Month: May 2010
K-REIT – CIMB
Prefer Suntec Reit for now
• Initiate with Underperform and DDM-derived target price of S$1.01 (discount rate 7.2%). While we like K-REIT for its pure office exposure, strong financials and pipeline of assets for acquisition, we believe these have largely been priced in. We are concerned about potential DPU declines with the expiry of income support for One Raffles Quay (ORQ) in 2012. Coupled with a lack of details on yield accretion from a potential injection of the first phase of Marina Bay Financial Centre (MBFC), we believe K-REIT could Underperform the market at current valuations and prefer Suntec REIT which offers similar exposure and higher yields.
• Expiry of income support for ORQ in 2012. K-REIT received S$23m in income support in FY09, which contributed 24% to its income in FY09. With most rents at ORQ framed by long leases and locked in at the rates of 2004-05 when rentals were much lower, current review and renewal rates may not be sufficient to allow rental income to catch up with income support following the expiry of the latter. We believe DPUs could in fact fall by 21% yoy in 2012 as a result.
• MBFC injection unlikely to be significantly yield-accretive without income support, due to high costs of debt and/or equity. We believe an injection at current market rates (4.5% NPI yield) may not be yield-accretive, even if we were to assume 100% funding by debt which avoids dilution from equity-funding.
Shipping Trusts – OCBC
Not out of the woods yet
1Q10 review: united in YoY DPU declines. 1Q10 results for the Singapore-listed shipping trusts under our coverage were largely in line with our expectations. Pacific Shipping Trust (PST), FSL Trust (FSLT) and Rickmers Maritime [RMT, NOT RATED] all reported YoY declines in DPU ranging from 19.1%-73.4% primarily due to lower distribution payout levels. FSLT, PST, and RMT are currently paying out 55%, 43%, and 13% of cash earnings respectively to unitholders.
RMT concludes negotiations with sponsor and lenders. In Apr, RMT’s sponsor agreed to discharge RMT’s obligation to purchase seven newbuild vessels for US$918.7m in exchange for a US$64m penalty. Additionally, RMT’s lenders also agreed to a loan maturity extension and to waive valueto-loan (VTL) coverage requirements. The agreement with the lenders is fairly restrictive: 1) the US$130m loan is now amortizing; 2) RMT has to pay a higher cost of debt in exchange for the VTL waivers; and 3) RMT cannot pay out more than 0.6 US cents/quarter while its VTL coverage is breached in any of its loan tranches. These agreements do take RMT away from the brink of bankruptcy but also create, in our opinion, a stasis situation where RMT cannot exert much control over its cash flows. The end point is also unclear (as we do not know what the VTL gap is). RMT could just bide its time under these agreements or possibly raise fresh equity (with a much recovered unit price) and get out of these restrictive agreements.
Counterparty issues remain. In sharp counterpoint to the RMT developments, FSLT announced earlier this month that its charterer Groda Shipping has requested the trust to take re-delivery of two of its product tankers that were under a sevenyear bareboat charter agreement. The charterer indicated that “it has become increasingly difficult for them to improve their cash flow” due to 1) escalating bunker prices; 2) underutilization of the vessels under the Contract of Affreightment (CoA); and 3) “limited options to generate incremental revenue given the trading area of the vessels”.
Growths plans offset by continuing risks. The sector, in our view, remains highly vulnerable due to counterparty risks – and this incident highlights that the broader shipping industry is not out of the woods yet. We expect both PST and FSLT to acquire new vessels this year but the key challenge will be to secure high quality counterparties and still make an accretive deal. Maintain NEUTRAL view. PST is our preferred pick because of its balance sheet strength.
AIMSAMPReit – Phillip
FY10 Results
• 4Q10 revenue of $15.6 million, net property income of $11.9 million, distributable income available to unitholders of $7.9 million.
• FY10 revenue of $50.9 million, net property income of $40.1 million, distributable income available to unitholders of $22.3 million.
• 4Q10 DPU 0.5376 cents, bringing FY10 DPU to 5.12 cents
• Maintain Hold recommendation with fair value of $0.23
A tumultuous year
AIMS AMP Capital Industrial REIT (AAC) recorded 4Q10 revenue of $15.6 million (+19.4% yy, +24.2% q-q), net property income of $11.9 million (+28.2% y-y, +20.3% q-q) and distributable income available to unitholders of $7.9 million (+57.9% y-y, +46.7% q-q). Full year FY10 revenue came in at $50.9 million (+0.2% y-y), net property income of $40.1 million (+8.9% y-y) and distributable income available to unitholders of $22.3 million (-4.6% y-y). To refresh our readers' memory, the REIT underwent a tough recapitalization exercise last year and subsequently changed its name from MIREIT to the present name. In essence, AAC managed to lower its gearing from over 40% pre-recapitalization to 28.9% currently. AAC also added 4 properties to its portfolio to shore up the balance sheet. The property portfolio now consists of 26 properties with an asset value of $635.25 million. Post-recapitalization, AAC now has total debt of $190 million which is due in 2012.
FY10 revenue was little changed from a year ago. The 4 properties were acquired in Jan 2010, therefore the contribution to full year revenue was not significant. High borrowing cost in FY2010 and the dilution of units from the rights issue resulted in a drop in DPU.
On the overall, actual full year results were not too far off from our estimates. Net property income and DPU were 5.9% and 3.6% above our numbers. From Fig 3, we can observe that the quarterly performance has been improving and the recapitalization exercise has worked out well. Fundamentals of the underlying portfolio remain fine, except for the drop in occupancy. The weighted average lease to expiry (WALE) is 4.4 years.
