Month: March 2009
Cambridge – Nomura
We cut our GAV estimate for CREIT by 3.5%, as we lower our industrial rental forecast to capture a peak-to-trough correction of 31.7% (vs. 23.9% previously). Lower GAV estimate suggests potential for CREIT to raise fresh equity to keep gearing within limit. Target price cut from S$0.30 to S$0.24. Maintain NEUTRAL.
Anchor themes
A rapid deterioration in the external sector and the economic outlook is likely to crimp demand for industrial/warehouse space amid rising new supply. We expect yields to soften by 150bp from June 2008, placing downward pressure on capital values.
Rental reversions/lease structures are likely to underpin REIT cashflows. That said, growing concerns over their ability to refinance debt have seen REITs trade below book. In such conditions, investors need to focus on underlying asset value/quality, while REITs with well-located assets should benefit from potential M&A activity.
Weaker asset outlook
- Worsening industrial outlook = a 3.5% cut in GAV estimate
- Lower GAV estimate = new equity potentially needed
- FY09-11F DPU cut 1.5% to reflect higher-than-previously guided cost of refinancing
- Maintain NEUTRAL; target price cut from S$0.30 to S$0.24
FSL – BT
FSL Trust seeking mandate for buy-back of units
Move will allow purchase of up to 10% of issued units
First Ship Lease Trust (FSL Trust) is seeking unitholders’ approval for a unit buy-back mandate.
FSL Trust Management (FSLTM), the trustee-manager, said FSL Trust will hold an extraordinary general meeting (EGM) on April 8 for this purpose. The mandate would authorise the trustee-manager to buy back up to 10 per cent of the total number of issued FSL Trust units as at the date of the EGM.
A unit buy-back would cut the number of outstanding units in the market, resulting in a higher ownership stake per investor on the profits of the firm.
‘The mandate is intended to provide FSLTM with a flexible and cost-effective tool of capital management that seeks to improve the net asset value per unit of FSL Trust and return on equity for unitholders,’ the trustee-manager said.
Cheong Chee Tham, chief financial officer of FSLTM, said that the actual unit purchase, if any, would depend on the current market conditions, working capital requirements, the availability of financial resources and the expansion and investment plans of FSL Trust.
The trust would also hold its annual general meeting (AGM) on the same day to get approval for the renewal of general mandates for the issuance of new units. This includes units to be issued based on the FSL Trust distribution reinvestment scheme, under which unitholders can choose to receive their distributions in new units instead of cash or a combination of both.
‘With reference to the general mandates for the issuance of new units, FSLTM currently has no plans to raise equity for FSL Trust,’ said the trustee-manager.
It added that such mandates are ‘regular resolutions’ at AGMs and provide the trustee-manager greater flexibility to manage the trust’s capital structure.
Industrial REITs – CIMB
Relative resilience
• Industrial P/BV at 0.37x; appears resilient. The industrial sector looks attractive at an average P/BV of 0.37x, close to the REIT sector average of 0.34x. Resilience is underpinned by a historical time lag between changes in leading industrial indicators (including NODX, sea and air cargo throughput) and occupancy levels that could exceed 12 months.
• Expect further support from government for industrial users. The government traditionally supports industrial users by reducing industrial land and building rents, and dishing out rental and property tax rebates. We anticipate this assistance to continue as the manufacturing sector remains the single largest driver of Singapore’s GDP. We expect industrial REITs to benefit three ways from this: 1) reduced land rent payments for industrial REITs; 2) increased sustainability for REIT tenants paying land rent directly to JTC; and 3) increased sustainability of the other industrial property users, on which industrial REITs’ tenants are inter-dependent.
• Low tenant default risks. Within the industrial REIT space, we prefer REITs with low tenant default risks. These would be represented by large and diversified asset and tenant bases, limited concentration on single tenants and significant MNC representation.
• Good capital management. All three industrial REITs are comfortably geared at below 40% with no major refinancing needs over the next two years. Cash calls for MLT and CREIT are not likely in the current year. In terms of capital management, all three industrial REITs look well-positioned to weather the storm
• Maintain Overweight; A-REIT our top pick. Among industrial REITs, we favour AREIT for its least tenant default risk, attributable to its large and diversified asset base, and large and quality tenant base. We also like MLT for its geographical diversification which moderates its risk of asset concentration. CREIT is our least preferred stock for its smaller asset base and higher tenant-concentration risks.
PLife – Phillip
Good Health, In Good or Bad Times
We initiate coverage on Parkway Life REIT (Plife) with a fair value estimate of $0.95. The unique revenue model of Plife ensures rental income is inflation protected and provides unitholders with stable and growing dividend payout.
