Month: December 2009
FCT – OCBC
It’s the sponsor’s move now
Asset values likely stable in 2010. Frasers Centrepoint Trust (FCT) booked a revaluation surplus of S$37m in 4QFY09 (end Sep), a 3.5% YoY increase in portfolio value. Surprisingly, this was despite the independent assessor hiking cap rates by 25 basis points for Northpoint (NP) and Causeway Point (CP) and by 65 basis points for Anchorpoint (AP). We are neutral on the retail property segment and believe asset values in 2010 may be supported by the high liquidity environment fostered by global central banks.
Acquisition pricing key risk. FCT is likely (in our view) to acquire retail malls Northpoint 2 (NP2) and YewTee Point from sponsor Fraser & Neave [FNN, NOT RATED] in the near term. In November, FCT and FNN extended their put and call option agreement on NP2, which indicates a price range of S$139.5m to S$170.5m, by six months. No other pricing details are available for the two malls but the manager has indicated that it intends to fund any acquisitions using a combination of debt and equity. Our key concern is accretion – physical prices of retail assets have held up better than the prices of the REITs themselves. While FCT has re-rated significantly, the magnitude of un-levered and levered accretion that FNN is willing to concede to FCT is a question mark.
Further investment into Hektar? Malaysia-listed Hektar REIT [NR] said recently that it is in talks to buy new assets, which may be partially financed through fresh equity. FCT may be unwilling to let its 31.06% strategic stake in Hektar be diluted. So if Hektar launches a rights issue, FCT will probably (in our opinion) subscribe and inject further funds into the REIT. The accretion concern also holds true here – if Hektar’s manager does not utilize capital effectively, it impacts the returns to FCT and consequently to FCT’s unitholders.
It’s the sponsor’s move now. FCT is now trading above our S$1.30 fair value estimate and has appreciated some 17% since our September upgrade. It is currently trading at about 1.07x book value and a forward yield of 6.2% based on our estimates. Relative to an average P/NAV of 1.14x in 2006 and 1.22x in 2007, we note that upside from current levels is limited. Meanwhile, the current forward yield already exceeds the average 6.35% forward yield over 2007 (based on consensus estimates). With limited upside and accretion uncertainty on the potential acquisitions, we believe the risk-reward ratio is no longer compelling. Downgrade to HOLD with S$1.30 fair value (unchanged).
CCT – OCBC
Tough operating conditions in 2010
Negative rental reversion to kick in in 2010. Going into 2010, we expect operating conditions to get tougher for CCT. Negative rental reversions are likely to set in as the higher rents secured in 2007 will be due for renewal in 2010. Some of these expiring rents (at Six Battery Road and Raffles City Tower) are significantly higher than the current Grade A office rents of S$8.80 psf pm. Although the decline in office rents has slowed, the downward pressure is expected to persist with the upcoming supply of new office spaces in 2010 and we believe that this could widen the negative reversionary gap.
No major refinancing in 2010. CCT did a Rights issue in mid-2009 and after repaying its borrowings with part of the proceeds from the issue, gearing level is now at a comfortable 31.2%. For 2010, CCT has S$235m of medium-term notes due for refinancing and this could be partially repaid using the remaining balance of the Rights proceeds of ~S$140m. On this assumption, we estimate that CCT’s gearing would fall to 29.7% after refinancing the borrowings due in 2010.
Acquisition plans may be constrained by refinancing in 2011. While CCT’s low gearing gives it significant headroom for debt-funded acquisitions, we believe that the significant refinancing needs in 2011 will be the key focus of management in 2010 and this could limit CCT’s acquisition plans. CCT has total borrowings of S$652m due for refinancing in 2011 and this figure could increase by S$370m if the convertible bond holders exercise their put option.
Maintain HOLD; Buy at more attractive valuation and yield. Undeniably, CCT has a strong portfolio of quality assets and tenants that make it stand out as one of the stronger office landlord in Singapore. Nevertheless, on absolute and relative basis, valuation and DPU yield are no longer attractive in our view, after the recent gain in share price. CCT is currently trading at a Price/NAV of 0.78x and a projected FY10 DPU yield of 5.4% whereas its closest peer, K-REIT Asia [unrated], is now trading at a Price/NAV of 0.72x and a consensus FY10 DPU yield of 6.5%. We are keeping our estimates unchanged and maintain our fair value of S$1.13 on CCT, which is pegged at par to our RNAV estimate. With a total return of 1.6%, we maintain our HOLD rating on CCT. We advise investors to accumulate at prices closer to S$1.05-S$1.10.
ART – OCBC
Compelling earnings story
Guidance hopeful but cautious. At 3Q09 results, Ascott Residence Trust (ART)’s manager said that while it remained cautious of the pace and extent of the economic recovery, it was “confident of the longer-term growth in the markets” in which ART operates. Our view is that the worst is behind ART – we believe Pan-Asian markets, where ART operates, will continue to be attractive FDI destinations. We think ART may shine in the year ahead as corporate spend and travel gradually return. The challenge now is increasing, and sustaining, occupancy at levels that allow for a successful increase in unit rates. Note that we are currently estimating flat RevPAU growth in FY10, which is fairly conservative.
Valuation picture is mixed. ART has re-rated 37% since our July upgrade and is now trading close to our previous S$1.19 fair value estimate. We use pre-crisis valuation levels as a sanity check on current pricing. The current price to book value of 0.87x already exceeds the 0.75x averaged in 2H 2006 but still offers 22% upside to the 1.06x book averaged in 2007. Distribution yields present a different picture. Using consensus estimates, the current forward yield of 6.35% already outperforms the 7.01% consensus yield averaged in 2007. We believe this could be because ART is at the trough (in our opinion) of a tough earnings cycle and the market may be pricing in significant earnings recovery, which is justified. Nevertheless, current pricing is more attractive than that of peer CDL-Hospitality Trusts [NOT RATED], which is trading at 4.7% consensus forward yield and 1.19x book value.
