senior Analyst.
She added ‘such that its financial metrics — Debt/EBITDA of around 8x and EBITDA/Interest around 3.5x — are more appropriate for its Baa2 rating’.
‘In addition, MapletreeLog has successfully alleviated material refinancing risk with the use of its rights proceeds from August partly paying down short term debt and committed acquisition payments as well as extending some short term debt to medium term bank lines’ says Ms Lee.
Mapletree Logistics Trusts was the first Singapore-based Asia-focused logistics REIT. It was listed on the Singapore Stock Exchange in July, 2005, and its portfolio has since increased from 15 to 79 properties by 30 September 2008, and valued at approximately S$2.67 billion. Including its recently acquired assets, MapletreeLog has a fairly well diversified portfolio with 54% of its investment assets in Singapore, followed by Hong Kong (24%), Japan (12%), Malaysia (5%), China (4%) and South Korea (1%).
Going forward, Moody’s expects MapletreeLog to observe financial metrics similar to those they now have and to be relatively measured in looking at new acquisitions. Even if they were to acquire new assets the company would look to have committed funding before committing to new asset acquisitions and maintain a well-laddered debt maturity profile.
The stable rating outlook reflects Moody’s expectation that the expected weakness in the industrial property market over the next 12-18 months is manageable within the rating considering MapletreeLog’s asset quality and its improved financial metrics.
On the other hand, Moody’s does not see an upside rating potential in the next 12-18 months given the expected weakness in the operatingenvironment and property fundamentals.
On the other hand, Baa2 rating could be downgraded if MapletreeLog’sfinancial performance weakens due to a material weakening in the industrial operating environment beyond that expected.
Financial indicators that could pressure the rating include: fixed interest coverage dropping below 2-3x or Debt/EBITDA coverage ratio increasing above 8x — 10x. In addition negative rating pressure could emerge if the company does not continue to proactively extend its debt maturities to avoid any short term pressures in this context.
The last rating action was on 10 April, 2008 when the rating of MapletreeLog was confirmed at Baa2 with outlook negative.
Suntec – OCBC
Looking oversold
Focus on rentals and capital values. Suntec REIT (Suntec) will see almost 70% of its office portfolio ex One Raffles Quay up for renewal in the next two years. We are projecting Suntec City office rentals will tumble down to single digit next year. We also expect vacancy rates to be on the rise. We estimate the average passing rent at Suntec City Office is currently in the S$6.50 ballpark, comfortably below our fairly bleak reversionary rent expectations for the next two years. On the retail side, we have priced in a conservative 8-10% per annum decline in Suntec City Mall rentals over the next two years. We also feel capital values are at risk, especially for the REIT’s office portfolio. Suntec’s properties were revalued on 30th September, yielding a marginal surplus. According to management, implied cap rates were up 25 basis points (bps) from last year – which still feels a little low to us.
Some refinancing risk. Suntec has about S$825m of debt, or about 40% of its total borrowings, up for refinancing in the next 12 months. Its cost of debt is likely to increase from the last reported all-in cost of 3.2%. The REIT is currently leveraged at 0.32x debt-to-assets. We expect (non-cash) revaluation losses going forwards, which could potentially stress the REIT’s tolerance for gearing. We believe our valuation reflects the risk of an equity recapitalization (which is not necessary, but possible).
Looking oversold. We still think Suntec’s assets are a good long-term bet, and will be net beneficiaries of the revitalization of the Marina area and the completion of the Circle line. We have only two concerns with the REIT: historians will likely label the One Raffles Quay buy in 2007 as overexuberant; and the deferred equity payment structure on the IPO assets creates unnecessary stress on DPU in what are looking to be testing times. Still, our primary focus is on valuations – which are looking oversold. Value hunters have an opportunity to pick up some really good assets on the cheap, in our view. Back of the envelope, the current share price seems to be implying a 48% decline in capital values. We think our concerns have been more than priced in at this point. Our RNAV estimate of S$1.05 prices in a 38% decline in asset values. Our fair value estimate for Suntec is 90 S cents, at a 15% discount to our RNAV estimate. Maintain BUY.
