Month: February 2011
a-iTrust – BT
Ascendas India Trust snaps up five buildings in Hyderabad
ASCENDAS India Trust (a-iTrust) announced yesterday that it will acquire five buildings in Hyderabad, India with a total built-up area of 2.2 million square feet.
Two of the buildings – which are completed and 100 per cent occupied – will be acquired for 1.74 billion rupees (S$48.8 million). The total purchase cost would be 1.77 billion rupees if transaction expenses were to be included.
The other three buildings are expected to be completed over the next four to five years. Based on estimated net property income, they will cost 6.81 billion rupees.
All five buildings are expected to be acquired from Indian property developer Phoenix Infocity Private Limited. Upon acquisition, the buildings – situated in Hitec City 2 Special Economic Zone – will be managed by Ascendas Group.
While the two completed buildings will be immediately acquired, a-iTrust said it will pay for the three other buildings as and when they are completed and leased.
The acquisition is expected to be distribution per unit accretive, with accretion from the acquisition of the two completed buildings estimated at 0.16 cents per unit in the first year, said a-iTrust. ‘Further accretion is expected from the acquisition of the remaining buildings over the next few years,’ it added.
If the acquisition is funded fully by debt, a-iTrust’s gearing will be 22 per cent after buying the two completed buildings, and 33 per cent after buying all five buildings over the next few years.
Ascendas Property Fund Trustee – the trustee-manger of a-iTrust – said it has ‘secured debt commitment from banks’.
‘We are optimistic that the demand for business space in Hyderabad will remain buoyant, supported by the city’s strong economic fundamentals and its IT sector,’ said Jonathan Yap, chief executive of Ascendas Property Fund Trustee. ‘Strong demand for business space has driven the occupancy of Hyderabad’s Grade A office space up, to 97 per cent as at Dec 31, 2010.’
The counter closed trading unchanged at 93.5 cents yesterday.
CMT – OCBC
Retail Bond Issue – A First for S-REITs
Retail Bond Issue. CapitaMall Trust (CMT) has recently announced the establishment of S$2.5b Retail Bond Programme. As a start, it is offering S$200m 2-year retail bonds at a fixed coupon rate of 2%. In the event of oversubscription, CMT may increase the size of the retail bond to S$300m. This issue marks the third corporate retail-bond offering (after SIA and CMA) in less than six months. One of the reasons for doing so is to lock in the low interest rate (fixed rate) before further rate hikes. As of 31 Dec 2010, CMT has an average cost-of-debt of 3.7%, with about 98.7% of total debt on fixed rate basis. On the back of the successful offering from its sponsor CMA, we view this move positively as it helps to lower the average cost-of-debt for CMT. Recall that CMT has S$601.2m convertible bonds due in 2013, with a put option on 2 July 2011. It also has an additional S$346.4m of CMBS and S$38m RCF1 maturing in 2011. We think the proceeds from the retail bond issue may be used to repay some of these borrowings. We have thus lowered our average cost-of-debt estimates by 15bps for our valuation, in anticipation of the successful take-up of the retail bonds.
Operational Performance. Despite the financial crisis, we have seen both CMT’s gross revenue and net property income (NPI) growing at a CAGR of 6.6% and 10.2% respectively since FY2008. If we exclude the newly acquired properties (Clarke Quay & Atrium@Orchard) during this period, the CAGR is around 3.3% & 7.1% respectively. Notably, properties such as Junction 8, Plaza Singapore and Bugis Junction have all registered NPI CAGR of more than 5% over the past two years. In terms of rental rates, CMT also registered positive rental reversions of 9.3%, 2.3% & 6.5% in FY2008, FY2009 & FY2010 respectively. Shopper traffic remains strong at around 200-230m per annum. CMT malls are strategically located in catchment areas (with an established or growing population) and well connected to public transportation systems. Going forward, with the enhancements works at Jcube & the Atrium@Orchard in focus, we are confident that the REIT manager will continue to exploit good value from its assets for unitholders.
