Month: November 2010
PLife – Phillip
•3QFY10 revenue of $21.2 million, net property income of $19.4 million, distributable income of $13.6 million.
•3QFY10 DPU of 2.25 cents
•Downgrade to Hold, target price $1.78
2 main pillars of growth drivers
Parkway Life REIT (Plife) registered 3QFY10 revenue of $21.2 million (+28.3% y-y, +13.0% q-q), net property income of $19.4 million (+26.5% y-y, +12.3% q-q) and distributable income of $13.6 million (+17.8% y-y, +7.9% q-q). DPU for the quarter was 2.25 cents (+17.8% y-y, +7.7% q-q). There are two areas of growth driving the improved earnings. Growth from acquisitions as well as the annual rental revision of the Singapore properties. The improvements came mainly from acquisitions Plife made in Japan. It made 11 purchases in Japan this year, having acquired six nursing homes in June 2010 and another 5 nursing homes in July 2010. Plife portfolio currently consists of three Singapore properties and 29 Japan properties. Net property income contribution from the Japan properties has increased now accounts for approximately 36% in 3Q10. For the Singapore hospitals, the 4th year of lease began from 23 August 2010 and the annual revision was set at 1.73%. During the quarter, Plife completed an asset enhancement initiative (AEI) on a Japan property which gives a return on investment (ROI) of 32.3% on capital expenditure of S$0.18 million.
Gearing nearing comfort level
Plife refinanced JPY13.66 billion (S$207 million) in August ahead of the loan maturity in the second half of 2011. The debt was refinanced through two equal sized term loan facilities with maturity of 4 and 5 years each. Post refinancing, the next loan maturity would be in 2013 with loan amount of S$50 million. Current gearing is 35%. At the time of listing in 2007, Plife was listed at an enviable gearing of just 4%, thus enabling it to acquire properties using just debt alone. To-date, Plife has made total acquisitions worth $360.4 million. We figure the comfort level of gearing is at 40% and that leaves Plife with another $84 million of debt headroom.
Valuation looks stretch, downgrade to Hold
Plife has been active on the acquisition trail, capitalizing on its ability to take on debt and embarking on expansion growth in a low interest rate environment. At 35% gearing, we believe future acquisitions would be funded with a mix of equity and debt. We are not factoring in any acquisitions in our forecasts. We are rolling over our valuation to FY11E, based on our DDM model, we arrived at a target price of $1.78. Plife has an amazing run-up in price recently. At our FY10E and FY11E DPU, it is currently trading at a dividend yield of 5.1% and 5.6% respectively, putting it at the low-end of the yield curve among the S-REIT. Although we like the fundamentals of Plife, we think price action will be taking a breather as well. Thus we are downgrading our call to Hold with a target price of $1.78.
Suntec – CIMB
More details on MBFC 1 acquisition
Downgrade to Neutral from Outperform on limited upside. Suntec REIT has released a circular on its acquisition of a one-third stake in Phase 1 of Marina Bay Financial Centre (MBFC 1). The circular provides more information on the mode of funding for the acquisition, income support and DPU projections. We reduce our FY11-12 DPU estimates by 0-2% after factoring in the acquisition, partially offset by
stronger rental and occupancy assumptions for its office portfolio. Accordingly, our DDM-based target price drops to S$1.55 (discount rate 8.1%) from S$1.63. While we see the addition of MBFC 1 as a long-term strategic positive, we believe that deal is hardly accretive for minority shareholders. Near-term yield accretion is likely to be minimal in view of limited lease expiries and rent reviews within the next two years. Downgrade to Neutral on limited upside to our target price. Re-rating catalysts could come from lower-than-expected costs of borrowing and positive rental reversions.
The news and our comments
Funding through debt and equity. The acquisition will be funded by S$1,105m debt and S$428.2m proceeds from a private placement of new units. Loan tenures are expected to be 3.5 years (S$773.5m) and 4.5 years (S$331.5m) respectively. Following the acquisition, the Manager expects aggregate leverage to climb to 41.5% from 33.0% as at end-Sep 10, though the figure could fall to 37.3% with the intended
repayment of shareholders’ loans held at ORQ. All-in interest cost on the new loans will be an effective 3.12% while cash cost is expected to be lower at 2.7%. The issue price has not been finalised for the equity-raising portion though 301.6m units are expected to be issued at a placement price of S$1.42.