LMIR – OCBC
Retail story still compelling
Low gearing, sponsor support. We believe perceived risk will drive REIT performance in 2009. As of 3Q, LMIR has a very low leverage level of about 9% with no refinancing risk until 2013. LMIR is currently trading at a 68% discount to book, but those asset values do not reflect current exchange rates.
Retail focus still compelling. We think the retail story in Indonesia is still compelling. The country’s domestic economy offers some insulation from the global crisis. A Reuters poll indicates that while Indonesia will see some slowdown, it will be Southeast Asia’s best performer. The poll forecasted growth of 4.8% next year and 5.6% in 2010, thanks to still healthy consumption1 . LMIR’s portfolio of eight retail malls and seven retail strata spaces is strategically located within well-established population catchments across Indonesia. The portfolio boasts strong tenancy profiles with large anchor tenants such as hypermarkets.
Asset revaluation risk. We note that LMIR’s debt is SGD-denominated. The IDR has seen a large movement against the SGD over the past year. The continued forex volatility should be of limited concern to LMIR investors focused on income, as the trust has hedged both its SGD-denominated distributions and interest expense. However, forex volatility does create a major revaluation risk. LMIR’s assets are due to be revalued in 4Q08. The REIT’s portfolio will be revalued in IDR – this IDR value will then be converted back into SGD at spot rates. Risk appetite for the IDR has recovered from the lows of October. But with the level of volatility seen in the currency this year, the exchange rate on 31st December (which determines asset values) is anybody’s guess. This puts LMIR’s book value at risk – even if the IDR value of the portfolio stays the same. While revaluation gains or losses are non-cash in nature, it would affect LMIR’s gearing level and NAV.
Maintain BUY. In our last report, we had taken a more cautious view on our assumptions on rental growth, discount rate, and cap rates. We have also taken a fresh look at our valuation model, relaxing our fairly bleak expectations for the IDR-SGD. Our RNAV estimate for the REIT is S$0.55. Our fair value estimate of S$0.39 (prev. S$0.27) prices in a 30% discount to that estimate. Maintain BUY.
FrasersCT
Fundamental call still stands
Strong sponsor. We believe perceived risk will drive REIT performance in 2009. Sponsored REITs like Frasers Centrepoint Trust (FCT) are generally thought to have a lower risk profile as the sponsor is seen as a bastion of support for the S-REIT – especially financial support. FCT has a strong sponsor whose recent show of tangible financial support for newly affiliated Frasers Commercial Trust speaks volumes. FCT is geared at 28.1%, with 80% of its outstanding debt expiring only in July 2011. Our main balance sheet related concern is the financing of ongoing capital expenditure – FCT is currently using uncommitted drawn banking facilities for this purpose. The likely strength of lending relationships inherited from its sponsor alleviates our concern (somewhat).
Refining assumptions. We continue to like FCT’s suburban assets and their mass-market consumer focus. The malls are strategically located adjacent to MRT stations and bus interchanges, and enjoy captive markets with strong population catchments and limited alternative shopping choices. The primary focus is on non-discretionary spending and both Northpoint and Causeway Point have had a good track record in previous crises. However, we are refining our assumptions. We had previously assumed flat YoY reversionary growth in rentals. We are now pricing in a 5-7% decline per annum over the next two years (except for an expected uplift at Northpoint next year post-asset enhancements). This is in line with our assumptions for rental contractions at Suntec City Mall (est. 8-10% pa decline) and CapitaMall Trust (est. 5% pa). We have also refined our estimate for the value of FCT’s stake in Malaysian Hektar REIT.
Fundamental call still stands. FCT’s share price has continued to fall in tandem with the S-REIT sector. It is currently trading at a 53% discount to book value. However, we believe our fundamental call still makes sense. In our opinion, FCT’s current portfolio lacks critical mass. FCT was in the process of building a scale portfolio on the back of a clearly defined sponsor pipeline. Unfortunately, even the best laid plans can go awry. FCT has now postponed its expansion plans indefinitely, citing credit market conditions. We believe that the pace of acquisitions will dramatically slow across the S-REIT sector because of the rising cost of capital, overstretched balance sheets, and limited access to capital. While slowing growth is a sectorwide problem, its importance to FCT is above average (in our opinion). Maintain HOLD. Based on the adjustments described above, our fair value estimate drops from S$0.72 to S$0.62.