Month: January 2009
PST – OCBC
4Q results par for the course
Acquisitions buoy revenue. Pacific Shipping Trust (PST) posted US$14.5m in 4Q08 revenue, up 67% YoY and 30% QoQ. For the full year, it recorded a 29% increase in revenue to US$44.6m. The strong gains were due to contributions from the four vessel acquisitions made over the course of 2008. The trust recorded a net profit of US$6.3m for the quarter. Because of a change in the accounting treatment, PST will no longer reflect fair value gains and losses on its interest rate swaps on its P&L statements. Stripping out the same from 4Q07 accounts, the trust saw roughly a 53% YoY gain in net profit. The results met our expectations.
DPU is lower. PST will pay unitholders 0.93 US cent per unit in distributions for the quarter, which translates to a 25% annualized trailing yield. Despite gains in cash income, this DPU figure is about 15% lower on a YoY and QoQ basis because of: 1) the lower payout policy adopted in 2008; 2) an enlarged shareholder base after the 3Q08 preferential offering; and 3) a partial revenue contribution from the CSAV Lauca, the fourth acquisition completed only in mid-November. We estimate a slight increase in 1Q09 DPU, which marks the first full contribution from CSAV Lauca. At the same time, PST’s interest expenses will decrease in sync with the trust’s debt repayment schedule. This should also boost DPU on a more gradual basis.
Stronger balance sheet. PST is in a comfortable position since the completion of its 3Q08 preferential offering, which raised about US$92.3m. The proceeds were used to partially fund the 2008 vessel acquisitions. PST is currently geared at about 1x debt-to-equity. We expect this to fall to about 0.94x by the end of this year as the trust pays down debt. PST can also sit tight as it has no refinancing needs in the near to medium term. PST also stands out because it is the only Singapore-listed shipping trust without loan-to-market value covenants on its books.
HOLD recommendation. Our key concern for PST is counterparty risk arising from the trust’s two customers, Pacific Intl Lines (PIL) and CSAV. Both charterers are among the world’s top 20 container operators1 . PIL, which accounts for about 70% of PST’s annual revenue, is the trust’s sponsor and 59.2% stakeholder. Tactically, we think it is too early in the cycle to become buyers of shipping trusts. There are still too many unknowns. We rate PST as a HOLD with US$0.16 fair value.
REITs – BT
Reits seek cut in payout to as low as 50%
They are also calling for a tax holiday for distributable income that is not paid out
Some real estate investment trust (Reit) managers have urged the government to reduce the minimum payout ratio to Reit unitholders to as low as 50 per cent, from 90 per cent now, while still allowing the trusts to enjoy tax concessions.
And they have even proposed a tax holiday on distributable income that they do not pay out.
The suggestions are aimed at helping Reits conserve cash to get them through today’s tight credit market conditions, BT understands.
Reits have to pay out at least 90 per cent of their distributable income to unitholders to enjoy tax transparency on the amount that they pay out. For example, if a Reit makes $100 million of distributable income in a year and pays out $90 million to unitholders, it does not pay corporate tax of 18 per cent at the Reit/vehicle level on the $90 million.
However, it has to pay tax on the $10 million that it withholds. If a Reit distributes all $100 million, then it does not pay any tax on its income for the year.
Instead, Reit unitholders are liable to be taxed on the distributions that they receive, depending on their profile. This ranges from zero tax for individual investors regardless of nationality, to 10 per cent for foreign corporate/institutional investors and 18 per cent for local corporate investors.
Reit managers have been giving a variety of feedback to the Monetary Authority of Singapore. One request is to reduce the minimum payout ratio from 90 per cent of distributable income to anything from 50 to 75 per cent, BT believes.
The Reits also want MAS to continue according them tax transparency, that is, to keep exempting them from paying corporate tax on the portion of income that they pay unitholders, even at a lower payout ratio. Some are even urging MAS to go a step further and grant Reits a tax holiday on the income that they withhold from distribution.
Market watchers say that this would lead to a substantial loss of tax revenue. To address this concern, some Reit managers have suggested that the tax holiday on income that is not distributed could be limited to, say, two years to help Reits ride out the current tough environment. Agreeing, an analyst suggested that Reits could be required to pay back taxes after the two-year period expires. By then, hopefully, things will be better.
MAS is understood to have sought the views of a gamut of parties – including Reit managers, bankers, lawyers and even unitholders – on the topic.
Among the issues is fairness in tax treatment in relation to other listed and non-listed entities. ‘Why should Reits continue to enjoy exemption of corporate tax at the vehicle level if their distribution payout ratios fall, when many other listed companies also distribute a chunk of their profits to shareholders but still have to pay corporate taxes?’ asked an industry observer.
Some Reit unitholders may not be happy with a lower distribution payout ratio, as it will create more uncertainty about returns. This could be a bugbear, especially for corporate investors such as funds and insurance companies that have obligations to achieve target returns for their own investors and policy holders.