Income support. Aggregate income support remains S$113.9m, expected to be drawn down over five years. This amount will be fully paid out regardless of the eventual rentals of the asset. Apart from mitigating rent-free fit-out periods expected in the first year, income support will be utilised to make up for any shortfall to ensure an expected NPI yield (net of all applicable taxes) of 4.0%. Management has the option to change the quantum of each quarterly instalment subject to certain limits and the amount is expected to taper off.
Rental catch-up possible. The two office towers are 100% pre-committed while Marina Bay Link Mall is about 87% pre-committed. Most lease expiries and renewals are expected only from 2013. Income support over five years should thus help in managing yields while allowing rentals to revert to market levels, particularly after 2013 when most lease expiries and renewals are expected. Assuming a 10% annual growth in renewal rates, yields could actually surpass 4.0% during the income support period. While overall income from MBFC 1 (including income support) could still drop on the expiry of income support beyond 2015, we believe this is still manageable in view of the small contribution of income support to total income from MBFC 1 (estimated at 20-35% from years 2 to 5), the tapering effect of the support and a recovering office market. Particularly, we believe it may not be difficult for MBFC 1 to maintain a 4.0% yield beyond 2015, even without income support.
Risks
Weaker-than-expected rental reversions on MBFC 1. While rents have been mostly locked in for the first two years, a sharp fall in market rents in 2013-14 could affect rents and reversions for MBFC 1, which could then affect yields on the asset after the expiry of income support in 2016.
Financials
Moderate dilution. The acquisition is subject to the approval of minority shareholders at an EGM on 26 Nov. Assuming the completion of the transaction by end-2010, we factor in contributions from MBFC 1 starting FY11. For FY11, we assume an overall NPI yield (net of applicable taxes) of 4.0% for MBFC 1 though upside could come from higher-than-expected income support provisions. We expect income support to taper off over 2012-15. We lower our cost-of-borrowing assumption to 3.2% for FY11 to factor in a rollover of S$700m debt at lower spread margins of 1.5% in Oct 10 and new loans secured at 3.12% for the acquisition. Coupled with slight revisions to rental and occupancy assumptions for Suntec REIT’s office portfolio, we arrive at a higher distributable income of S$207m for FY11 from S$176m before the acquisition. Factoring in 302m units placed out at an assumed price of S$1.42, our DPU forecast for FY10 dips to 9.8 Scts from 10.0 Scts before the acquisition. A higher placement price and lower cost of borrowing could provide upside to our estimates.
Valuation and recommendation
Downgrade to Neutral from Outperform on limited upside. Overall, we reduce our FY11-12 DPU estimates by 0-2% after factoring in the acquisition, partially offset by stronger rental and occupancy assumptions for its office portfolio. Accordingly, our DDM-based target price drops to S$1.55 (discount rate 8.1%) from S$1.63. While the addition of MBFC 1 is a long-term strategic positive, near-term yield accretion is likely to be minimal in view of limited lease expiries and rent reviews within the next two years. Downgrade to Neutral on limited upside to our target price. Re-rating catalysts could come from lower-than-expected costs of borrowing and positive rental reversions.
PLife – BT
PLife Reit DPU up 17.8% in Q3
PARKWAY Life Real Estate Investment Trust (PLife Reit) has reported a 17.8 per cent year-on-year increase in distribution per unit (DPU) to 2.25 cents for the third quarter ended Sept 30, on the back of yield-accretive acquisitions in Japan and higher rent from its Singapore properties.
Gross revenue was $21.17 million, up 28.3 per cent from Q3 last year, while net property income rose 26.5 per cent to $19.43 million.
During the quarter, the group recognised revenue contributions from the six Japanese properties acquired in June this year, as well as contributions from five Japanese properties acquired in July. These amounted to $2.3 million.
Distributable income to unit-holders was $13.61 million, versus $11.55 million previously. At a DPU of 2.25 cents for the quarter, annualised distribution per unit came in at nine cents.
In September, PLife Reit completed reconstruction work at its Japanese nursing home Maison Des Centenaire Haruki.
This involved the conversion of existing clinic space into three income-producing rooms and a common area for administrative use, to yield a return on investment of 32.3 per cent and an 8.63 per cent increase in gross rent for the unexpired lease term of about 17 years.
‘PLife Reit remains cautiously optimistic about our medium to long-term prospects, supported by our favourable rental lease structures where at least 87.8 per cent of the total portfolio has downside revenue protection, good future rental growth with the CPI-linked revision formulae, long-term master leases and a 100 per cent occupancy rate across the portfolio,’ the trust said.
‘The demand for quality private healthcare will remain resilient and continue to grow, driven by growing affluence, fast-ageing populations and increasing social acceptance of the elderly living in nursing care facilities.’