Plife is currently trading at 0.54 times price/book and we have a forecasted FY09F 10.4% yield. Although not the highest among the S-REIT, but resiliency of earnings give it an edge over the rest.
The initial portfolio of Plife consists of three private hospitals in Singapore. It has expanded its portfolio to include one pharmaceutical products distribution facility and 9 nursing homes in Japan. Total asset value increased 35% from S$774.6 million to S$1047.8 million. Revenue contribution is approximately 80% Singapore based and 20% Japanese based.
Plife has a revenue model that ensures rental revenue will not erode with rising inflation. The Singapore properties are under a master lease agreement with an inflation-linked formula to calculate rental. For the Japanese properties, part of the rental is also inflation-linked to Japan’s inflation. As such, unitholders are assured that dividend distributions are stable and not subjected to the cyclical economic cycle.
We believe Plife’s low gearing is a reflection of the management prudence. Current gearing is 24% and it has no near term financing requirement. Total debt is $250 million and the next round of refinancing is estimated to be in 2011. In 2008, Plife made $216 million of acquisitions of properties in Japan. We do not think Plife is aggressive in its growth strategy although we believe it is a tough balance in managing overseas acquisitions and ensuring the objective of stable distribution to unitholders as there are inherent foreign exchange risks. Plife strategy is to divest into mature countries with good legal framework and healthcare system while keeping its core focus in Singapore.
REITs – BT
Scrip dividends for Reits: why not?
IS THE use of scrip – instead of cash – as a way of issuing dividends to unitholders a violation of the basic characteristics of a real estate investment trust (Reit)?
One school of thought says that it is a violation as the scrip dividend scheme, if widely practised, runs counter to the objective of a Reit as a ‘stable, high-payout, pass through vehicle’.
This argument has its merits. But given the current unprecedented global financial turmoil, which has made many rethink previously established financial practices, the issue deserves a look from a different perspective. This is important as, like it or not, more trusts are likely to resort to scrip dividends amid an environment of credit squeeze.
If proper guidelines are in place on how cash conserved from issuing scrip dividends should be used, there is no reason why some Reits can’t take the scrip dividend route, even if it is a part scrip, part cash scheme with an opt-out option.
Given the present economic climate, asset values have dropped, sometimes in large percentages and there is very tight financial liquidity as banks seek to manage risks and minimise losses. The nature of business or life is that nothing is ever certain. We try our best to manage the challenges as they confront us.
Often times, we adapt, improvise, modify and even take a 180 degree-turn just to survive.
A Reit which had a good business model just two years ago is probably facing a different set of figures now. Falling asset values cause the net gearing to rise. Drops in consumer spending due to unemployment and other reasons bring lower yields as rentals fall. A very high degree of conservatism among financial institutions to minimise potential non-performing loans (NPLs) brings higher borrowing costs.
Taken together, these three factors threaten to sink many a less sturdy Reit. Unitholders don’t want to see their Reits collapse due to refinancing failures, a view shared by those against the scrip dividend practice.
Scrip dividends have been with us for a long time. The argument is that if you bought into a business, getting a bit more of the business is often a good thing so long as sound management prevails. Though it’s perhaps unfortunate that in today’s context, more companies resort to it for different reasons.
Reitholders who had invested even a year ago are looking at large losses on the prices of their units. Many Reits are trading at substantial discounts to net tangible assets (NTAs) or initial public offering (IPO) prices.
Real estate is fundamentally a medium to long-term investment. From this viewpoint, the current guidelines for Reits to distribute at least 90 per cent of their distributable income to qualify for tax benefits should perhaps be re-examined. This percentage and the accompanying tax benefits could be reduced on condition that the amount not distributed as a result of a scrip dividend be set aside for paying debt. A regulatory requirement to ensure that the retained earnings are correctly deployed to mitigate the accompanying drop in cash distribution is important. Savvy long-term investors may then shift their focus on short-term DPUs (distribution per unit) to net gearing and cash balances. This allows for Reits to be built on sturdier ground to stabilise them from regular oscillations in asset values and economic cycles.
There are investors who look forward to putting their money in a Reit that has a good portfolio with very little gearing. It has to do with times past where we often looked upon debt as a burden and tried to pay cash for our purchases if possible.
A well-managed Reit that can reduce its gearing regularly over time may even end up with zero gearing or a net cash surplus position. Owning more shares in such a Reit is probably the best real estate investment one can make. It pays ‘good yields’ as there is little financing costs and insulates unitholders from bankers who keep the umbrella when it starts to pour. And a Reit built on ‘solid sturdy ground’ may trade close to or even above their NTAs in good times, a far cry from today’s deeply discounted prices.