Month: July 2010
Cambridge – DBSV
Divesting non-core assets is positive
At a Glance
• DPU of 1.24 Scts in line
• Restructure portfolio with aim of lowering leverage is positive in the longer term
• Stable 9.9% yields, maintain BUY, TP S$0.54.
Comment on Results
No surprises in 2Q10 results. Topline was slightly lower at S$18.3m (-0.9% yoy) due to divestment of properties; offset somewhat by higher rentals from its periodic rental escalation clauses. Portfolio occupancy remained high at 99.9%, with incomes relatively secured. Net property income improved marginally to S$16.1m (+0.5%) due to lower operating expenses. Despite relatively flat distributable income of S$10.8m, DPU was down 7.8% yoy to 1.24 Scts due to larger unit base.
Portfolio revaluation remained stable. CREIT’s portfolio was revalued at S$831.1m at half time, up S$6.1m (+1%) after netting off its divested properties, translating to 59.9 Scts NAV.
Recommendation
Positive capital recycling strategy. We are positive on management plans to continuously sell its non-core assets, keeping the portfolio relevant. To date, CREIT recorded S$49.7m in asset sales and has contracted to sell another S$40.5m worth in the coming quarters. A majority of the proceeds (up to S$60m) will be used for debt repayments to strengthen balance sheet and lower gearing to <40% by end FY10. The rest will be channeled towards planned asset enhancement initiatives (AEI).
Time to look for growth opportunities? Planned AEI on a couple of its assets could further enhance portfolio yields in the medium term, which are not factored in our numbers yet. Acquisitions however, could be challenging given relatively high-implied yields of c9.0%. With gearing of 42%, any acquisitions would have to be partially funded by new equity, which is expensive.
Buy for stable yields of 9.9%. CREIT remains attractive for its stable FY10-11F DPU yields of 9.9%, 300 bps above the Sreit peers and 740 bps above the Singapore government bond yields.
PLife – CIMB
Optimising Japanese exposure
• Maintain Outperform and target price of S$1.57. PLife REIT has acquired 11 nursing homes in Japan for S$107.3m at an average net property yield of 6.6% after withholding tax. With this acquisition, income contributions from Japan had increased to 38% from 28% in 1Q10. We maintain our DDM-based target price of S$1.57 (discount rate 7.2%) as we had earlier factored in S$170m of acquisitions for FY10. Stock catalysts could include early debt refinancing on lower costs in 2H10 and a change of the holding structure for its Japanese assets in 1H11 which would lower the withholding tax for its Japanese assets.
• Still opportunities for interest cost and tax savings. Management believes the REIT will be able to refinance a portion of its Japanese debt due next year by 2H10 on lower costs and longer debt tenure. Separately, PLife REIT has reached its minimum required size for issuing a change of holding structure which would enable it to lower its withholding tax from 20% to 5%. We anticipate a 6-12-month time frame for this change.
• Asset leverage at 35%. With its last announced acquisitions, asset leverage has reached 35%. While this is way below the regulatory cap of 60%, management aims to keep asset leverage under 40% in the long term. Hence, raising equity for the next sizeable acquisition is highly likely, in our view.
FSL – BT
FSL Trust secures $6m for vessel re-delivery
FIRST Ship Lease Trust (FSL Trust) has received US$6 million, an amount serving as security deposit and which it was entitled to following the non-fulfilment of contracts by the charterer of two vessels, one of which remains detained by a creditor.
The receipt of the sum follows the re-delivery by the customer of the two vessels. A re-delivery occurs when a lessee asks to return a vessel earlier than stated in a charter agreement.
In May, FSL Trust’s client Groda Shipping & Transportation re-delivered Verona I and Nika I to the trust, citing cashflow problems. Because the contracts were not fulfilled by Groda, Groda was required to pay the US$6 million.
‘The amount has now been released to FSL Trust upon the expiry of the stipulated default notice period,’ said FSL Trust’s trustee-manager. The US$6 million will be recognised as non-recurring revenue for the quarter ended June 30, 2010.
