Month: June 2009
AREIT – CIMB
On the road
Feedback from KL roadshow
During a recent Kuala Lumpur roadshow, AREIT fielded questions from investors on the operational resilience of its portfolio and forward strategy.
Falling occupancy + positive reversions + completed development projects = flat NPI. Management admits that the outlook for the industrial market remains poor. It expects occupancy of its sale-and-leaseback buildings to hold at 100%, while that of its multi-tenanted buildings to decline. The decline is attributed to the downsizing of existing tenants, rather than complete relocations. AREIT estimates a retention rate of 70% for existing tenants for FY10 (80% in FY09), and assumes that space given up will not be taken by new tenants. This would result in a 5% fall in portfolio occupancy.
Positive reversions. Current average market rents for Business & Science Parks and the Hi-Tech segment have declined 15% (to S$3.50 psf/month) and 10% (to S$2.70 psf/month) from Dec 08, respectively. Despite a narrowing gap between passing rents and market rents, management believes that rentals for both segments could still benefit from positive reversions of 10-15%. Management rationalises that there remain incentives for most tenants to accept moderate increases in rents given a favourable rental gap and costs of relocation.
Development projects. AREIT completed three development projects in FY09: Pioneer Hub, 15 Changi North Way and 3 Changi Business Park Crescent. These would contribute to the current year’s topline. The multi-tenanted building and amenity centre in Changi Business Park, and Expeditors’ build-to-suit project at Airport Logistics Park will be completed in 2009.
Main concern is economic recovery, rather than supply. About 3.5m sq m of industrial space is expected to enter the market over the next three years This represents a 3% increase p.a. based on a stock of 35.3m sq m as at Mar 09. In mitigation, take-up for about half of the Business & Science Park segment has been pre-committed while more than half of the Hi-Tech and Light Industrial supply will be built by industrialists for their own use. Management’s main concern is economic conditions, which determines the demand for industrial space.
Future acquisitions. Although acquisitions are possible with property yields in excess of 8% and borrowing costs of 4%, management is more inclined to be conservative in view of unpredictable access to capital. For the same reason and other operational reasons, it sees the probability of M&As among industrial REITs as limited.
Valuation and recommendation
Maintain Neutral and target price of S$1.63. Guidance of flat net property income is more conservative than our own estimates which have assumed moderate growth of 4.7%. However, our assumption for average of debt for FY10 is higher than guidance (4%), at 4.3%. Overall, we believe our assumptions reflect a realistic performance for AREIT this year.
P/BV for AREIT has risen to 1.0x, a premium over the sector average of 0.6x. At this level, we believe AREIT is fully valued. Maintain Neutral and DDM-based target price of S$1.63 (discount 8.7%).
PLife – BT
P-Reit downgraded by Fitch Ratings
FITCH Ratings yesterday downgraded Parkway Life Real Estate Investment Trust (P-Reit).
In the downgrade, P-Reit’s long-term issuer default rating (IDR) and its $500 million multicurrency medium term note (MTN) programme were downgraded to ‘BBB’ from ‘BBB+’.
While P-Reit has good interest coverage, low cost of debt, low refinancing risk, stable rental mechanism, a diversified source of patients and strong position in the healthcare industry, it has a weak sponsor in Parkway Holdings (PHL), the owner of Parkway Hospital Singapore Pte Ltd (PHSPL), the operator of P-Reit’s three Singapore hospitals, Fitch said.
This has a negative impact on the credit profile of P-Reit, given that it still relies heavily on lease payments from PHSPL.
Although the financial ratios of P-Reit are sound and it is bolstered by a defensive rental mechanism, the majority of its gross revenue (80 per cent) is still based on the three Singapore hospitals, which are operated by PHSPL, in turn wholly owned by PHL.
‘On a standalone basis, Fitch thinks PHSPL is profitable through its three Singapore hospitals and has good credit metrics. Nevertheless, PHSPL is a wholly owned subsidiary of PHL and is not ring-fenced from its parent,’ the rating report said.
‘Any deterioration of PHL’s credit quality could lead to an increased consolidation risk between PHL and PHSPL, and hence negatively affect PHSPL’s ability to service lease payment to P-Reit.’
