Author: tfwee
PLife – BT
P-Reit downgraded by Fitch Ratings
FITCH Ratings yesterday downgraded Parkway Life Real Estate Investment Trust (P-Reit).
In the downgrade, P-Reit’s long-term issuer default rating (IDR) and its $500 million multicurrency medium term note (MTN) programme were downgraded to ‘BBB’ from ‘BBB+’.
While P-Reit has good interest coverage, low cost of debt, low refinancing risk, stable rental mechanism, a diversified source of patients and strong position in the healthcare industry, it has a weak sponsor in Parkway Holdings (PHL), the owner of Parkway Hospital Singapore Pte Ltd (PHSPL), the operator of P-Reit’s three Singapore hospitals, Fitch said.
This has a negative impact on the credit profile of P-Reit, given that it still relies heavily on lease payments from PHSPL.
Although the financial ratios of P-Reit are sound and it is bolstered by a defensive rental mechanism, the majority of its gross revenue (80 per cent) is still based on the three Singapore hospitals, which are operated by PHSPL, in turn wholly owned by PHL.
‘On a standalone basis, Fitch thinks PHSPL is profitable through its three Singapore hospitals and has good credit metrics. Nevertheless, PHSPL is a wholly owned subsidiary of PHL and is not ring-fenced from its parent,’ the rating report said.
‘Any deterioration of PHL’s credit quality could lead to an increased consolidation risk between PHL and PHSPL, and hence negatively affect PHSPL’s ability to service lease payment to P-Reit.’
Fitch said it has noted that the leverage of PHL has significantly increased following the extra debt incurred for the Novena Hospital project, and the key financial ratios of PHL have ‘deteriorated’. — Reuters
FrasersCT – OCBC
Is the pipeline ready for resuscitation? Not just yet.
FCT up sharply YTD. Frasers Centrepoint Trust (FCT) is up 51% YTD and is now trading at 0.74x book. A buy rationale at this price level implies, in our view, expectations of growth either through 1) the re-rating of existing assets, which we don’t see much economic evidence for, or 2) through value-accretive acquisitions.
Opportunity in pipeline. FCT is comfortably geared at 29.7%. It also does not have to look far for potential deals: recall that FCT has a pipeline of four retail malls from sponsor Fraser & Neave [FNN, NOT RATED] under a right of first refusal (ROFR). We believe the ROFR, which expires in 2011, has been a key investment driver for FCT. FCT’s acquisition plan is currently suspended due to difficult market conditions. At the 2Q briefing, the manager commented on the divide between the physical market and S-REIT valuations. FCT’s price has increased 30% since then, and it is now trading at a FY09F yield of 7.5%.
NP2 most compelling. Among the ROFR assets, we find Northpoint 2 most compelling because of the small deal size and its synergy with an existing asset – Northpoint. The asset is close to 100% leased. A put and call option agreement with a price range of S$139.5m-S$170.5m is in place. The agreement expires in December 2009. If 100% debt funded, buying NP2 would increase FCT’s gearing to about 42-45%.
But stumbling blocks, still. Note this pricing range is roughly equivalent to a 12% discount to 8% premium on Northpoint’s Sept 2008 valuation. This is not a very attractive deal, in today’s context. We think the market may be more receptive to a “cheaper” deal; a desire FNN may have no interest in accommodating. The deal structure itself also promises to be complex – if the buy is not 100% debt-funded, FNN may need to do its part as a 51% stakeholder. This holds even if FCT goes for potentially lower priced third-party assets. A potential solution is a cash-and-shares deal on a pipeline asset, sidestepping the need for a large cash call. But financing acquisitions may not be a top priority for FNN, especially when sibling Frasers Commercial Trust [FCOT, NR] presents a more pressing case for sponsor support. As such, we believe a buy call is yet to be justified on FCT. Our fair value estimate rises to S$0.75 (previously: S$0.62) as we relax our discount rate to reflect a lower cost of equity. Maintain HOLD on valuation grounds.
AREIT – MS
Steady as She Goes – Initiating at Equal-weight
Initiating coverage of Ascendas REIT with an EW rating and S$1.70 price target: A-REIT is our new sector top pick, with 11% upside. We like A-REIT for its high dividend yield of 8.5% for F2010e and 8.7% for F2011e, supported by long-term leases, a diversified tenant base, and its ability to generate inorganic growth via development of built-to-suit properties. A-REIT is now our sector top pick, given its high dividend yield compared with other large cap peers, limited risk of further capital raising, and recent underperformance (since STI low in March 09) that we believe to be unjustified. At current levels, A-REIT is trading at a 12m forward yield premium of 2.6% and 2.8% to CCT and CMT – high compared with the historical yield premium of 1.7% and 1.0%, respectively.
