Month: August 2010
PLife – Lim and Tan
Humming Along Nicely
• Distributable income rose 1% sequentially (and 11% y-o-y reflecting contributions from the nursing homes in Japan acquired since 2008) to $12.62 mln or 2.09 cents per unit. (PLife now owns 24 nursing
homes and other healthcare-related assets in Japan, representing 37% of total revenue.)
• On an annualized basis, that translates to 5.8% yield. Price / NAV is 1.04x. Gearing is a comfortable 32.6%.
COMMENTS
1. We maintain BUY even though the healthcare reit is at a record high. (It hit $1.50 on Aug 2.)
2. PLife has become even more “transparent” with more disclosures.
3. It is comforting to know that despite several acquisitions in Japan, 88.1% of PLife’s revenue has “downside protection”, ie not just the 3 Singapore hospitals, where minimum revenue is set to grow by 1.73% from Aug 23rd ’10 – Aug 22nd 2011 under the arrangement with Parkway Holdings: annual rental to grow by at least 1% + CPI.
4. PLife expects to complete in the current quarter the refinancing of 46.1% of its total existing loans (or S$207 mln), likely at even lower interest rates, given the anemic economic growth in Japan.
5. We also believe PLife offers an attractive alternative to Parkway, which Khazanah may well end up taking full control of, given the “rich” valuation that its $3.95 a share offer represents. Expectation is for Khazanah to then raise hospital charges here, which can only be good for PLife. (Parkway owns 35.77% of PLife.)
6. This could also result in more acquisition opportunities for PLife, for which PLife has ample “debt headroom”: $122 mln and $835 mln before gearing hits 40% / 60% respectively.
ART – OCBC
Divests an asset in Indonesia
Divesting an Indonesian asset. Ascott Residence Trust (ART) plans to divest one of its Indonesian assets, Country Woods. Located in the heart of South Jakarta, the rental housing property comprises of 36 townhouses, 78 bungalows and 137 apartment units. It occupies a net lettable area of 48,490 square meters and has tenure of 20 years expiring on 22 October 2025. The purchaser is an un-related party, identified through a competitive bidding process. The sale is expected to be completed by in 4Q10.
Net gain of S$5.7m. The property will be sold for US$24.18m or S$33.9m. This is 60% higher than the asset’s 30 Jun appraised value of US$15.1m or S$21.2m. Based on 1H10 EBITDA, the implied exit yield of Country Woods is a strong 2.9%. The buyer could potentially be looking to re-convert the asset for residential use, in our view. After accounting for taxes and transaction-related expenses (including early termination of existing contracts), the estimated net gain from the sale is S$5.7m. Proceeds will be used to pare down ART’s debts or for funding future acquisitions.
A positive move. The sale does not come as a surprise as the manager has been open about its intention to divest properties that have exhausted their yield optimization potential under current usage. Country Woods is an ideal “non-core” asset as it is operated as a rental housing property and does not leverage on the Ascott or Somerset brands. ART also noted that Country Woods would “require significant capital expenditure in order for it to compete with the increased competition in the vicinity”. With ongoing refurbishment activity at other properties, we believe this is likely the first of several portfolio adjustments (acquisitions and divestments) as ART focuses on yield & portfolio optimization.
Positive impact to fair value. The impact of the divestment is minimal on our earnings estimates as Country Woods contributed only about S$0.4m or 1% to ART’s 1H10 gross profit. On a pro forma basis, ART estimates that the divestment would have added 1 S-cent to the REIT’s 30-Jun NAV per unit of S$1.38. It would also have added 0.01 S-cent to 1H10 DPU of 3.53 S-cents. Assuming net proceeds are used to pay down debt, we estimate that leverage would fall from 40.7% as of 30 Jun to roughly 39.6%. On that same assumption, our S$1.32 fair value estimate edges up by roughly S$0.01 to S$1.33. Both the price and the choice of asset are quite favorable, in our view. Maintain BUY.
PLife – DBSV
Stable as it is
At a Glance
• 2Q10 DPU of 2.09 Scents (+10.9%) within our expectations; NPI growth driven by 8 nursing homes acquired in Nov’09
• Potential for interest savings (current : 2.6%) as it explores refinancing for JPY facility of S$207m (due in 2H11) in 3Q10
• Buy, TP: S$1.59, for its 6% yield, stable, defensive structure with 88% rental downside protection
Comment on Results
2Q10 DPU 2.09Scts, within expectations. 2Q10 DPU of 2.09 Scts (+10.9% yoy; 1% qoq) was within our expectations. Gross revenue grew to S$18.7m (+16.4% yoy), driven largely by additional contribution (S$1.8m) from the 8 nursing homes in Japan acquired in Nov’09, higher rental from existing properties, and partial contribution from 6 nursing homes acquired in Jun’10. NPI margin fell marginally to 92.4% arising from expenses related to the 8 new nursing homes. As a result, NPI grew by 15.6% to S$17.3m.