Fitch said it has noted that the leverage of PHL has significantly increased following the extra debt incurred for the Novena Hospital project, and the key financial ratios of PHL have ‘deteriorated’. — Reuters
FrasersCT – OCBC
Is the pipeline ready for resuscitation? Not just yet.
FCT up sharply YTD. Frasers Centrepoint Trust (FCT) is up 51% YTD and is now trading at 0.74x book. A buy rationale at this price level implies, in our view, expectations of growth either through 1) the re-rating of existing assets, which we don’t see much economic evidence for, or 2) through value-accretive acquisitions.
Opportunity in pipeline. FCT is comfortably geared at 29.7%. It also does not have to look far for potential deals: recall that FCT has a pipeline of four retail malls from sponsor Fraser & Neave [FNN, NOT RATED] under a right of first refusal (ROFR). We believe the ROFR, which expires in 2011, has been a key investment driver for FCT. FCT’s acquisition plan is currently suspended due to difficult market conditions. At the 2Q briefing, the manager commented on the divide between the physical market and S-REIT valuations. FCT’s price has increased 30% since then, and it is now trading at a FY09F yield of 7.5%.
NP2 most compelling. Among the ROFR assets, we find Northpoint 2 most compelling because of the small deal size and its synergy with an existing asset – Northpoint. The asset is close to 100% leased. A put and call option agreement with a price range of S$139.5m-S$170.5m is in place. The agreement expires in December 2009. If 100% debt funded, buying NP2 would increase FCT’s gearing to about 42-45%.
But stumbling blocks, still. Note this pricing range is roughly equivalent to a 12% discount to 8% premium on Northpoint’s Sept 2008 valuation. This is not a very attractive deal, in today’s context. We think the market may be more receptive to a “cheaper” deal; a desire FNN may have no interest in accommodating. The deal structure itself also promises to be complex – if the buy is not 100% debt-funded, FNN may need to do its part as a 51% stakeholder. This holds even if FCT goes for potentially lower priced third-party assets. A potential solution is a cash-and-shares deal on a pipeline asset, sidestepping the need for a large cash call. But financing acquisitions may not be a top priority for FNN, especially when sibling Frasers Commercial Trust [FCOT, NR] presents a more pressing case for sponsor support. As such, we believe a buy call is yet to be justified on FCT. Our fair value estimate rises to S$0.75 (previously: S$0.62) as we relax our discount rate to reflect a lower cost of equity. Maintain HOLD on valuation grounds.
AREIT – MS
Steady as She Goes – Initiating at Equal-weight
Initiating coverage of Ascendas REIT with an EW rating and S$1.70 price target: A-REIT is our new sector top pick, with 11% upside. We like A-REIT for its high dividend yield of 8.5% for F2010e and 8.7% for F2011e, supported by long-term leases, a diversified tenant base, and its ability to generate inorganic growth via development of built-to-suit properties. A-REIT is now our sector top pick, given its high dividend yield compared with other large cap peers, limited risk of further capital raising, and recent underperformance (since STI low in March 09) that we believe to be unjustified. At current levels, A-REIT is trading at a 12m forward yield premium of 2.6% and 2.8% to CCT and CMT – high compared with the historical yield premium of 1.7% and 1.0%, respectively.
Long-term leases provide stability: A-REIT’s portfolio of sale and lease-back (SLB) properties, which are typically occupied by single tenants, contributes ~50% to net portfolio income, we estimate. These leases typically run for 5-15 years with annual step-up clauses and provide A-REIT with income stability.
Development capability supports dividends: Since its IPO in 2002, A-REIT has completed or is currently in the process of completing a total of 11 properties worth ~S$650mn. Built-to-suit properties have higher yields than acquired properties and long-term tenants that give stability to the portfolio. A-REIT has executed its previous built-to-suit properties well, we believe, and should continue to attract tenants seeking built-to-suit properties.
Risks to our call – Positive: Vacancy levels rise more slowly than expected; A-REIT announces new development projects. Negative: Faster-than-expected rise in vacancies and fall in rentals; loss of a large tenant in one of A-REIT’s single-tenanted buildings.