Month: March 2011
SREITs – OCBC
Leveraging trend continues in 2011
Leveraging trend. In our year-end S-REITs strategy report in 2010, we highlighted that the trend of leveraging up among S-REITs is likely to continue into 2011, buoyed by the still-low interest rates environment. So far, this has proven to be true, with many S-REITs taking on more debt to fund new acquisitions. Recently, we have seen K-REIT entering into a S$125.1m sale and purchase agreement for Prudential Tower, which will increase its aggregate leverage from 37% to 39.3%. AAREIT has also leveraged up from 32.7% to 33.6% following its S$72m NorthTech acquisition. CACHE is also expected to bump up its gearing from 23.7% to 27.6% on the back of its maiden acquisition of two local logistics properties. CDLHT is also leveraging up from 20.4% to 26.5% with the purchase of Studio M Hotel for S$154m. We noted that most of these transactions to-date (except CDLHT) have been third-party acquisitions – we have yet to witness more sponsor-backed assets being injected into the REIT.
40% watermark increasingly tested. According to our estimates, the top three highest-geared S-REITs are Suntec (40.4%), K-REIT (39.3%) and FCOT (38%). Departing from the previous conservatism seen during the financial crisis, it seems that more S-REITs are now comfortable reverting back to the pre-crisis target gearing levels of 40-45%. We think the next likely candidates to gear up and possibly test the 40% watermark will be MIT, which has yet to make its maiden acquisition to-date; and FCT which is be looking at acquiring Bedok Point from its sponsor.
Sponsor Injections. Going into the remaining three quarters of 2011, we are awaiting more sponsor injections into the REITs, which will likely bring up gearing levels. Apart from Bedok Point, other FY11/FY12 targets on our radar screen include: ION Orchard (CMT), Ocean Financial Centre (K-REIT), Pandan Logistics Hub & CWT Logistics Hub 3 (CACHE), Pandai Hospitals in Malaysia (PLife REIT), 30 Tuas Ave 10 (Sabana), Changi City Point & Centrepoint (FCT), CMA’s China malls (CRCT) and Lippo-Karawaci’s Indonesian malls (LMIRT).
Interest rate hike likely in 2012. The MAS manages the Sing dollar’s strength by buying or selling currencies to keep its exchange rate against major currencies within a policy band. This FX-centred monetary policy regime means that Singapore has effectively imported US’s interest rate policy, despite obvious domestic inflationary pressures. Many economists are expecting the Fed to start normalising rates towards the latter part of 2012 – which, if correct, would imply the Sibor will stay at current low levels through 2011. We thus anticipate the leveraging trend among S-REITs to persist for the remaining of 2011 and possibly the early part of 2012.
Industrial REITs – BT
Industrial S-Reits’ expansion into China poses risk: Moody’s
AS industrial Singapore real estate investment trusts (S-Reits) look at spreading their wings to China, Moody’s Investors Service (MIS) has cautioned about the legal and regulatory risks they face.
In a report on the business risks which industrial S-Reits will face in China, associate analyst Alvin Tan of MIS, a wholly owned credit rating agency subsidiary of Moody’s Corporation, said: ‘Moving into China would have negative credit implications, given the uncertainties associated with entering an unfamiliar market and the associated regulatory risk, which could nullify the potential gains of geographical diversification.’
Mr Tan said that China’s financial, tax, and legal frameworks are still in their infancy, which could have a number of negative ramifications, such as the regulatory risk related to tax policies on profits, the enforcement of lease contracts, and land ownership issues, as well as foreign-exchange risk for the repatriation of capital.
On why industrial S-Reits are seeking expansion into new regions, the MIS report said the competition for industrial properties in Singapore is intensifying. S-Reits’ growing risk appetite and the low interest rate environment have exacerbated the competitive pressure.
Another push factor is that the large supply of new industrial properties opening up over the next two years may limit rental growth in the medium term.
‘In their search for higher yields, the industrial S-Reits are now looking at expanding into new regions,’ said Mr Tan, ‘with several of the S-Reits identifying China, the world’s fifth most active real-estate investment market, as a possibility.’
There are of course ‘positive factors’, said Mr Tan, but they ‘could mitigate, but not fully offset, the impact of these negatives’.
The merits of overseas diversification include lessening the S-Reits’ geographic exposure to Singapore. And those with sponsors that have already established a presence abroad could tap into their sponsors’ China-related experience to reduce the risk associated with operations in a complex regulatory environment.
Also, the acquisition of overseas properties with long-term leases and rental guarantees would provide additional income and stability to medium-term operating results.
AIMSAMPReit – BT
Sale of AIMS Reit’s Japan property completed
AIMS AMP Capital Industrial Reit has completed the sale of Asahi Ohmiya Warehouse – at an effectively lower price of 1.483 billion yen (S$23 million).
The price of the warehouse was effectively reduced from 1.49 billion yen after a joint inspection by the interested parties and an independent engineer indicated 6.9 million yen worth of repairs were required on the property following the massive earthquake on March 11.
The completion of the sale of the warehouse, which is located about 345 km from the epicentre of the earthquake, was earlier delayed pending inspections.
The trust said in late February that it was selling the property to ‘free up capital to provide the trust with greater financial flexibility for future investment opportunities’. It added that the sale was consistent with the manager’s strategy to dispose of its single Japan-based asset.