The near term strategy is to reposition the portfolio; divesting underperforming assets and using the proceeds to replace the current debt facility with cheaper facility. Management indicated that it is looking to sell the Japan property as the focus is on the Singapore market.
Furthermore it can't achieve economy of scale with a single property in Japan. One of the stated strategies is to increase the asset size to $1.4 billion within five years and to gear up to approximately 35% to fund the acquisitions.
FY10 was a difficult year whereby refinancing was due and the portfolio suffered a $41.4 million write-down in value. We think baring the dilution that resulted from the recapitalization exercise, AAC performed within expectations. Going forward, the REIT should be able to maintain its performance with the economy picking up. We have a DPU forecast for FY11E of 1.99 cents, which translate to 9% dividend yield. In view of the stability of the REIT, we are now ascribing a lower WACC of 9.2% versus 9.8% previously to our DCF model and arrived at a fair value of $0.23. Maintain Hold recommendation. We believe re-rating for AAC will depend on the actualization of the strategy to lower interest payment.
HWT – DBSV
Volumes show no signs of picking up
At a Glance
• Generates distributable cash flow of 1.16Scts per unit – down 19% q-o-q – lower than estimates
• Weak water treatment demand at industrial parks compounded by seasonal and one-off factors
• Cut FY10-11 DPU estimates by 6-13%.
• Maintain HOLD, TP revised down slightly to S$0.68
Comment on Results
Downside risks prevailed. Water treatment volumes were weak in 1Q10, falling 12% q-o-q, owing to seasonal weakness caused by the CNY holiday period, a temporary closure at one plant, as well as the lack of any noticeable pick up in activity at the industrial parks despite the broadly improving economic conditions.
Water tariff receipts of S$6.9m (up 3% q-o-q) were somewhat boosted by the minimum offtake payments for the closed plant, but core operating margin dipped further to 35% vs. 37% in 4Q09. Interest expenses were lower in 1Q10 owing to the lower prevailing SOR benchmark, but could increase, going forward. The Trustee Manager is currently negotiating a refinancing agreement for the existing US$66m credit facility (expiring in February 2011), which would carry a higher interest spread.
Outlook & Recommendation
No waivers from Sponsor any more. The DPU subordination period ended in FY09, and as such we expect FY10 DPU to fall significantly short of the 5.42Scts paid out in FY09. Given the continued weakness in volume demand, and the absence of any kickers for the rest of FY09, we cut our FY09-10 DPU estimates by 6-13% respectively to 4.7-5.4Scts. This implies a FY10 DPU yield of 7% at current prices, which we view as fair. Maintain HOLD. Our DDMbased TP (WACC 9.5%) is revised down slightly to S$0.68 to reflect the lower DPU estimates.
Management ruled out any acquisitions over the next 6 months. The strategy now is to acquire completed plants only when they reach a certain level of operating maturity. Expansion works at four plants are ongoing, and should complete in FY11. Till then, treatment volumes and cash flows should remain largely flattish.
SREITs – OCBC
1Q10 results review; downgrade sector to NEUTRAL
1Q CY2010 results review. Four out of the eight S-REITs under our coverage reported earnings in line with our estimates. CapitaCommercial Trust (CCT) and Frasers Centrepoint Trust (FCT) beat our DPU estimates by 7.8% and 6.7% respectively. CCT benefited from positive rent reversions and lower property tax that drove a 11% YoY increase in net property income. FCT, meanwhile, beat our estimates (and the manager’s own guidance) on the back of a strong performance from Northpoint post asset enhancement works. Conversely, A-REIT and LMIR Trust missed our earnings expectations for 1Q CY10; with A-REIT missing our DPU estimates because of one-off upfront fees for loans. As a gauge, in 4Q CY09 five REITs reported results in line, three above our expectations and none below.
Guidance was ‘cautiously optimistic’, and growthoriented. Several managers indicated an intention to optimize yield and grow the portfolio both organically (asset enhancement initiatives, including CapitaMall Trust (CMT) and Ascott Residence Trust (ART)) and inorganically (acquisitions, including Mapletree Logistics Trust (MLT)). With this focus on growth, we believe S-REIT’s balance sheet capacity and ability to raise capital will remain key valuation differentiators. It may also be the first time the relatively young S-REIT sector will see REITs refresh their portfolios through divestments and re-developments in a big way (Cambridge Industrial Trust [NOT RATED] has been leading the pack as it de-leverages its balance sheet). Another price differentiator, in our opinion, will be the manager’s skill in optimizing yield through asset works: CMT and FCT, for instance, have a proven track record in this area in our view.
Volatility in the near term. Year-to-date performance of the S-REIT index is slightly negative (-0.7%) at 613.58 points. The recent volatility in the market has led to ~100 basis point movements in yields – we think this volatility will continue as macro-economic concerns, this time in Europe, take a front seat again. In our view, investors may consequently ascribe a higher risk premium (that is, higher yields and lower price-to-book ratios) to the S-REIT sector in the near-term. Nonetheless, we see selective opportunities to pick up strong REITs at attractive valuations (on a longer time horizon), after careful scrutiny of return versus risk. In an uncertain environment, we prefer REITs with a strong earnings outlook and strong balance sheets. We tilt slightly defensive in our top picks and favor FCT, MLT and ART with estimated total returns of 19%, 19.8%, and 21.7% respectively. Downgrade broader sector to NEUTRAL on a more cautious view.