Month: May 2009
REITs – ML
Growth momentum limited; Maintain cautious stance
Bulk of equity issuance completed
YTD S-REITs have raised S$2.5bn in new equity (19% of end 2008 market cap). While we believe that the bulk of the sector funding has now been resolved, we maintain our cautious stance. YTD S-REITs are up 13%, underperforming both the STI (+27%) and developers (30%). We expect underperformance to continue as we are unable to identify significant catalysts that will re-rate the sector.
Appetite for acquisitions limited
Improvements in the debt and equity markets bode well for the outlook for REITs given the capital intensive nature of the business model. Despite this we struggle to see how REITs will be able to achieve significant growth momentum over the next 12 months. We believe REIT managers will continue to maintain a conservative stance with regards to gearing and that without an appetite for further acquisitions, earnings upside will be limited to organic growth.
Growth outlook still muted
Given the downturn in the property market, no sub-segment has been spared and both rentals and occupancies are under pressure. In particular, we expect operating metrics for the office and industrial sub-segments to weaken. Looking across the S-REITs, we expect an average of 4% negative DPU growth in 2009 and 2010 respectively. This is driven primarily by lower rentals, higher debt costs and the dilution from recent equity issuance.
CMT remains our preferred S-REIT pick
Our preferred exposure to the sector remains CapitaMall Trust given its weighting to the retail sector which we believe will fare relatively better verses other property sub segments. We remain negative on the industrial exposed A-REIT and expect its operating metrics to face further downward pressure. Given our expectation that the office market will not show signs of recovery until at least 2012, we would also avoid office-exposed CapitaCommercial Trust and Suntec.
FCT – UOBKH
Highly Focused On Non-discretionary Consumer Spending
Suburban malls are more resilient. We conducted a site visit on 19 May 09 to Northpoint Shopping Centre located in Yishun, which was a lot more crowded compared to our last visit in Jan 09 (see our last update Anchor tenants have reopened at Northpoint dated 29 Jan 09). This reaffirms our view that suburban malls in the Housing and Development Board (HDB) heartlands are less affected by the economic turmoil. According to Frasers Centrepoint Trust (FCT), shopper traffic increased 7.9% yoy at Causeway Point, 7.2% at Northpoint and 8.6% at Anchorpoint in 2QFY09.
Retail sales index rebounded in Mar 09. Retail sales index for departmental stores and supermarkets recovered to +3.8% and +6.8% yoy respectively in Mar 09 after briefly entering negative territory in Feb 09. Anecdotal evidence suggests domestic consumption will continue to improve, going into 2Q09. A more buoyant retail scene will ensure renewal rates for leases expiring stay firm.
Earnings recovery driven by Northpoint. Net property income from Northpoint rebounded 31.3% qoq to S$4.2m in 2QFY09 with 80% of the enhancement works already completed. Occupancy rate at Northpoint recovered from 52.2% as at Dec 08 to 72.1% as at Mar 09. Management estimated that the asset enhancement initiative, which will be fully completed by Jun 09, will increase Northpoint’s average rent by 20% and net property income by 30%.
FCT focuses on suburban malls located next to the Mass Rapid Transit (MRT) stations, which cater to non-discretionary spending by captive populations in HDB heartlands. Our target price of S$1.44 is based on the Dividend Discount Model (required rate of return: 7.7%, terminal growth: 2.5%). FCT provides 2009 distribution yield of 8.8% and trades at 30.9% discount to NAV/share of S$1.23.
SREITs – DBS
Catching up
• Results in line with expectations
• Bulk of 2009 refinancing needs addressed, cashflow is still key
• Lagged developers in recent performance, room to catch up
• Preference for suburban retail over office segment
Results generally in line. Slower pace of topline growth, +14% yoy and –0.3% qoq, was affected by the weaker hospitality reits performance. NPI improved a better 14% yoy and 4% qoq due to cost containment measures by the Sreits. Distribution income was up a smaller 9% yoy and 0.1% qoq as higher interest cost and more prudent payout policy eroded bottomline growth.
Refinancing concerns abating, cashflow preservation still key. With 75% of the Sreit debt due in 2009 already locked in 1Q09, concerns over credit availability is abating. Nevertheless, cashflow preservation is still key given that higher average cost of funding and downward pressure on rents from weaker economic prospects are likely to result in negative DPU growth over the next 2 years. In this regard, Sreits are exploring other avenues of cashflow retention, including lowering dividend payout and dividend reinvestment scheme.