The DPU for Q3 is payable on Dec 13.
Units in PLife Reit closed one cent higher at $1.70 yesterday.
K-REIT – BT
K-Reit DPU up 4% after asset swap
Unit-holders recommended to vote in favour of planned transactions
A PROPOSED asset swap between Keppel Land and its unit K-Reit Asia would increase the latter’s distribution per unit (DPU) by 4 per cent without the need for equity raising, according to a circular that K-Reit sent to its unit-holders yesterday.
K-Reit’s manager said that unit-holders would enjoy a higher DPU of 6.68 cents for the forecast year of 2011, up from 6.42 cents upon the completion of the transactions.
Last month, the two companies announced a deal under which K-Reit would acquire a one-third interest in Marina Bay Financial Centre (MBFC) Towers 1 & 2 and Marina Bay Link Mall from Keppel Land, and at the same time would dispose of Keppel Towers and GE Tower to its sponsor.
Some analysts have questioned if the deal is as beneficial to both parties as claimed. They asked if the MBFC purchase would be yield-accretive to K-Reit and whether Keppel Towers and GE Tower could have fetched a higher price in competitive bidding. They also pointed out that K-Reit would have to increase its borrowings to fund the purchase of MBFC. Yesterday’s circular answered some of the questions raised.
The deal would be yield-accretive, but only if the interest rates for the new borrowings remain between 2.5 per cent and 3.25 per cent per annum, the Reit’s manager said. A 50-basis point increase in the base case borrowing costs would reduce the DPU to 6.31 cents. Fluctuations in interest rates would have the impact on the DPU of K-Reit following the transactions.
But based on the current low interest rate environment, K-Reit’s move to take on new debt would reduce its average borrowing cost to 3.05 per cent, from 3.4 per cent as at Sept 30, 2010. The trust’s weighted average debt maturity would also increase to 4.1 years, from 1.4 years.
As for the valuations of the transactions, K-Reit’s independent financial adviser PricewaterhouseCoopers Corporate Finance (PwCCF) has said that it considers them fair. In particular, the sale price of $573 million for Keppel Towers and GE Tower is higher than the average of the open market values of the two buildings as appraised by the independent valuers – Savills and Knight Frank – on the ‘highest and best use basis’, it said.
Based on that, and having considered the rationale for the transactions, PwCCF advised that the independent directors recommend that unit-holders vote in favour of the transactions, which will be proposed at an extraordinary general meeting on Dec 8. Similarly, the independent directors of Keppel Land have also recommended that minority shareholders vote in favour of the transactions.
Since the proposed deal was announced, Keppel Land’s share price has shot up 23 per cent, outperforming the FTSE ST Real Estate Holding and Development Index by a whopping 20 percentage points. K-Reit, meanwhile, has edged up a mere 1.5 per cent. But still, it managed to pip the Reit Index by half a percentage point. 
PLife – CIMB
Good results
• In line; maintain Outperform. 9M10 DPU of 6.41cts met consensus and our expectations (77% of our FY10 estimate). This was a 12.6% yoy improvement, led by full contributions from acquired Japanese assets. In the quarter, improvements to forward earnings were achieved through advance refinancing of debt on lower interest costs and accretive asset enhancement. While the impact of AEI is not immediately material, we view the work positively as management should be able to milk organic growth consistently (lacking in the Japanese portfolio) through such work. We factor in slightly higher Japanese contributions going forward, resulting in 1-3% upgrades in our DPU estimates for FY10-12. We also roll over our DDMbased target price to end-CY11, raising it to S$1.96 from S$1.91 (discount rate 7.2%). PLife REIT trades at 1.2x P/BV and a prospective FY11 yield of 5.9%.
• 3Q10 DPU 2.25cts grew 17.6% yoy, primarily from higher revenue from full contributions from Japanese assets acquired in June-July; and a higher CPI-pegged minimum rent for Singapore assets by 1.73%. Contributions from new Japanese assets were slightly better than expected, at 77% of our FY10 forecast.
• Debt structure improved, with the early refinancing of S$215m Japanese debt (46% of its total) which would have been due in 2H11. The debt was broken into 4- and 5-year committed term loans resulting in substantially longer weighted average debt maturity of 4.2 years (from 2.87 years) and no refinancing requirements till 2013. Weighted average cost of debt was lowered to 2.13%, (down about 30bp) with interest cost savings of about S$1m. Asset leverage was 35% as at 30 Sep 10. This gives the REIT debt headroom of S$240m, assuming 45% asset leverage. We believe potential acquisitions within S$200m are more likely to be fully debt-funded.