Month: November 2010
StarHill Global – Kim Eng
New beginning beckons
We initiate coverage on Starhill Global REIT with a BUY recommendation and target price of $0.80/share. Starhill owns 13 prime commercial properties in stable, high‐growth markets in the Asia Pacific, with retail rental making up 87% of group revenue in 3Q10. DPU growth is bolstered by medium‐ and long‐term leases that provide income stability and rental upside potential, as well as acquisition opportunities. With a clear target to double asset size and the backing of a strong and committed sponsor, Starhill is poised for a new beginning. At 0.7x FY10 P/B and 6.8% FY11F yield, the stock is deeply undervalued.
Steady income from defensive rental structure
Starhill has a stable of master and long‐term leases that comes with built‐in positive rental reviews every few years. This ensures a steady stream of longterm income for the group. Around 44% of its total revenue this year comes from such leases. Its medium‐term leases, which are typically for three years, have rental tied to gross turnover, thus allowing Starhill to ride on market rental recovery and rising consumption in retail markets such as Singapore.
Asset size to double in five years
Unlike many other REITs, Starhill’s REIT manager has a clear target to double Starhill’s portfolio from $2.6b currently to at least $5b in five years. The REIT manager has been sourcing for third‐party assets in China, Australia, Singapore and London, and has a few deals on the negotiating table.
Committed sponsor with deep pocket
Starhill’s sponsor is YTL Corporation Berhad, one of the largest companies listed on Bursa Malaysia. YTL aspires to own a portfolio of prime commercial properties globally under the luxury Starhill brand, and the REIT is a viable vehicle to achieve its dream. Its financial prowess and commitment should provide Starhill with the necessary support for acquisitions.
Sharp discount hard to ignore; initiate with BUY
Starhill is trading at a steep 30% discount to its NAV in stark contrast to the 10‐30% premium commanded by its peers. We think this could be because of the lack of asset enhancement initiatives on its part. Its FY11F DPU yield of 6.8% offers a yield spread as high as 160bps over the yield of some of its retail peers. We initiate coverage with a BUY recommendation and target price of $0.80/share, based on the Dividend Discount Model.
MLT – OCBC
Riding on Asia’s Acquisition Wave; Maintain Buy
Riding on Asia’s Acquisition Wave. MLT was focusing on inorganic growth for the most part of 2010. The latest acquisition was the Toki Logistics Centre for S$16.2m. Year-to-date, MLT has completed the acquisitions of 11 properties at NPI yields of 7%-9% in Asia after raising S$305m via equity in Sep 10. This was in stark contrast to 2009, where only one acquisition was completed. It now has 93 properties, comprising 51 properties in Singapore, eight in Hong Kong, six in China, 11 in Malaysia, 14 in Japan, two in South Korea and one in Vietnam. Going forward, MLT has stated that it will continue its pipeline of accretive third-party acquisition opportunities in markets such as Japan & Singapore, which offer attractive NPI yields.
Favorable Industrial Outlook. According to DTZ, there is a total of 398m sf of industrial space in Singapore as at 1Q10, with 26.9m sf of new supply expected over the next three years (majority pre-committed). The 3Q10 price and rental indices of industrial space also continued to improve by 8.3% and 4.8% QoQ, respectively. With improved rail connectivity to the suburban regions, we also expect further upside to the industrial buildings situated near the upcoming MRT lines. MLT has some 51% of its net property income (NPI) derived in Singapore. In line with our OVERWEIGHT rating for the Industrial REITs subsector, we think MLT will likewise benefit from positive rental reversions in FY11-FY12. Asia is also expected to lead the industrial recovery due to trade flows and domestic consumption in China (+Hong Kong) and Vietnam, which constitute 25% of MLT’s NPI.
Valuations. MLT is our top most prolific acquirer among its industrial peers YTD. Given the pick-up in industrial space demand and the strengthening of industrial rents, we think MLT looks set to capitalize on the recovery cycle in Asia. The full effect of its announced acquisitions should improve its top-line and DPU contributions by 2011. MLT is trading at a 4% premium-to-book compared to the broader Industrial-REITs which are trading at 8% premium-to-book. We take the view that this premium is understated, considering MLT’s track record in undertaking accretive acquisitions that boost distributable income. Sponsor, Mapletree Investments, and Itochu also plan to develop logistics built-to-suit projects of approx US$300-500m over the next 3-5 years, which will be offered to MLT on a right-of-first refusal basis, further providing MLT with a pipeline of potential assets for future acquisitions. Maintain BUY and we up our RNAV-derived fair value to S$1.00 (19.5% estimated total return).
A-REIT – BT
Ascendas Reit looks for assets beyond S’pore
ASCENDAS Real Estate Investment Trust (A-Reit), which at present owns industrial properties only in Singapore, is looking to acquire assets in the rest of Asia.
Its manager has set up a representative office in Shanghai, China, and is also ‘actively exploring’ investment opportunities in the mainland. Deals may materialise in the next year or so.