Be selective. Sreits have lagged developers in the recent price run up and we see room for catching up. In terms of valuation, Sreits are trading on an average 0.5x P/bk NAV and offer average FY09 yield of 10%. We continue to like the Sreits for its attractive valuations, however, in view of the recent run-up we would be more selective at this point. Our top buys remain FCT, Suntec, Parkway Life and Starhill Global. FCT offers dividend yield of 8.2-8.6%, higher than its comparable peers and its pure suburban retail exposure appears more resilient. Suntec is yielding 11.8-10.3% over FY09-10. Recent debt renewal exercise has removed refinancing needs till 2011. We continue to like Parkway Life for its ‘base plus’ revenue model, low gearing and minimal refinancing risk. We have upgraded Starhill Global to Buy with TP of $0.70. Starhill is yielding c12% FY09-10. Newsflow of increased competition from soon-to-open malls have been factored into current share price. The upside risk at this point is the potential of spillover effect of increased pedestrian traffic once these malls open. We have downgraded AiT to Hold purely on valuation grounds after the recent surge in share price. The risk for the Sreit sector at this point remains the possibility of further fund raising if share prices continue to power up.
Link – Tables
Suntec – OCBC
Fairly valued – downgrade to HOLD
Office rents down 35% from peak. CB Richard Ellis data showed that both prime and Grade A monthly office rents have fallen about 35% from the highs of this cycle achieved in 2Q-3Q08. 1Q09 rents of S$12.30 psf per month for Grade A (versus S$18.80 psf pm in 3Q08) and S$10.50 psf pm for prime rents (versus S$16.10 psf pm in 3Q08) have taken the market back to 2Q07 levels. Meanwhile, the Business Times reported that a 16- storey freehold office block in the CBD has been sold by a UK fund. The Parakou Building was sold for about S$81.38m or S$1280 psf of net lettable area. The transaction is at a 36% discount to the S$128m the seller paid for the property two years ago. This is the first major office transaction after a fairly subdued 4Q08-1Q09.
We maintain our stance on office. The market data jibes with Suntec, which reported achieved rents of S$9.96 psf pm for Suntec City Office in 1Q09. In 2Q08, the manager had disclosed achieved rents in the range of S$12-15. At the results briefing, the manager had said that maintaining occupancy above the 90% level is a key priority. Negative drivers for office rents and capital values still persist, in our view: 1) excess capacity concerns; which are exacerbated by 2) a questionable demand outlook as companies rationalize their need for both existing space and planned expansions. As such, we maintain our forecast of continued rent declines for Suntec’s office portfolio over FY09.
Capital value decline may drive recapitalization. With the successful refinancing of S$825m in loans maturing this year, Suntec’s next refinancing requirement arises only in FY11. Our attention is on capital values – as independent valuations catch up with the market, we expect asset values to fall across the sector – increasing gearing levels. Lender and market appetite for leverage is low and we believe more S-REIT managers may launch equity issues to recapitalize REIT balance sheets.
Fairly valued. Our valuation for Suntec recognizes the need for correcting that implicit under-capitalization through additional equity – we price in an equity issue of S$500m at an issue price of S$0.70 (up from S$0.60 previously due to the recent price run up). This takes our fair value estimate for Suntec to S$0.84 (from S$0.80 previously) – or a 7% discount to our SOTP value of S$0.91. Suntec’s price has increased 32% since our last report just three weeks ago. Downgrade to HOLD on valuation grounds.
Cambridge – DBS
Stable Yields
• Unlikely to breach cash lock-up covenants
• Exploring various capital management initiatives
• Maintain BUY, TP S$0.38 based on DCF
Unlikely to breach cash lock-up covenants. With the recent refinancing of its $390m debt, CIT is faced with tighter cash lock up covenants of 50% loan-to-value and 2.5x interest cover ratio. However, we believe it is in no danger of breaching these limits as it would take a 20% decline in asset values and a 25% drop in EBIT to trigger this event. Recent revaluations done by comparable peers only showed a 3-5% decline in asset values. While we expect further downward adjustments to capital values, we believe declines would be more modest given the stable and long lease profile of its tenancies. In addition, the long lease terms with inbuilt fixed periodic rental escalations and no pre-termination clauses also mean a stable
income profile.
Unwinding initial swap strain cash flow, exploring various capital management initiatives. With the debt rollover and unwinding of its S$18m original interest rate swap (S$6m expensed p.a.), CIT is effectively paying out close to 120% of its operating cashflow over the next 3 years. The additional payment, to be funded by drawing down on its facilities, would put a strain on cashflow. Management of CIT is aware of this and is exploring various other avenues to address them such as a reduction in distribution payout or capital raising in the medium term. This could result in some earnings downside risks, which are currently not reflected in our forecasts.
Maintain BUY, TP S$0.38. CIT is trading at 0.4x P/BV and offers a stable prospective FY09-10F yield of 16% backed by a portfolio secured on long leases of 15 years. While we are mindful of potential capital management activities, we view this possibility as a medium term development to strengthen its balance sheet.