Month: January 2009
KREIT – DBS
Results in line
K-reit’s strong performance was expected, boosted by organic growth and ORQ contributions. However, looking ahead, the acceleration in office rental decline would continue to moderate DPU growth outlook. Despite inexpensive valuations of 11.9% FY09 yield, 0.3x P/bk NAV and implied yields of 9.8%, maintain Hold call with TP of $0.80 on the lack of short-term catalyst.
Results within expectations
K-reit reported a 30% rise in Q4 revenue to $14.3m while distributable income rose 152% to $17.4m (DPU: 2.67cts), thanks to contributions from ORQ, positive rental reversions and lower operating expenses. For the full year, the group chalked a 166.7% improvement in distribution income to $58.2m. The group revalued its properties, with a marginal surplus of $7m vs Dec 07 level. Value of Prudential Tower and ORQ saw a small decline of 1-1.5% while KTGE and Bugis Tower experienced a 0-3% hike in value.
Weak office sector outlook
Outlook for the office leasing market remains uncertain. Office rentals have dipped in 4Q08 and are expected to decline further this year. Amongst its buildings, Prudential Tower continued to see its occupancy decline to 92.3% from 96.4% qoq. K-reit has 27% and 26% of its NLA due to renewal/review in FY09 and FY10 respectively, largely from KTGE Towers. While reversions are still positive, the acceleration in rental rate decline would erode DPU growth outlook. Our FY09 projection has factored in a 15% rental dip, accompanied by a 10% drop in vacancy level.
Valuations inexpensive, no short-term catalyst
Current valuations appear to have factored in much of the expected office weakness with implied cap rates of 9.8% vs actual passing yield of 4.1%. However, short-term catalysts are not visible. The stock is trading at FY09 and FY10 DPU yield of 11.9% and 11.7% respectively. While K-reit does not have refinancing concerns and have a relatively long average lease expiry of 5.6years, its low stock liquidity could hamper investor interest.
REITs – BT
MAS gives Reits a New Year gift
Refinancing of maturing debt facilitated; clarity on leverage ratios
Reit managers here have been given more breathing space on borrowing limits by the Monetary Authority of Singapore (MAS), which has clarified how downward revaluations of properties should be treated.
Basically, MAS has said that Reits need not worry if their leverage has increased because properties have been revalued and are now worth less.
Under MAS’s Property Fund Guidelines, an S-Reit’s total borrowings and deferred payments (the ‘aggregate leverage’) should not exceed 35 per cent of its deposited property. This maximum limit is set at a higher 60 per cent if the Reit obtains a credit rating and publicises it.
In a circular to Reit managers and trustees earlier this month, MAS confirmed that if the aggregate leverage has gone up because of a decline in property values, it will not amount to a breach of leverage limits. MAS also made the important point that refinancing of existing debt by a Reit is not to be construed as incurring additional borrowings.
‘So if at the point of refinancing, a Reit has to revalue its assets (which lenders will require), and so long as the refinancing is of existing debt, MAS will not consider this as additional borrowing and hence the Reit will not be in breach of the statutory leverage limit,’ says Giam Lay Hoon, group general counsel of Oxley Capital Group, which owns a stake in the manager of Cambridge Industrial Trust.
MAS also said that it will permit Reits to raise debt for refinancing purposes earlier than the actual maturity of the debt to be refinanced, without having to include such funds raised in the aggregate leverage limit. However, this is ‘provided that the funds are set aside solely for the purpose of repaying the maturing debt’.
‘The trustee must place these funds in a separate trust account which shall be drawn on only to repay the maturing debt,’ MAS said in its circular.
Oxley Capital’s Ms Giam welcomed MAS’s responsiveness to tight credit market conditions. The CFO of a Reit manager told BT that the MAS clarifications would ‘give some breathing space for some Reit managers with high gearing and with properties in danger of being substantially depreciated’.
This, he said, would ease the pressure on these Reits to recapitalise through raising fresh equity and reduce pressure on the unit price of these Reits.
‘However, ratings agencies will continue to be nervous about property depreciation as that may reflect sliding rents and occupancies and a rise in tenant-default rates,’ he added.
Stan Ho, Fitch Ratings’ senior director and head of Non-Japan Asia structured finance, stressed that ‘any downward revaluation of the underlying property would raise the loan-to-valuation ratios as far as banks lending to Reits are concerned, and this would need to be considered in our ratings for Singapore Reits’.
Kathleen Lee, vice-president and senior analyst at Moody’s Singapore, also pointed out that while a downward revaluation may not breach MAS’s statutory aggregate leverage limit for S-Reits, ‘lenders to Reits can set their own covenants and a downward revaluation could trigger a breach of some of these covenants and that could also lead to a re-rating of the Reit’.
In a separate development, MAS is understood to have sought feedback recently on whether the current minimum distribution payout ratio for S-Reits should be lowered, from 90 per cent of distributable income currently to, say, 75-80 per cent. Some Reit managers are lobbying for the cut. ‘Cash is a premium today and Reits may want to conserve their cash for a host of reasons, including servicing loans, reducing debt or just as general ammunition,’ an industry player said.
However, a rival disagreed, arguing ‘this would go against the fundamentals of why the S-Reit market was created’.
Reits have a high degree of transparency and investors have a high level of certainty of distributions from Reits. ‘So when you give more flexibility to the Reit manager in terms of how much of distributable income it has to pay to unit holders, it creates more uncertainty for the investor. Investors like clarity,’ he added.
