Month: November 2009
PLife – DBS
Bulking up with Life
• Acquired 8 additional nursing homes for JPY5bn (c.$77.6m)
• NPI yield at 8.29%, favourable against existing nursing homes portfolio of 6.14% and cost of funds
at 3.22% (5 year term loan)
• Increased FY10F DPU forecast to 8.0 Scents (from 7.7 Scents), equating to c.6.6% yield
• Maintain Buy; TP: S$1.45.
8 more nursing homes. PREIT announced that it has entered into an agreement to acquire 8 nursing homes in Japan for a total consideration of JPY5bn (c.S$77.6m), which has a net property income (NPI) yield of 8.29%. This compares favourably against the 6.14% NPI of its existing nursing homes portfolio. The REIT will fund the acquisition via a 5 year unsecured term loan at a cost of 3.22%.
Gearing for the REIT will increase from 23.2% to 28.7%. Long leases with rental deficit support. The nursing homes have long-term lease agreement with the operators, with a weighted average lease term to expiry of 19.29 years. The vendors of the nursing homes are subsidiaries of Kenedix Inc, a real estate manager in Japan. Kenedix will be providing a rental deficit support for 7 years provided, capped at 5% of the purchase price (i.e. JPY250m or c.S$S$3.87m). Five of the eight properties also have backup operator agreements.
Maintain Buy, TP: S$1.45. We view this acquisition positively given that it is yield accretive, in line with the
REIT’s strategy to invest in healthcare related assets and diversify its income stream. Our DPU estimates are raised to 8.0 Scents (FY10F) and 8.2 Scents (FY11F), equating to a yield of 6.6-6.8%.
MIREIT – SGX
CONFIRMATION SOUGHT RE
MI-REIT EGM TO CHANGE MANAGER
In its announcement, MacarthurCook Investment Managers (Asia) Limited (“MIM”) has ignored the requisition by Cambridge Industrial Trust (“CIT”) and others for an EGM of MIREIT as lodged with both it and the trustee of MI-REIT this morning.
Cambridge Industrial Trust Management Limited, on behalf of CIT, the largest unitholder in MI-REIT, requires MIM to confirm that it has arranged with the MI-REIT trustee for the EGM to remove MIM as manager to be called on 4 December 2009.
CitySpring – OCBC
DPU surprises on the upside
Time lag impacts 2Q10. CitySpring Infrastructure Trust reported a 11% QoQ increase in 2Q10 revenue to S$92.1m but a 31% fall in cash earnings to S$9.6m. The negative variance was primarily due to the short-term timing mismatch between changes in City Gas’ tariff revenue and fuel costs, which we understand have shot up significantly over the last six months. City Gas raised its tariff by 7.5% effective 01 Aug and by 13.8% effective 01 Nov. Over time, City Gas should be net neutral to fluctuations in fuel costs. Basslink’s telecoms network made its maiden contribution to cash earnings this quarter.
DPU surprises on the upside. CitySpring declared 1.05 S cents in 2Q10 DPU, down 40% YoY and QoQ because of the enlarged post-rights unit base. This was 5% higher than the pro forma 1 S cents estimate. The manager said CitySpring will target the same quarterly payout for the remainder of FY10. The 4.2 S cents annualized payout outperforms our 3.9 to 4 S cents annual estimate. The manager said that the trust increased the absolute level of payout (S$41.2m versus S$34.3m) because of its “comfort” with the performance of the three businesses.
Looking ahead after the cash call. We believe CitySpring will likely be able to deliver gradual (but modest) organic growth in distributions in the long term, driven by increasing City Gas volumes and the fledgling telecoms business at Basslink. Still, significant income growth will (in our opinion) have to be fueled by external growth. The rights issue has improved CitySpring’s ability to consider such growth. One major project coming up is the City Gas network conversion project, where discussions continue with the regulator. At IPO, the project cost was estimated at S$200m (over a period of five years). The manager continues to explore acquisition opportunities but reiterated its skepticism of hard-and-fast yearly targets and its insistence on acquiring on its own terms. Our interpretation: don’t expect anything too soon.
Defensible yield. Our earning estimates now reflect actual 1H10 results. We note the manager is still in discussions with DBS Bank on the terms of the planned new revolving credit facility. Our DDM-derived valuation assumes a 6.4% discount rate and a 0% terminal growth rate. On this basis, our fair value estimate for the trust is 68 S cents (unchanged). The annual yield of 7.3% is fairly defensible in our view, because of the stability inherent to the business models of the three regulated assets. Maintain BUY (29% total return).