An S&P analyst had warned that the security sum could be in jeopardy because both vessels were seized in June.
Singapore-based Daxin Petroleum detained Verona I and Nika I in Shimotsu, Japan, and Qingdao, China, respectively, over claims that it had not been paid for bunkers it supplied to the vessels.
Verona I has since been released, after FSL Trust posted bail of about US$1.6 million with a Japanese court. Nika I remains in detention, with bail set at US$2.8 million.
PLife – Lim and Tan
Likely More Acquisitions In Near Future
• PLife has made another acquisition in Japan, 5 nursing homes this time for 3.1 bln yen / S$46.8 mln.
• Only a month ago, PLife had bought 6 nursing homes in Japan for 3.9 bln yen / S$60.5 mln.
COMMENTS
1. The latest acquisition follows the same template as all other acquisitions made in Japan. (PLife now has 24 healthcare-related properties in Japan, where at least 25% of the population is above 65 years of age.)
2. It is yield accretive, with proforma DPU rising to 8.35 cents, from 8.06 cents after the Jun 10th
acquisitions.
3. That’s because the purchase, like previous ones in Japan, will be fully debt funded.
4. In fact, the interest rate of 1.8% pa is the lowest for PLife in all of its purchases in Japan, ie the yield accretion is correspondingly the highest.
5. Given the long life of the leases (17.45 years for the latest 5), it is arguable that PLife’s gearing, rising to 34.4% from 32.2% after the last acquisitions, should have further room to grow, ie allowing for more acquisitions.
6. Indeed, because of the low interest rates in Japan, PLife is expected to make moré acquisitions in Japan in the not-too-distant future.
7. At 1.34, yield is 6.2%, which we still find alluring.
8. Because of the successful formula or template, PLife, which has been one of the best performing reits in Singapore, tested the $1.40 high for the 7th time this morning. It had however closed at $1.40 on three occasions in March this year.
PLife – Phillip
On An Acquisition Spree
• Buys 5 nursing homes in Japan for S$46.8 million with net property yield of 8.35%
• Enlarged portfolio consists of 32 properties; 3 Singapore, 29 Japan
• Maintain Buy, raised fair value to $1.66
In the span of just one month, Parkway Life REIT (Plife) announced the acquisition of another 5 nursing homes in Japan, following the acquisition of six nursing homes also in Japan the prior month. Looking at the purchase statistics, this purchase appears to be one up over the previous. The latest acquisition was for a total consideration of S$46.8 million, a discount of 16% off the appraised value, and at a net property yield of 8.35%. The properties have an average weighted lease term of 17.45 years with average occupancy of 94.9%. There will be a backup operator arrangement and the vendor is providing a rental income guarantee for seven years up to a maximum claim of S$2.4 million. The acquisition will be funded wholly by debt at an all-in rate of 1.8% p.a. Gearing post acquisition will increase to approximately 34.4%. For the previous acquisition, the purchase consideration was at a 2.8% discount off the appraised value, at a net property yield of 8.08%. Funding cost was also higher at an all-in rate of 2.0% p.a.
With this acquisition, Plife now has 32 properties in its portfolio with 29 in Japan. Asset value breakdown is approximately 68% Singapore and 32% Japan. On a normalized basis, revenue contribution from Japan is about 35%.
From the acquisitions Plife had made in Japan, we can see that the credit environment is getting more and more conducive. Funding cost has come down from over 300 basis points to below 200 basis points. Net property yield is also attractive at eight-plus percentage points.
Factoring in the DPU contribution, the acquisition will increase our FY10E DPU forecast by 0.7% to 8.4 cents. Subsequent years DPU increase by approximately 4%. We have also raised our fair value to $1.66 and maintain our Buy recommendation. Again, we reiterate our preference for Plife. Our only concern now is the creeping gearing, notwithstanding that 35% is still a comfortable level.