KREIT – BT
K-Reit Asia’s Q4 distributable income soars to $17.4m
Net property income up 68% to $11.8m; DPU down due to rights issue last year
KEPPEL Land’s listed office trust, K-Reit Asia, yesterday reported a distributable income to unitholders of $17.4 million for the fourth quarter ended Dec 31, 2008 – a 152 per cent jump from a year ago.
This followed a 68 per cent year-on-year increase in net property income to $11.8 million, due to lower property expenses and higher rental income.
Investment properties held directly by K-Reit achieved an average gross rental rate of $6.08 psf in December last year, compared with $4.65 psf in December 2007.
Despite the higher earnings, K-Reit’s distribution per unit (DPU) in Q4 2008 was 2.67 cents, lower than the 2.8 cents in the same period last year.
This was due to K-Reit’s rights issue in May last year, which added more than 390 million new units to the market.
On an annualised basis, K-Reit’s DPU in Q4 was 10.62 cents, generating a distribution yield of 15.2 per cent based on its unit closing price of 70 cents as at Dec 31, 2008. K-Reit last closed unchanged at 67 cents yesterday.
For FY2008, K-Reit reaped a net property income of $39.7 million, 40 per cent higher than in FY2007. This led to a 167 per cent surge in distributable income to $58.1 million.
DPU for FY2008 was 8.91 cents, marginally higher than the 8.82 cents a year ago. This translates to a distribution yield of 12.73 per cent.
For the period July 1, 2008 to Dec 31, 2008, K-Reit will pay out 5.07 cents per unit on Feb 23 this year. This will bring the total DPU payout to 13.04 cents for the period Jan 1, 2008 to Dec 31, 2008.
Trust manager K-Reit Asia Management sought to reassure investors about K-Reit’s financial strength yesterday. Having raised proceeds of $551.7 million from the rights issue in May 2008, K-Reit has a low aggregate leverage level of 27.6 per cent as at end-December 2008 and has no debt refinancing needs until 2011, said CEO of the trust manager, Tan Swee Yiow.
K-Reit also established a $1 billion multi-currency medium term note programme yesterday as an additional source of funding.
Mr Tan added that it would take a more than 54 per cent drop in K-Reit’s portfolio value for the leverage level to exceed 60 per cent. Under current rules, a Singapore-listed Reit’s aggregate leverage should not exceed 60 per cent of its deposited property if it obtains a credit rating and publicises it.
And while the year ahead could be challenging, K-Reit is still keeping an eye out for selective asset acquisitions across Asia. The Reit will adopt a ‘cautious and prudent’ approach to this, said Mr Tan.
KREIT – BT
K-Reit to distribute 8.91 cts per unit for FY08
K-Reit on Monday reported income distributable to unitholders of $17.4 million for the quarter to Dec 31, bringing full year distribution to $58.2 million, or 8.91 cents per unit.
This implies a full-year yield of 12.7 per cent, one percentage point above 2007, and 18.3 per cent above forecast DPU of 7.3 cents, or 10.8 per cent.
Net asset value per unit was $2.28 at Dec 31, compared to $3.78 a year ago. Adjusted NAV, excluding distributable income was $2.19, down from $3.69 a year ago.
K-Reit said the outlook remained ‘challenging’ but that there were mitigating factors. Its average portfolio rents are below market rents ‘and will provide a cushion for positive rental reversion even under current conditions.’
It said that average lease to expiry was 5.6 years in its portfolio, and that it has no debt financing needs until 2011. Leverage was at 27.6 per cent as at Dec 31.
K-Reit said the present climate provided opportunities for selective asset acquisitions, and said it will engage in asset enhancement to optimise net lettable area and improve operational efficiency.
AREIT – DBS
Overhang removed
FY 3Q09 results showed sustained 14% growth in distributable income to S$53.9m, translating to 4.05 Scts per share. In addition, the reit is undertaking a recapitalization exercise of c.S$410.6m to repay loans and fund development commitments. Post equity raising, we believe that the reit will emerge stronger with a net gearing of c.37% with no major refinancing requirements in the next 2 years. In addition, AREIT is likely to continue to deliver a sustained c.10% DPU yield over FY10F – FY11F. As such, maintain BUY, TP S$1.51 based on DCF.
Healthy organic growth Net distributable income of S$53.9m (+14% y-o-y, +1% q-o-q) is within our expectation. This translates to an average DPU of 4.05 Scts per share.
Asking rents still up, occupancy levels dipped slightly to 97.2%. Asking rents for its properties continued to remain firm q-o-q. However, we estimate asking rents to soften 10%-20% over the coming 2 years in the bid to retain tenants in the face of a deteriorating economic outlook. In addition, our occupancy assumption is lowered to 85% from 90%, pegged to previously historical lows.
Equity raising: Placing out 353.9m shares, raising up to S$410.6m. AREIT separately announced an equity raising exercise to raise up to S$410.6m through issuing 353.9m shares @ S$1.16 per share (7% to VWAP). This amounts to c.26% of current total share base. Proceeds will be used to fund development commitments and repay ST loans. DPU is expected to decline by c. 19% in FY10 to 12.1 Scts from 15.0cts, taking into account the enlarged share base. We view this exercise as positive given (i) AREIT will emerge stronger with a low gearing of 37%, (ii) major financing requirements in 2009-2010 is completed.