Valuation. CMT’s share price has fallen 6.7% YTD. It is presently trading at a PBR of 1.17x PBR, versus its historical PBR of 1.35x since listing. We think the discount is unwarranted, considering CMT’s track record of impeccable property selection and operational management. We upgrade CMT to a BUY rating on valuation grounds, with an increased RNAV-derived fair value of S$1.98.
REITs – BT
Debt turns from foe to friend for many Reits
Debt has turned from foe to friend for many real estate investment trusts (Reits) as they pursue acquisitions again at a time of low interest rates.
This can be seen in the rising levels of borrowings among Reits against their assets. Out of a sample of 16 Reits in Singapore, as many as 10 had a higher aggregate leverage or gearing ratio at end-December 2010 compared with the previous year.
Several Reits had relied considerably on debt to fund growth until the global financial crisis hit in 2008, which forced them to cut borrowings as credit markets froze. Investors developed a phobia of highly-leveraged Reits, worried that they would collapse without sufficient financing.
But this is no longer the case. Ascendas Reit’s (A-Reit) shifting level of indebtedness, for instance, illustrates how tolerance for debt in the industry – and among Reit investors – has changed.
Between 2008 and 2009, A-Reit strove to lower its aggregate leverage from 42 per cent to 31 per cent through equity fund raisings and other capital management strategies. But as the economy grew last year and credit markets improved, so did its aggregate leverage, which crept up to 35 per cent by end-2010.
Take Suntec Reit as another example. Its aggregate leverage had dipped from 37 per cent at end-2008 to 35 per cent a year later, but jumped to 40 per cent at the close of 2010.
For a handful of Reits, the debt-to-asset increase is slight. CDL Hospitality Trusts is one which has maintained a relatively conservative debt profile over the last few years.
But many other Reits took on much more debt to feed their resurgent appetite for inorganic growth. ‘2010 was the most active year for new asset acquisitions that the market has seen in years,’ said Jason Kern, HSBC managing director and head of real estate investment banking for Asia Pacific.
K-Reit Asia was one which went on an acquisition spree last year. Its buys included a $1.4 billion one-third stake in the first phase of Marina Bay Financial Centre (MBFC). Consequently, its aggregate leverage rose to 37 per cent at end-December from 28 per cent in the previous year.
Suntec Reit also paid around $1.5 billion for a stake in properties at MBFC Phase One.
‘We are seeing more office Reits shoring up their aggregate leverage ratios,’ said OCBC Investment Research analyst Ong Kian Lin in a recent note. ‘We think that 40 per cent will be the new norm for FY2011.’
Reits outside the office sector, such as A-Reit, Mapletree Logistics Trust and Parkway Life Reit, also snapped up assets last year.
The low cost of debt, helped by sustained near-zero interest rates in the US, has facilitated borrowing.
Most Reits ‘are quite comfortable with the credit conditions’, said CIMB analyst Janice Ding. She believes that the average aggregate leverage among Reits could reach the high 30 per cent range.
While the credit environment is friendlier, market watchers do not expect Reits to ratchet up aggregate leverage to levels seen before the financial turmoil anytime soon.
Increasing gearing levels are a sign that property investors are gradually becoming more comfortable with leverage as they move further away from the financial crisis, said HSBC’s Mr Kern.
Nevertheless, he does not think investors are ready to see Reits revisiting the 40-50 per cent aggregate leverage that was common earlier. ‘Reits that are seen pushing the envelope on gearing too much will be punished with a lower equity valuation,’ he said.
The credit crunch had been a ‘very painful’ lesson for the Reit sector, Ms Ding said. As a result, Reits ‘will definitely be a lot more cautious’.