Long-term leases provide stability: A-REIT’s portfolio of sale and lease-back (SLB) properties, which are typically occupied by single tenants, contributes ~50% to net portfolio income, we estimate. These leases typically run for 5-15 years with annual step-up clauses and provide A-REIT with income stability.
Development capability supports dividends: Since its IPO in 2002, A-REIT has completed or is currently in the process of completing a total of 11 properties worth ~S$650mn. Built-to-suit properties have higher yields than acquired properties and long-term tenants that give stability to the portfolio. A-REIT has executed its previous built-to-suit properties well, we believe, and should continue to attract tenants seeking built-to-suit properties.
Risks to our call – Positive: Vacancy levels rise more slowly than expected; A-REIT announces new development projects. Negative: Faster-than-expected rise in vacancies and fall in rentals; loss of a large tenant in one of A-REIT’s single-tenanted buildings.
REITs – MS
Still the Best Way Forward
Maintain In-Line view: S-REITs remain our preferred sector exposure within the Singapore property space at least for 2009. S-REITs have not disappointed in terms of refinancing their debt. Indeed, they recapitalized their balance sheets 6 months ahead of our expectations. At least for 2009 and to a certain extent 2010, there is less risk of S-REITs cutting their dividend payout due to pressure from rising leverage. We remain comfortable that the recent fall in commitment rents will be marginally negative for 2009 earnings given that the brunt of the decline will be felt only in 2010 and 2011. A near-term positive catalyst for S-REITs is if the benchmark interest rate remains low after its recent decline.
We have a new sector top pick – A-REIT: We initiate coverage on A-REIT with an EW rating and price target of S$1.70, suggesting 11% upside from current levels. We like its 8.5-8.7% FY2010-11E dividend yield, the highest amongst its larger-cap peers, and find its recent underperformance unjustified. See our note, Steady as She Goes, published June 9, for details.
What’s new: We have revised our earnings forecasts by -1% to 39% for F2009-10E and raised our price targets by 17-112%. Given the improvement in liquidity in the equity market, investors may be willing to pay a premium above intrinsic value. Hence, for stocks that have recently recapitalized, we assign a 30% probability to our bull-case NAV and a 70% probability to our base-case NAV to calculate our price targets. We are maintaining our EW ratings on CapitaCommercial Trust, CapitaMall Trust, and CDLHT, and are downgrading Suntec REIT to Underweight given its 23% downside risk from current levels. We maintain our UW on ART.
Our investment philosophy for the S-REIT sector remains intact. Given that all the property segments – office, retail, industrial, and hospitality – are seeing oversupply for 2009-2010, the playing field is level. Moreover, all the S-REITs within our coverage are backed by strong parents and quality assets within their respective segments.
CMT – UOBKH
The Behemoth In Retail
We visited CapitaMall Trust (CMT) and key highlights are as follows:
Retail sales have rebounded. 1Q09 performance was disappointing as consumers shied away from shopping malls during the Chinese New Year season. However, shopper traffic and retail sales bottomed out in Feb 09 and picked up in Apr-May 09. Negative growth for retail sales has narrowed. Basic and necessity goods have fared much better than luxury items.
Quality malls attract long-term tenants. Occupancy reached 99.5% in 1Q09, which is impressive as there is little impact from the recession. CMT benefitted from a flight to quality to well-located malls. Core tenants, eg BHG, Cold Storage and NTUC Fairprice, are players with long-term plans for the Singapore market. Renewal and new leases for 169,233sf of space signed in 1Q09 boasted rental rates that were 1.3% higher than preceding rates.
Occupancy remains in the high-90%. We visited Tampines Mall, Plaza Singapura, Bugis Junction, Raffles City, IMM Building and Sembawang Shopping Centre over the weekend. Shopper traffic was heavy. There were no visible vacant shops at the malls, thus giving us confidence that CMT has maintained occupancy in the high-90% going into 2Q09. We are impressed by CMT’s efforts in organising promotional, cultural and educational activities to attract shoppers.
We raise our 2010 and 2011 DPU forecasts by 6.1% and 13.0% to 8.7 and 7.8 cents respectively after factoring in contributions from Jurong Entertainment Complex, which will be completed in 2H11. We also expect occupancy to taper off to 94% (previous: 88%) and retail rentals to correct 12% (previous: 15%). Upgrade to BUY with a target price of S$1.70, based on a dividend discount model (required rate of return: 7.2%, growth: 3.0%).