The counter-argument is that, in times like these, the survival of Reits must be paramount. As OCBC Investment Research said this week: ‘While this may create income uncertainty for investors, we think the first priority is to ensure Reit survival and dividend sustainability. We note that a minimal cut from 90 per cent to say, a 75 per cent payout ratio requirement, is not a silver bullet for Singapore Reits with significant liquidity issues. But Reit managers may like to have as much flexibility and (cash) ammunition as they can get in the current environment.’
Fortune – BT
Fortune Reit’s Q4 net property income up 6.8%
FORTUNE Reit has reported a net property income of HK$121.34 million (S$23.54 million) for the fourth quarter ended Dec 31, 2008, up 6.8 per cent from HK$113.57 million a year ago. Revenue for the period was HK$166.18 million, 5.1 per cent higher than HK$158.14 million a year ago.
Income available for distribution for the quarter was HK$80.78 million, up 4.1 per cent year-on-year (yoy). Distribution per unit was HK$0.099, up 3.1 per cent yoy.
Stephen Chu, CEO of ARA Asset Management (Singapore) Ltd, the manager of Fortune Reit, said: ‘These results underscore the defensive nature of the Hong Kong suburban retail sector in general and Fortune Reit in particular.’
He added that, under the current volatile market conditions, the management will focus on sustaining organic growth through proactively managing its portfolio of assets, cost management and execution of its ongoing asset enhancement initiatives.
As at end-December 2008, Fortune Reit’s aggregate amount of secured borrowings repayable after one year was HK$2.34 billion.
Its cash and cash equivalent position at the end of the same period was HK$243.36 million. It also has a gearing of 26.4 per cent.
Fortune Reit has a portfolio of 11 suburban retail properties.
The performance of the Reit was attributed to organic growth at City Shatin Property and Ma On Shan Plaza as well as results from the completed asset enhancement works at Waldorf Garden Property.
As at end-December 2008, the portfolio occupancy was 96 per cent, up from 92.1 per cent a year earlier. Rental reversion of 18.8 per cent was achieved for renewals in 2008.
Overall tenant retention was 83.6 per cent in 2008.
The portfolio passing rent was HK$27.03 psf as at Dec 31, 2008, an increase of 7.1 per cent yoy.
At the end of trading yesterday, Fortune Reit closed at HK$2.40 per unit, up 7 cents.
FSL – BT
First Ship Lease revises distribution policy
Lower 75-78% Q1 payout seen; 4Q08 DPU up 27.3%
THE cloudy outlook for the shipping industry and the capital market have led First Ship Lease (FSL) Trust to revise its distribution policy.
Target distribution per unit (DPU) for the first quarter of this year is 2.45 US cents, representing 75-80 per cent of expected distributable cash flow, compared with 100 per cent usually. The retained cash will be used to reduce the trust’s gearing and to seize growth opportunities.
FSL Trust Management (FSLTM) chief executive Philip Clausius said the move is a proactive one amid the global uncertainty. ‘This is not something we have done because we think there is going to be a default or because our lending banks asked us to,’ he said.
Rather, the retained funds will come in handy should the unexpected happen. DPU guidance will be provided on a quarterly basis until longer-term visibility returns.
Chief financial officer Cheong Chee Tham said: ‘Given FSL Trust’s secure long-term cash flow and lack of near-term refinancing needs, it is well-placed to take advantage of attractive opportunities that will present themselves in the next 24 months.’
For Q4 2008 ended Dec 31, FSL Trust will distribute US$15.4 million, excluding an incentive fee of US$590,000 payable to FSLTM. This works out to DPU of 3.08 US cents, up 27.3 per cent from Q4 2007.
FSLTM is confident that FSL Trust will not see any charter rate renegotiations or payment defaults by clients, despite volatility in the industry.
FSL Trust’s portfolio comprises 23 vessels which are leased out on long-term basis. The earliest lease expiry is in 2014. As at Dec 31, 2008, the lease portfolio had a net book value of US$900 million and remaining contracted revenue of US$858 million.
While FSL Trust’s leading bankers did not invoke a market disruption clause during the latest round of interest rate re-sets, Mr Clausius does not rule out the possibility of this happening.
‘The interbank market is so volatile. The banks are still funding themselves at costs way above the quoted Libor,’ he said.
FSL Trust’s net profit fell 75.8 per cent to US$456,000 in Q4 2008 as vessels acquired post-IPO were wholly financed by debt, and interest and depreciation charges for these vessels were higher than the lease rates.
However, revenue jumped 70.2 per cent to US$25.7 million due to the acquisition of two crude oil tankers and three container ships.
For FY 2008, net profit was 23.5 per cent lower at US$4.8 million, while revenue came in 113.4 per cent higher at US$86.62 million. DPU for the year was 11.52 US cents.
Q4 2008 DPU will be paid on Feb 27. FSL Trust’s units closed unchanged at 46.5 cents yesterday.