What next? ART is geared at 41.5% debt-to-assets and is due for asset revaluations in 4Q09. While we don’t expect significant downward revaluations, ART’s gearing is one of the highest in the S-REIT sector in a climate where the concept of leverage above 35% is now outmoded (in our opinion). So far, the manager has been remarkably disciplined about protecting value and has not raised equity since FY07. In 2010, fresh equity, likely raised through a private placement, could be used to fund asset enhancement works or yield-accretive acquisitions. A virtuous cycle of cheap acquisitions at cheaper capital is achievable if the manager maintains its focus on value protection and creation. Maintain BUY with fair value increased from S$1.19 to S$1.25 (14.9% total return). Key risk to our thesis is heightened regional economic risk, which could dampen investor sentiment towards diversified REITs.
A-REIT – OCBC
Limited impact from negative rental reversions in 2010
Expect a challenging year ahead for industrial landlords. Going into 2010, we continue to remain cautious on the industrial landlords due to supply-side concerns (for factory space) and weak demand recovery due to the still-uncertain global economic recovery pace. While a portion of the upcoming supply may have been pre-committed, take-up rate of the remaining uncommitted space could still be a concern. Nevertheless, rents of warehousing space are expected to fare better than factory space as the outlook for warehousing space supply is better in comparison to the factory space.
A-REIT’s diversified portfolio structure mitigates negative impact. Despite our negative outlook on the industrial space, we believe that the impact on A-REIT can be mitigated by its diversified asset portfolio with its balanced exposure to different groups of industrial properties, balanced mix of single and multi-tenanted properties and diversified base of quality tenants. Even though some of the assets could face negative rental reversions going forward, we believe that the impact on its portfolio as a whole would not be significant because the NLA of expiring leases is small compared to the total NLA of A-REIT’s portfolio and the average existing rents of these expiring leases are not significantly higher than current market rents.
Opportunity for growth via property development. We expect property development to be a key area of growth for A-REIT in 2010. Based on AREIT’s deposited property value of S$4,559.7m, it has the capacity to take on as much as S$456m worth of development projects in accordance to the maximum 10% exposure limit of the property fund’s deposited property to property development under the MAS guidelines for property funds. With just one ongoing development project at the moment – Built-to-Suit (BTS) for SingTel with an expected development cost of S$175.4m, this leaves A-REIT with significant headroom of S$280.6m for new development projects.
Maintain HOLD; fair value S$1.76. No changes have been made to our estimates and we maintain our RNAV estimate of S$1.76 per share. Pegging our valuation at par to our RNAV estimate, we derive a fair value estimate of S$1.76 for A-REIT. We expect A-REIT to pay out DPUs of 12.86 cents and 12.90 cents in FY09/10 and FY10/11 respectively, translating to DPU yields of 6.73% for FY09/10 and 6.75% for FY10/11. With an expected total return of -1.3%, we maintain our HOLD rating on A-REIT. We advise investors to accumulate A-REIT at more attractive price levels around the range of S$1.60 to S$1.70.
REITs – OCBC
The virtuous and the not-so-virtuous
Policy and leverage appetite shapes 2010. We believe the Singaporelisted REIT sector’s 2010 performance will be influenced by opposing systemic forces. A favorable policy climate is likely to sustain a high liquidity environment. While some S-REITs may book negative revaluations in 4Q09, the ‘Bernanke Put’ could potentially create a floor for asset values in 2010. On the flipside, the rules for leverage have changed and increased conservatism is the new normal. Over-leveraged players (by today’s standards) may need to reduce gearing through equity fund-raising or asset sales. This de-leveraging can potentially occur not only on the REIT level, but also on the sponsor, manager, and institutional investor level.
The virtuous and the not-so-virtuous. 2010 will not be an ‘easy’ market, in our view, as we expect greater variance in performance among the individual REITs. We believe the sector can be broadly divided into two camps differentiated by leverage, sponsor strength, and sub-sector specific differences in forward earnings performance. Investment opportunities are available in both camps but of different varieties: the stronger REITs may enjoy yield compression and price-to-book normalization, and can potentially tap into a virtuous cycle of accretive acquisitions. On the other hand, the weaker REITs could be trapped in a vicious cycle of declining asset value, refinancing difficulties, and a consequent need to de-leverage. For those REITs with outstanding challenges, we advise interested investors to wait until after a resolution is proposed and the extent of any dilution is clear.
Limited upside, risks to the downside. We use 2006 valuations as a sanity check on the current recovery. The sector trades on average at 0.78x book, still below the 0.89x average in 2006. The potential 13.4% increase from current levels is offset, however, by book value risk from 4Q09 revaluations. A 6.9% potential upside from a distribution yield perspective is also offset by a mixed earnings outlook. With an unexciting risk-reward ratio for 2010, we maintain our NEUTRAL rating on S-REITs. Within our coverage universe, we have BUY ratings on Mapletree Logistics Trust [MLT, FV: S$0.78], Ascott Residence Trust [ART, FV: S$1.25], and Suntec REIT [FV: S$1.40]. Our top picks for the sector are ART and MLT, for ART’s positive earning outlook and MLT’s earnings stability, and for the possibility of yield-accretive acquisitions at both REITs. Key risks to our thesis include an increase in interest rates (which we believe would impact the blue chips the most), a double-dip recession and the threat of a new asset bubble.