HWT – DBS
No pick up in utilisation rates yet
At a Glance
• 3Q09 distributable cash of S$3.5m in line with expectations – equates to 1.16Scts in DPU
• 2H09 DPU guidance maintained at 2.86Sccts – can be met with partial waiver from sponsor, Hyflux
• However, utilisation rate stays flat at 45%; management indicates muted demand growth over next 2-3 quarters
• Maintain HOLD in the absence of catalysts, TP S$0.65.
Comment on Results
With the addition of a new plant at the end of June’09, average treatment volumes picked up 10.2% from 234,000 cu m/day in 2Q09 to 258,000 cu m/day in 3Q09. This translated to a 10% q-oq rise in tariff receipts – from S$6.9m in 2Q09 to S$7.6m in 3Q09.
Operating costs were again well controlled, and net operating income was 17% higher q-o-q at S$3.2m. However, this did not translate to a growth in distributable income which stayed largely flat at S$3.5m for the quarter, implying a DPU of 1.16Scts for 3Q09. Higher interest expenses and the absence of interest rate swap gains resulted in this flat q-o-q performance.
Outlook & Recommendation
As we have highlighted before, DPU payout for 2H09 is protected by the Sponsor’s waiver, whereby Hyflux will subordinate its share of distribution entitlement to the extent required to ensure that 2H09 DPU projection of 2.86Scts is achieved. We estimate Hyflux may have to waive about 45-50% of its entitlements in 2H09.
However, we believe FY10 DPU may take a dip, in the absence of any such waiver. Going forward, management indicated that growth in demand for water treatment would be muted over the next 2-3 quarters, as new industries are not likely to be established in the industrial parks (where HWT operates) in the near-term, following the global slowdown. Acquisitions will be the key growth driver, but we do not foresee any action before 2H-FY10. Thus – in the absence of any positive near-term catalysts – we continue to maintain our HOLD call on the stock, TP unchanged at S$0.65.
REITs – BT
All Reits must hold AGMs from next year
MAS mandate seen boosting corporate governance, options for fund raising
WITH effect from Jan 1 next year, all real estate investment trusts (Reits) are required to hold annual general meetings (AGMs).
This mandate from the Monetary Authority of Singapore is seen as boosting corporate governance and giving more flexibility to Reits in their fund-raisings.
Under the revised rules announced yesterday, Reits will be required to hold an AGM once every calendar year and not more than 15 months from the last preceding AGM. This means that by the end of next year, all Reits would have held an AGM.
In line with SGX’s rule on the timing of AGMs for other listed issuers, Reits will have to hold their AGMs within four months from their financial year end.
MAS said it has considered the merits of this requirement, which ‘will enhance corporate governance for Reits by providing an important channel for communication between Reit managers and unitholders, allowing Reit managers to be more accountable to unitholders’.
AGMs will also provide a regular opportunity for Reit managers to seek general mandates from unitholders for the issuance of new units, giving greater flexibility for equity raising.
The past year has seen Reit managers putting up urgent extraordinary general meetings (EGMs) notices to obtain shareholders’ approval for fund-raising exercises to refinance their debts.
With the exception of Ascendas Reit (A-Reit), which has been holding AGMs for the past three fiscal years, other Reits have not held an AGM though they may have other regular communication touch-points.
But some are now looking forward to holding their first AGM.
‘AGMs will promote the exchange of ideas between the company and unitholders, which will ultimately contribute towards the long term growth of the organisation,’ said Yong Yean Chau, chief executive of Parkway Trust Management, the manager of Parkway Life Reit.
‘We are looking forward to holding our first AGM next year.’
Simon Ho, deputy CEO of CapitaMall Trust Management, noted that the AGM requirement will further enhance the transparency of the Reits industry and offer another platform for CapitaMall Trust to engage its investors.
Added Yeo See Kiat, CEO of Suntec Reit’s manager ARA Trust Management (Suntec) Ltd: ‘The AGMs will allow the Reit managers to clarify questions from unitholders, facilitate better understanding of the Reit’s performance and enable the unitholders to know the Reit managers better.’
The cost of holding an AGM does not seem to bother some Reit players.
A spokeswoman from A-Reit noted that the cost is affordable and worthwhile.
A general mandate for the issue of new units passed at these AGMs has allowed A-Reit to make two cash calls this year swiftly and price the units at a smaller discount because of the shorter exposure period.
‘Our latest private placement in August was done above net asset value (NAV),’ she said.
‘I believe we are the only Reit that has issued units above NAV this year.’
Singapore Reits are regulated under the Collective Investment Scheme (CIS). MAS said it made revisions to CIS after taking in feedback from public consultation in May and discussions with Reit players.
Under the latest revisions, MAS also scrapped the requirement for Reit managers seeking authorisation for a new Reit to submit information in a prescribed form since Reit managers are now subject to the capital markets services licensing regime.
The Securities and Futures Act was amended on Aug 1, 2008, to regulate Reit managers through the licensing regime.