A-Reit announced its widened investment scope in a statement yesterday after the stock market closed. It will follow its customers to serve their real estate needs in Asia, it said.
It added that a geographically diversified portfolio will give unit-holders ‘an opportunity to ride on growth in other Asian markets’ and allow them to access real estate markets which they ‘could not access efficiently on their own’.
BT understands that Malaysia and Japan are other countries that may be of interest to A-Reit.
As at Sept 30, A-Reit had 92 properties in Singapore worth around $4.8 billion. They include business and science parks, hi-tech industrial properties, logistics and distribution centres and warehouse retail facilities.
A-Reit said its investment focus in Asia will remain on such properties, and that its manager ‘will persist in its disciplined evaluation of all potential investments’.
It added that its portfolio will continue to be dominated by Singapore-based assets ‘in the foreseeable future’.
An analyst who declined to be named said overseas expansion is a ‘natural progression’ for A-Reit. It has grown to a considerable size in Singapore and its sponsor Ascendas also has properties abroad.
In China, Ascendas has developed Dalian Ascendas IT Park, Singapore- Hangzhou Science & Technology Park and other industrial properties.
The analyst pointed out, however, that Singapore-focused Reits tend to enjoy a premium on the stock market, and A-Reit could lose its premium as it would face more risks doing business overseas, including exchange rate volatility and possible political instability.
A-Reit gained three cents yesterday to close at $2.10.
Sabana – BT
Sabana Reit to snap up 3 properties soon
World’s largest syariah-compliant Reit to raise $664m through its IPO
SABANA real estate investment trust (Reit) – the first syariah-compliant Reit here – expects to buy at least three more industrial properties in Singapore from its sponsor Freight Links Express Holdings to boost its portfolio.
The Reit will raise $664 million from its listing at $1.05 per share – against its indicative price range of $1-$1.10 – and offer a distribution yield of about 8.22 per cent for its forecast year 2011, its prospectus showed yesterday. By comparison, recent listing Mapletree Industrial Trust forecast a yield of 7.6 per cent for its fiscal 2010.
Sabana Reit will rank as the world’s biggest syariah-compliant Reit by asset size – ahead of just three listed Islamic Reits found in Malaysia – given that it holds some $850 million worth of 15 industrial properties in Singapore.
The distribution yield comes as Sabana Reit enters an industrial trust market dominated by the names of Mapletree and Ascendas. ‘We’re very aware that we’re an independent Reit; and based on market feedback, we need to pay a bit more,’ chief financial officer Eric Pascal said in a briefing last week.
Sabana Reit’s managers have also aligned their pay structure such that they would only get a performance fee if the Reit shows an annual DPU growth of at least 10 per cent over the last fiscal year.
Freight Links is now in discussions with JTC Corporation to lengthen the current land tenure of its three industrial properties of under 20 years, which make them unsuitable for the trust, said chief executive Kevin Xayaraj. Once negotiations are completed over the next two months, Sabana Reit plans to buy these properties – which includes two chemical warehousing facilities – with the trust having the first right of refusal for the three facilities.
Most of Sabana Reit’s IPO proceeds, and a drawdown of $221 million from a committed three-year commodity murabaha facility, would be used to pay the vendors for the properties in its portfolio.
It is also in the hunt for more acquisitions, particularly in the high-tech industrial space that commands rental premiums in the double-digits, added Mr Pascal.
The bulk of its forecast gross revenue for 2011 comes from its high-tech industrial businesses at 58 per cent.
Any future acquisitions – which will be aimed at Singapore properties – should be funded by debt, with a long-term gearing target of about 40 per cent, said Mr Pascal.
The trust will pay US$45,000 a year as part of its syariah-certification process, said Mr Pascal. Under Sabana Reit’s syariah guidelines, 95 per cent of all business done in the properties of the trust must be permissible activities.
Some 0.27 per cent of the trust’s revenue come from businesses that are not syariah-compliant, including business from a flight catering service that stores alcohol.
The income from that portion of the business will be donated, and because the donation will not qualify for tax deduction, the trust’s DPU yield will see zero impact, Mr Pascal said. DPU is derived from distributable net income, which is the maximum amount received by a unitholder that is taxable.
Its 5 per cent limit contrasts with the 20 per cent limit on non-syariah compliant businesses for the three Islamic Reits in Malaysia – office property trust Axis Reit, plantation asset trust Al-Hadharah Boustead Reit, and healthcare asset play Al-‘Aqar KPJ Reit – with Sabana Reit deliberately following a more stringent requirement to draw in Middle Eastern investors.
Some 508 million units will be sold through the IPO – consisting of a placement of 432 million units to institutional players, and a public offering – while Freight Links will take up another 27 million units through its units.
A separate 97.8 million units will be subscribed by cornerstone investors which include FIL Investment Management (Hong Kong), Al Salam Bank-Bahrain, Capital Investment & Brokerage, a subsidiary of a Jordan bank, and a subsidiary of Metro Holdings.