The net sale proceeds, after repayment of a 989 million yen debt and payment of sale-related costs, will be used to reduce aggregate leverage from 33.6 per cent to 32 per cent.
Based on valuations obtained as at Sept 30, 2010, AIMS Reit consisted of 26 industrial properties located throughout Singapore and one property in Japan (Asahi Ohmiya Warehouse), with an appraised total value of $803.9 million.
Reits with Japanese exposure have been in the spotlight this fortnight.
Saizen Reit sold Johnan Building III in Fukuoka to an independent private investor for about $4.9 million. The building accounted for about 0.9 per cent of the trust’s revenue for the financial year ended June 30 last year. It is not expected to have a material impact on the trust’s financial position.
Proceeds will be used for the partial repayment of a loan that had gone into maturity default in November 2009.
Mapletree Logistics last announced that 13 of its 14 Japanese properties escaped with either no or minimal damage. It was estimated that the worst hit, Sendai Centre, would cost some $9 million to reinstate.
Frasiers Commercial Trust’s three properties in Tokyo and Osaka are intact with minimal damage. Ebara Techno-Serve Headquarters Building and Galleria Otemae Building in Tokyo and Osaka respectively, incurred minor damage with estimated costs of 1.25 million yen as at March 14.
Starhill Global Reit has seven malls in Tokyo. The manager stated that there was no known damage to the malls.
The AIMS AMP Reit counter closed at 20.5 cents yesterday, up half a cent.
StarHill Global – OCBC
Positive on Wisma’s facelift but Japan Earthquake created a dent
Facelift for Wisma Atria. Starhill Global REIT announced its plan to embark on asset redevelopment of Wisma Atria to boost the mall’s positioning along Singapore’s Orchard Road. The first phase of the redevelopment will commence in 1Q11 and is expected to complete by 3Q12. The asset redevelopment will unveil an ultra sleek frontage for Wisma Atria, highlighted by double-storey storefronts designed to showcase the latest flagship stores of international retailers. There will be full width steps spanning the facade of Wisma Atria, which will improve accessibility and also provide a permanent flood control measure, doing away with mechanical flood barriers. In addition, there are strategically located ramps and walkways leading to the new shop fronts from the surrounding malls and the nearby Orchard Road MRT station. Phase one of Wisma Atria’s asset redevelopment is expected to incur capex of about S$31m and generate an additional net property income of approximately S$2.5m per annum when stabilized, representing a ROI of approximately 8.0%. The cost of the asset redevelopment works will be funded from the proceeds of the rights issue completed in 2009 and/or working capital. We view this positively, in terms of both higher occupancy and rental rates following the enhancements in 2012.
Impact of Japan earthquake. Starhill has seven malls located in central Tokyo, which contributed 4.6% of total gross revenue and 6.6% of portfolio value as at 31 Dec 2010. So far, Starhill has announced that there is no known damage to the malls based on preliminary reports by its property managers. Nonetheless, we expect retail sales in Japan to be impacted, on the back of electricity rationing in Tokyo which will affect business operations in the near term, as well as an anticipated dent in tourist shoppers in the medium term following Japan’s nuclear fiasco and the risk of radioactivity exposure. We thus revise our FY11/FY12 gross revenue estimates for Japan properties down by 5% to adjust for declining sales and rental income. Our sensitivity analysis also shows that a 5% drop in the rental income of Starhill’s Japan assets will decrease its fair value by 0.4 S-cents.
Valuation still compelling. We noted that Starhill’s assets in Singapore, Malaysia, Australia and China still constituted the majority portion (93.4%) of its portfolio. Starhill is currently trading at a PBR of 0.66x, which is lower than its historical PBR of 0.73x since listing. Notwithstanding that the Japan crisis has bitten into Starhill’s earnings, we still believe in its prime assets positioning, strong sponsor and sound financials. Maintain BUY with a decreased fair value of S$0.69 (Price upside 12.2%)
FCT – CIMB
Riding on retail growth
• Maintain Outperform. We expect strong job and wage growth to support retailsales (ex-auto) growth of about 7% for Singapore this year (7.2% in 2010) and growth in real private consumption of 3-3.5% (4.2% in 2010, 0.2% in 2009). With FCT’s portfolio of well-located retail malls, we expect the strength to drive up occupancy rates and rental reversions at FCT’s retail malls. Ongoing enhancement at Causeway Point and any upside from higher turnover rents should also support organic growth while an impending injection of Bedok Mall from its sponsor could provide acquisition catalysts. Maintain Outperform and DDM-based target price of S$1.86 (discount rate 7.9%). We see catalysts from announcements of accretive acquisitions.
• Positive rental reversions expected. Notwithstanding lower Causeway Point income during its refurbishment, contributions from acquisitions and higher rental reversions lifted FCT’s 1Q11 NPI by 17% yoy. With positive rental reversions expected from stronger retail sentiment and ongoing asset enhancement at Causeway Point, its largest asset, we are expecting a stronger 2H11.
• Acquisition catalyst from Bedok Mall injection. Bedok Point received TOP in Nov 10. With the asset 98% leased as at end-1Q11, we see acquisition catalysts from an expected injection into FCT (targeted for CY11). Any accretion should also provide upside to our estimates.