MIT – CIMB
Low-risk yields
• Initiate with Outperform and target price of S$1.24. Sponsored by Mapletree Investments, MIT is a REIT that invests in income-producing industrial assets in Singapore. With an 11.2% market share of Singapore’s flatted factory space, MIT’s S$2.1bn portfolio is a good proxy for Singapore’s SME space, we believe. We anticipate a 3-year DPU CAGR of 5.3% for the next two years as existing rental caps on its non-business park space are lifted by June. Using DDM valuation (discount rate 8.4%), we arrive at a target price of S$1.24. Trading at 1.24x P/BV and a 2010 yield of 6.6%, MIT is not cheaper than industrial leader AREIT (1.25x P/BV; 7% yield). However with a under-rented portfolio, pure Singapore exposure, and large tenant base point, rental downside is limited whilst upside is conversely strong. We expect catalysts from announcements of accretive acquisitions or development projects.
• Demand to outpace supply. A healthy Singapore economy and manufacturing growth backed by the global electronics and semiconductor recovery are likely to boost take-up for flatted factories as firms expand to increase demand. Net new demand for flatted factories could surpass net new supply at least till 2013. The resultant rise in occupancy should lend support to rents and capital values.
• JTC’s trade sale could represent acquisition opportunity. JTC’s Phase 2 divestment of assets is likely to be finalised in 1H11. Its 3.5m sf portfolio will have no rental cap imposed, representing good opportunities for upward rental reversions at the onset, in our opinion. This represents a good acquisition opportunity for MIT to acquire a portfolio of similar asset quality and positioning as its existing one.
First REIT – OCBC
Stability in times of risk aversion
Providing stability amidst uncertain times. We believe that First REIT’s (FREIT) stability makes it an attractive investment thesis amidst such times of uncertainty. Growth is driven largely by Indonesia’s private healthcare sector, which is relatively inelastic in demand. Recall that FREIT performed decently in its recent FY10 results. Gross revenue increased 4.4% to S$31.49m (including deferred rental income); while distributable income rose 1.8% to S$21.35m. Looking ahead, we expect growth via both organic and inorganic means, since FREIT has a target to raise its asset base to S$1b in the next two to three years. Inorganic growth is likely to come from the acquisitions of hospitals from its sponsor Lippo Karawaci (Lippo).
Sponsor’s growth to spur FREIT’s earnings momentum. Lippo reported a good set of results last week. Revenue and net profit rose 21.8% and 35.4% to Rp3.13t and Rp525.3b respectively for FY10. We believe that the improving financial strength of Lippo will provide stronger support and stability for FREIT, given that Lippo contributed 86.7% of FREIT’s gross rental income as at 31 Dec 10. In particular, Lippo’s healthcare segment for FY10 experienced a healthy 15.8% growth to Rp1.04t (33.2% of total revenue), underpinned by rising demand for better quality healthcare services in Indonesia. FREIT is likely to be a key beneficiary of this trend, since the master leases for its Indonesian hospitals have a variable rental component to capture the upside in topline growth. Indonesia’s growing healthcare needs is likely to continue to lend support to Lippo, and hence FREIT’s growth momentum moving forward.
Higher emphasis on Singapore’s nursing homes. Singapore’s Ministry of Health has highlighted that there will be increasing emphasis placed on nursing homes in Singapore. The long waiting times and rising affluence of Singaporeans could entice more people to take up private nursing home services. While rental income from FREIT’s nursing homes is fixed at a 2% annual increase, the possible increase in profitability of the operators would help to boost their ability to fulfil their obligations to FREIT.
Reiterate BUY. We believe that FREIT has showcased its resilience and defensiveness during the current market downturn. Its share price has declined 2.6% (+5.0% YTD) since China announced its interest rate hikes on 8 Feb 11, which is milder than the broader market’s 3.4% decline (-3.4% YTD) and also the S-REIT universe’s 3.4% fall (-2.2% YTD). The prospective yield of 8.6% (our FY11F estimate) further enhances FREIT’s attractiveness, in our view. Reiterate BUY and fair value estimate of S$0.82.