They are expected to be long-term investors, though they have not committed to a lock-up period, said Mr Pascal, noting that the Middle Eastern bank may provide debt financing to the trust later.
Al Salam Bank’s head of Asia-Pacifc Byron Askin told BT that the investment was part of the bank’s strategy to raise its Asian private equity portfolio by $500 million over five years.
When asked if the Reit would tap the Islamic bond market, Mr Pascal pointed to a $1.5 billion Islamic bond issue that was issued by Malaysian state investor Khazanah in August. ‘It’s very large, very liquid, of a good credit rating, and in Sing dollars. You can draw your own conclusions.’
The public offer opened yesterday and will close tomorrow. Trading should start at 2pm on Friday.
Shipping Trusts – BT
The lowdown on shipping trusts
IT hasn’t been much fun being a shipping trust, lately. If your creditor isn’t leaning on you, your client is reneging on you or asking for a 30 per cent discount on charter rates.
At some point in the past 18 months, at least one or a combination of these three vexing situations has been a reality for all three shipping trusts listed here – Rickmers Maritime Trust, First Ship Lease Trust (FSL) and Pacific Shipping Trust (PST).
Consequently, the past 18 months haven’t been a barrel of laughs for investors either. The share price for PST has lost about 23 per cent of its offer price value since the trust listed in 2006, while FSL and Rickmers have lost 55 per cent and 75 per cent respectively since they went public in 2007.
While the headlines for the trust sector have been glum in general, they have varied for each of the trusts across a spectrum of harrowing news.
Glum news
At one end of the spectrum has been Rickmers, which found itself unable to raise enough equity to buy seven vessels that it had committed itself to for US$918.7 million, even as it scrambled to refinance US$130 million in loan facilities with its banks.
About the same time, charterer Groda Shipping & Transportation told FSL to take back two tankers about four years early in May – but not before running up a US$4.1 million tab for unpaid bunker bills that led to tanker arrests and a 10 per cent dive in FSL’s share price.
Amid renewed fears of counter-party risk, some threw up their hands. OCBC Investment Research’s Meenal Kumar ceased coverage of the entire sector in June, citing ‘subdued trading volumes’. He also noted the difficulty of getting publicly available information on some of the trusts’ clients, such as Groda.
At the opposite end of the spectrum, however, PST’s trials were milder by comparison – and already seem to be receding into the past. Chilean liner CSAV, which charters two vessels from PST, caused a bit of a flap in April last year when it looked likely to negotiate a temporary 30 per cent reduction in charter hire payments.
But now, with CSAV’s turnaround in fortunes – it posted a record Q3 profit earlier this month – the threat of renegotiation has been reduced to a panicky footnote.
It is fitting that for Q3, only PST reported an increase in its distribution per unit (DPU) – albeit a small one of 1.7 per cent year on year.
Of the lot, PST has been favoured by analysts for its conservative financing strategy. It also scored points for its canny move to diversify into bulk carriers and multi-purpose vessels in measured doses that precluded any frantic equity-raising exercises.
FSL, on the other hand, is still being hobbled by the fall in revenue from the two tankers that Groda returned prematurely. Its Q3 distribution per unit of 0.95 US cent was 36.7 per cent lower year on year – and the outlook appears subdued.
DBS Group Research’s Suvro Sarkar cut DPU estimates for FY 2011 by 17 per cent to about one US cent per quarter.
FSL’s payout ratio is at 40 per cent as of Q3 – which is relatively prudent and not abysmal unless you are an investor who remembers getting 100 per cent of distributable cash flow in 2008 before the sector hit an ice patch.
What FSL does have in its favour is its vessel portfolio, which is the most diversified of the three – at a time when diversification has become a hedge against events that the sector cannot control, such as falling vessel values.
Diversification, on the other hand, is not on the immediate horizon for Rickmers’ all-containership fleet. After a period of giddy acquisition that preceded its financing woes – at one point, it had 11 containerships waiting to be delivered within a two-year span – it will be content with its existing 16 while it regroups.
While containership rates have recovered convincingly and are poised to improve next year, the much-dreaded double dip could undo it all.
And all else remaining equal, there is the 0.6 US cent cap on Rickmers’ DPU per quarter. It will be in place for at least as long as the trust is protected by the value-to-loan waiver granted by its creditors for up to three years. Its latest DPU of 0.57 US cents was a payout of just 13 per cent of distributable cash flow.
Stable and boring bet
It could work out for everyone, of course, and the sector could become the more exciting alternative to Reits that it was originally branded – and not in a way that causes indigestion.
But as things stand, PST – which its sponsor’s MD called ‘stable and boring’ in March, according to Lloyd’s List – looks like the sector’s best bet. When ‘boring’ is the best adjective for a sector, investors might just stock up on antacid tablets and move elsewhere.