Month: March 2010
K-REIT – Nomura
Brisbane acquisition completed
Action
KREIT yesterday announced the completion of its acquisition in Brisbane. In this, a follow-up to our email (Adds prime Grade A office building in Brisbane to portfolio, 1 February, 2010), we revise up our estimates. The acquisition adds 0.6-0.7Scts to KREIT’s FY10-12F DPU, on our numbers, while our NAV estimate and price target are little changed at S$1.40. BUY maintained.
Catalysts
How KREIT deploys its balance-sheet capacity amid disappearing acquisitive opportunities and, on the other hand, increases stock liquidity will be key catalysts.
Anchor themes
With REITs having grappled with the issues of refinancing, the spectre of revaluation deficits and negative rental reversions should dominate. We see risks being priced in the office sector, though we retain our view that the market has been too complacent in its assessment of the retail and industrial REIT sectors.
Acquisition of 275 George Street completed
KREIT yesterday announced the completion of its acquisition of a 50% stake in 275 George Street in Brisbane. The all-in acquisition cost of S$225.1mn was funded by rights proceeds raised in 4Q09. In our model, we have assumed rents for the 40,307 sq m occupied by Telstra and Queensland Gas on 10-year leases escalate at an annual rate of 5.5% from A$500-550psm in FY09, and rents for the retail space now occupied by Cicada remain constant at A$1,000psm over our forecast period. In addition, we have assumed a withholding tax rate of 7.5% in arriving at our estimates. There is an annual net income guarantee of A$12.8mn/year till June 2012.
Raising FY10-12F DPU by 0.6-0.7Scts
As highlighted previously, we had assumed the 30-month loan of S$390mn from Keppel Corp would be repaid with the rights proceeds. Following the acquisition, we are now assuming in our model a partial repayment of S$300mn with the remaining rights proceeds. Overall, we raise our FY10-12F DPU by 0.6-0.7Scts — a 1-1.2Scts accretion from 275 George Street’s income, offset by a 0.1Sct increase in tax expenses and a 0.3-0.4Sct increase in net finance costs.
Reiterating BUY; price target tweaked to S$1.40
We value KREIT’s newly acquired 50% stake in 275 George Street at its all-in acquisition cost of S$225.1mn and because the acquisition is funded by cash, there is minimal change in our NAV estimate and price target (now S$1.40, from S$1.41, on account of a marginal change to our FY10F net debt estimate). Our price target implies a potential total return of 34.8%, including a projected FY10F yield of 6.4%. Trading at an implied EV of S$1,183psf for its SG office portfolio, valuation remains undemanding, in our view.
Shipping Trusts – OCBC
4Q09 results review
Results in line; payouts lower. Full year results for the three Singapore-listed shipping trusts were in line with our expectations, with FY09 distributable income within 4% of our estimate for each trust. The trusts all declared significantly lower payouts for 4Q09 vis-à-vis 4Q08. FSL Trust’s (FSLT) payout represented 56% of cash earnings compared to 100% in the corresponding quarter. Pacific Shipping Trust’s (PST) 4Q09 payout was equivalent to 43% of cash earnings versus 53% in 4Q08. Meanwhile Rickmers Maritime’s (RMT) quarterly distributions amounted to 13% of cash earnings versus 59% a year ago. The trusts used the retained cash to repay loans and/or bolster cash reserves.
No movement on key issues. The results were fairly uneventful with limited or little progress on the outstanding fronts. PST has not re-opened talks with charterer CSAV on the liner’s request for rate renegotiations. On a positive note, CSAV’s debt re-structuring and equity fund-raising plans are coming along on target, which PST’s manager was “encouraged” by. FSLT, meanwhile, continues to scout acquisition opportunities that will utilize the funds raised through the recent placement. The manager also kept its options open for another attempt to diversify its funding sources through a senior unsecured notes offering. RMT is still in talks with its bankers and sponsor on loan-to-value covenants, a US$130m loan facility maturing in April, and large capex commitments. While talks continue, completed newbuilds are being warehoused by sponsor Rickmers Group.
Too soon to call for a recovery. There are arguments for both sides. The bull case for containers: 1) inventory restocking; 2) some economic growth; 3) slow steaming; 4) scrapping and order book management. The bear case: 1) uneven economic data pointing to the likelihood of a slow, ‘benign’ recovery; 2) a still substantial order book; 3) financing difficulties; and 4) precarious industry discipline – laid up vessels are already being re-introduced into service, and it’s unclear who controls the tap. The broader industry’s stance on the ‘knife-edge’ of recovery moves us to upgrade our sector view from UNDERWEIGHT to NEUTRAL. Nevertheless, we leave our ratings on the individual trusts unchanged for now, as we wait to see more sustained evidence of a recovery. A cautious approach in the coming weeks may be prudent considering that RMT’s US$130m loan facility is maturing just next month. How that maturity is handled may drive sector valuations and sentiment in the near-term.
Property – JPM
Policy overhang to widen discount to RNAV
• S-REIT tax concessions/remissions extended for another five years: Singapore’s 2010 Budget extended S-REIT tax concessions/remissions (including those relating to foreign institution distribution withholding taxes and stamp duties on acquisition) to 31 March 2015.
• RNAV estimates still with a mild upward bias: Singapore property developers’ RNAV estimates are, in our view, still upwardly biased, with the launch prices of recent projects generally above our estimates.
• But physical market uptrend may lead to further policy action: Few, if any, sectoral indicators will in the next 1-2 quarters give policy-makers an opportunity to claim victory over rising property prices, in our view. Fresh policy action, including further tightening of housing loans or real property gains taxes, could be imposed if the price uptrend continues.
• De-rating of property developer stocks while the policy overhang persists: The discount at which property developers trade to our RNAV estimates may widen while the policy overhang persists. Stocks are trading at about 10% higher than 1 standard deviation above the historical mean discount to our RNAV estimates, and we hesitate to suggest that all adverse case implications now are priced into stocks.
• S-REITs favored over developers: In our view, the Singapore developers are likely to struggle to perform, given continued fears of ever more aggressive policy action to stem residential property price increases. We therefore prefer the Singapore REIT sector for exposure to Singapore property, and our top pick in the sector is CapitaMall Trust. The key risk to this positioning may come if there is a return in the appetite for risky assets (Singapore developers are high-beta stocks) or if the policy overhang is alleviated.