Minimum rent for Singapore Hospital to grow by 1.73%. Rental for its Singapore hospital is set to grow by at least 1.73% in its 4th year of lease (Aug’10 – Aug’11) over the actual rental in the 3rd year of lease, based on (CPI+1%) formula.
All-in effective borrowing costs at 2.6%, with a weighted average term to maturity of 2.87 years. PREIT is exploring and targeting to complete the refinancing of a JPY facility of c.S$207m (due in 2H11) in 3Q10, to further lengthen debt weighted average term to maturity. With the tightening of credit spreads, this could present potential interest savings.
Recommendation
Resolution of tussle at Parkway offers Life a clearer path. With the emergence of a clear “winner” for majority control for Parkway, we believe this bodes well for PREIT. Having Khazanah as the major shareholder also provides for the possible injection of Pantai hospitals in Malaysia, in our view, though this could take place over the medium term.
A defensive play, with opportunistic growth. We like PREIT for its stable, defensive portfolio with 88% of portfolio revenue with downside rental protection and 98.4% with rent review provision. Gearing stands at 34%; PREIT has an additional debt headroom of c.S$121.5m before reaching 40% for acquisitions, though we believe there could be some form of equity raising should there be a potentially larger deal, given our view that management will likely not overstretch its balance sheet. Maintain Buy, TP S$1.59 based on DCF (WACC 6.6%, t=2%)
SREITs – MS
Growth Challenging; Yields To Support
Investment Conclusion: Post the recent S-reits’ results, we maintain our In-Line industry view as we believe valuations look fair. Upside from inorganic growth appears challenging as capital values seem to have bottomed and sellers are pricing forward asking prices. Rental reversions in 2011 are likely to be flat/negative as rents from peak 2008 roll-over, but this is already reflected in the share prices, in our opinion. Average yields of 6.0% look attractive vs. the current savings rate of ~0.25% and current MAS S$ 10yr bond yields of 2.0%, especially if expectations for long-term yields stay low. In a range-bound market, we believe investors may be content to collect dividends that look well supported. Strong demand for S$ bond issuance in 2010 suggests to us that the demand for yield-like products could be increasing, a positive for S-reits.
Difficult to grow via acquisitions: How things have changed. At almost every results briefing we attended, inorganic growth was a major focus of attention; especially with low gearing and balance sheets repaired. While it is generally positive for an S-reit to make an acquisition, we do not support an acquisition-at-any-cost philosophy. Acquisitions in Singapore will be difficult given the lack of quality assets and sellers’ increasingly optimistic outlook that is translating into higher asking prices, while the success of overseas acquisitions remains to be seen. A dogged focus on inorganic growth is likely to disappoint, but we think the focus should be on the stability of underlying portfolios’ and organic growth prospects that are looking up as the rental cycle bottoms.
CCT our preferred pick: With acquisitions challenging and rates likely to stay low, we prefer S-reits with higher dividend yields, or with specific pipelines of assets to acquire. Our top pick remains CCT, followed by Suntec REIT. Our least preferred S-reit is CMT. We like CCT for trough yields of 5.2% (FY11e) that may surprise on the upside if the rental cycle turns faster than expected.
AIMSAMPReit – Phillip
1QFY11 Results
• 1Q11 revenue of $16.0 million, net property income of $11.7 million, distributable income available to unitholders of $8.1 million.
• 1Q11 DPU 0.5376 cents
• Maintain Hold recommendation with fair value of $0.23
Stable results
AIMS AMP Capital Industrial REIT (AAC) recorded 1Q11 revenue of $16.0 million (+46.4% yy, +2.9% q-q), net property income of $11.7 million (+26.1% y-y, -1.2% q-q) and distributable income available to unitholders of $8.1 million (+100.1% y-y, +2.5% q-q). AAC paid out 97.5% of the distributable income. DPU for the quarter was 0.5376 cents (-64.4% y-y, 0.0 q-q). The improved y-y performance is due to the result of the recapitalization exercise whereby four buildings were acquired by the REIT which contributed positively. However DPU comparison was impacted as new units were issued during the exercise. On a q-q basis, results were little changed. Occupancy rate improved slightly over the previous quarter from 96% to 97.2%. Separately, AAC announced that it has commenced litigation against a former tenant for breach of lease agreement. The REIT had taken possession of the property and found new tenants for the space. Management does not expect material impact on the earnings.
Capital value of the portfolio maintain constant with slight revaluation upwards on the sole Japan property. Total portfolio value is $636.1 million. Total debt of the REIT is $190.4 million and gearing is at 28.8%.
There was not much development in 1Q10 and results were within expectations. Management mentioned earlier in the year that near-term strategy is to carry out asset repositioning by divesting properties and recycling capital into higher value uses such as reducing debt or acquiring quality assets. Management is also looking to refinance the existing debt with new facilities that charge lower cost. We are thus expecting management to carry out these activities in the course of the year.
In our modeling, we had assumed a 3% vacancy rate for the portfolio which was in-line with 1Q11 occupancy rate of 97.2%. We keep our estimates and maintain our Hold recommendation with fair value of $0.23. We have a FY11E DPU of 1.99 cents which translate to a dividend yield of 8.9%.