Author: tfwee
ART – OCBC
Time for a little patience
Lower credit ‘tail risk’ has boosted unit price. Since we re-initiated coverage in April 2009, Ascott Residence Trust (ART) has seen a 41% increase in its unit price on the back of, we believe, lower risk of a systemic credit breakdown. World governments have 1) committed to maintaining the viability of credit institutions and 2) also introduced fiscal stimulus packages. According to The Economist, fiscal packages in Asia are much larger than elsewhere (relative to GDP). China, Japan, Singapore, South Korea, Taiwan and Malaysia have all announced fiscal packages of more than 4% of GDP. Fiscal spending in the US, in contrast, is equivalent to about 2% of GDP.
Private sector keeps wallet shut. This economic stimulus has yet to translate into private spending. In China for instance, foreign direct investment fell for the eighth month in a row from a year ago. Investment fell 17.8% YoY in May to US$6.4b after falling 22.5% in April. FDI data is a reasonable proxy for the extended stay business. The green shoots getting heavy media coverage have yet to translate into ‘real’ business decisions in our view. Companies are still wary about committing to aggressive growth expansions. We think this is especially true of the
financial sector, which has traditionally paid top-dollar for extended-stay accommodations.
Don’t expect a 2Q miracle. In line with this view, we expect 2Q results to be largely unchanged versus 1Q09. We estimate that 2Q distributable income would fall 10-20% YoY but marginally improve on a QoQ basis. We understand that Singapore occupancies have stabilized but rates have come down – this could imply further RevPAU weakness in 2Q09. Performance in other major markets is stable to slightly negative.
Time for a little patience. As such, the jury is still out on corporate spending and travel. We do not believe there is enough justification to upgrade earnings forecasts. Our investment thesis stands: we see nearterm yield volatility but believe ART’s long-term prospects are sound. ART is only trading at 0.44x book but we do not think current levels provide the best entry point for investors, in view of the near-term fluctuations in yield and RevPAU. We advocate patience for now and downgrade our rating for ART to HOLD. Our S$0.82 SOTP value incorporates our assumption of an equity issue of S$160m at the S$0.55 price level (up from S$0.45). Our fair value estimate for ART is S$0.61 (S$0.57 previously), at a 25% discount to our SOTP value.
MI-REIT – BT
MI-Reit clears conditions for further debt extension
$202.3m debt facility now due to Aussie lenders on Dec 31
THE managers of MacarthurCook Industrial Reit (MI-Reit) – MacarthurCook Investment Managers (Asia) Ltd – announced yesterday the fulfilment of conditions needed for the extension of MI-Reit’s $202.3 million debt facility.
The facility will now come due on Dec 31 and is MI-Reit’s second extension in a bid to negotiate longer- term refinancing of its debt with lenders National Australia Bank and Commonwealth Bank of Australia.
At the end of March, MI-Reit was granted its first extension – a 60-day one for its $220.8 million debt facility that would have matured in April.
The debt facility’s limit was later reduced to $202.3 million as part of the second extension approved in May, with an ‘all in interest margin’ of 5 per cent per annum.
This debt facility accounts for about 90 per cent of its borrowings, with the remainder based in Japan, which the firm is also trying to refinance.
The extension had been subject to documentation and satisfaction of certain conditions precedent, which the investment managers stated were ‘within the control of MI-Reit’.
MI-Reit declined to elaborate on what the conditions were when contacted by BT yesterday.
Under the terms of the second extension, an event of default under the extension includes a failure by MI-Reit to settle the acquisition of a property in the International Business Park.
‘The manager understands the settlement of the property is likely to occur late fourth calendar quarter 2009,’ MI-Reit’s manager stated late last month. ‘The manager, together with its adviser, Standard Chartered Bank Ltd, is considering the most appropriate longer-term capital structure for MI-Reit inclusive of funding options for the property.’
For its fourth quarter ended March 31, MI-Reit posted a 13.9 per cent drop in distribution to unitholders, from $5.8 million to $5 million for the quarter, year-on-year.
For the full year, however, it saw a 19.4 per cent increase in distribution to unitholders, with net property income rising 48.5 per cent to $36.9 million.
AREIT – BT
Four banks to help A-Reit raise $275m: report
Three development projects completed by the Reit in FY2009, says CIMB
ASCENDAS Real Estate Investment Trust (A-Reit) is said to have hired four banks to help it raise $275 million to pay maturing debt.
According to a Bloomberg report that quoted an unnamed source, Australia and New Zealand Banking Group, OCBC Bank, Natixis and Standard Chartered plan to syndicate a three-year loan to other banks by mid-July.
In response to a query from BT, Tan Ser Ping, CEO of the trust manager, said: ‘We have always been and will continue to explore opportunities to increase and diversify our sources of debt funding.’
Stanchart and OCBC declined to comment on the Bloomberg report.
‘The banks may provide indicative pricing to lenders as early as next week,’ the report quoted its source as saying.
A-Reit’s major debt that needs refinancing this year is $300 million of commercial mortgage-backed securities due in August.
‘Refinancing of this loan has already been taken care of through a committed term loan of $200 million and another $100 million from equity raised in January 2009,’ Mr Tan said.
Separately, CIMB-GK Research issued a research note yesterday, maintaining a ‘neutral’ on A-Reit, with a target price of $1.63. The report was based on feedback during a recent roadshow in Kuala Lumpur.
‘Management admits that the outlook for the industrial market remains poor,’ the report said. ‘It expects occupancy of its sale-and-leaseback buildings to hold at 100 per cent, and that of its multi-tenanted buildings to decline.’
The report said the decline will come from existing tenants.
At the same time, CIMB pointed out that A-Reit completed three development projects in FY 2009 – Pioneer Hub, 15 Changi North Way and 3 Changi Business Park Crescent – which will contribute to the current year’s top line.
As far as acquisitions are concerned, ‘management is more inclined to be conservative in view of unpredictable access to capital’, the report said.
A-Reit closed at $1.57 yesterday, down eight cents.
AREIT – CIMB
On the road
Feedback from KL roadshow
During a recent Kuala Lumpur roadshow, AREIT fielded questions from investors on the operational resilience of its portfolio and forward strategy.
Falling occupancy + positive reversions + completed development projects = flat NPI. Management admits that the outlook for the industrial market remains poor. It expects occupancy of its sale-and-leaseback buildings to hold at 100%, while that of its multi-tenanted buildings to decline. The decline is attributed to the downsizing of existing tenants, rather than complete relocations. AREIT estimates a retention rate of 70% for existing tenants for FY10 (80% in FY09), and assumes that space given up will not be taken by new tenants. This would result in a 5% fall in portfolio occupancy.
Positive reversions. Current average market rents for Business & Science Parks and the Hi-Tech segment have declined 15% (to S$3.50 psf/month) and 10% (to S$2.70 psf/month) from Dec 08, respectively. Despite a narrowing gap between passing rents and market rents, management believes that rentals for both segments could still benefit from positive reversions of 10-15%. Management rationalises that there remain incentives for most tenants to accept moderate increases in rents given a favourable rental gap and costs of relocation.
Development projects. AREIT completed three development projects in FY09: Pioneer Hub, 15 Changi North Way and 3 Changi Business Park Crescent. These would contribute to the current year’s topline. The multi-tenanted building and amenity centre in Changi Business Park, and Expeditors’ build-to-suit project at Airport Logistics Park will be completed in 2009.
Main concern is economic recovery, rather than supply. About 3.5m sq m of industrial space is expected to enter the market over the next three years This represents a 3% increase p.a. based on a stock of 35.3m sq m as at Mar 09. In mitigation, take-up for about half of the Business & Science Park segment has been pre-committed while more than half of the Hi-Tech and Light Industrial supply will be built by industrialists for their own use. Management’s main concern is economic conditions, which determines the demand for industrial space.
Future acquisitions. Although acquisitions are possible with property yields in excess of 8% and borrowing costs of 4%, management is more inclined to be conservative in view of unpredictable access to capital. For the same reason and other operational reasons, it sees the probability of M&As among industrial REITs as limited.
Valuation and recommendation
Maintain Neutral and target price of S$1.63. Guidance of flat net property income is more conservative than our own estimates which have assumed moderate growth of 4.7%. However, our assumption for average of debt for FY10 is higher than guidance (4%), at 4.3%. Overall, we believe our assumptions reflect a realistic performance for AREIT this year.
P/BV for AREIT has risen to 1.0x, a premium over the sector average of 0.6x. At this level, we believe AREIT is fully valued. Maintain Neutral and DDM-based target price of S$1.63 (discount 8.7%).