Author: tfwee
REITs – UOBKH
Assessing Risk Of Inflation
Bond yields have risen in both the US and Singapore. In the US, yield for 10-year Treasury bonds has increased 71bp from 3.12% as at end-April to the current 3.83%. In Singapore, yield for 10-year government bonds has increased 52bp from 2.04% as at end-April to the current 2.56%.
Huge drop in commodity prices virtually eliminates inflation. The Consumer Price Index in the US and Singapore are both in negative territory, falling 0.7% in Apr 09. The US Producer Price Index was -11.6% while Singapore’s Manufactured Producer Price Index was -16.6% in April. Inflation at both consumers’ and producers’ levels is almost non-existent due to the huge drop in crude oil and other commodity prices on a yoy basis.
Expect inflation to be more severe in the US. A study of yield curves indicates that the market expects inflation in the US to intensify going forward. Yield curve based on US Treasury bonds steepened by 30-36bp in May 09 and by another 30-49bp in the first week of June. Yield curve based on Singapore government bonds steepened by 11-57bp in May 09 but eased off by 5-11bp in the first week of June. The behaviour of the yield curves, especially in the first week of June, indicates that investors are concerned that the US could experience higher inflation in the future due to monetary and quantitative easing.
Maintain OVERWEIGHT. Singapore is well protected by a strong Singapore dollar, which is supported by fiscal prudence. The Singapore dollar has strengthened 5.5% from S$1.52 to S$1.44/US$ so far in 2Q09.
Current yield spread is 3.60%, higher than historical average of 3.22%. We expect yield spread to contract further due to normalisation in the credit markets. Refinancing risk has abated with partial resumption of lending activities in the local banking industry. We prefer switching to laggard retail and industrial REITs. BUY Frasers Centrepoint Trust (BUY/S$0.945/Target: S$1.44) and Ascendas REIT (BUY/S$1.60/Target: S$1.93). Our only BUY call for office REITs is K-REIT Asia (BUY/S$1.08/Target: S$1.16).
Link – Table
FSL – OCBC
Reinvestment Scheme results
Distribution Reinvestment Scheme (DRS) results. FSL Trust (FSLT) announced that unitholders holding around 155.5m units or 30.9% of the total number of issued units have elected to receive 1Q distributions in the form of units. FSLT has issued about 15.6m units, increasing the total outstanding unit base to around 518.7m units. The manager said that this level of participation was stronger than expected.
Prepaying loans. Proceeds (or retained cash) from the DRS amount to US$3.8m, have been earmarked for voluntary debt repayment. Recall that FSLT had already retained US$4.6m or 27% of 1Q cash earnings, of which US$4m was used to repay debt (also voluntary). In aggregate, FSLT will prepay US$7.8m, or roughly 46% of 1Q cash earnings and 1.5% of total loans. Using 1Q data, its gearing post-prepayment comes to around 1.37x debt-to-equity. Retained cash in 2Q09 will again be used to prepay loans.
Implications for LTV. Loan-to-value covenants are a key concern for the shipping trust sector in light of the ‘new world order’ of falling asset values and low lender risk appetite. The manager’s decision to launch the DRS and to voluntarily reduce FSLT’s payout ratio is a pre-emptive gesture of good faith to lenders. In FY09, FSLT could potentially pay off US$16-31.2m (annualized, without and with the DRS) or 3.1-6.1% of total loans. We note that this amount is still small compared both to total loans and to our expectations of the quantum of the decline in vessel values. But whether this level of prepayment is a gesture, or a game-changer, is up to the trust’s lenders. The ball is in their court, now.
Implications for DPU. We had previously suggested that outcome of the 1Q09 DRS may affect FSLT’s course of action going forwards. The DRS was a success, relatively speaking. FSLT now has more options, in our opinion – we believe it may prefer to keep the scheme in play rather than making further cuts in the distribution payout. Deterioration in the external environment, or adverse feedback from the lenders, could of course tilt this decision the other way. Our updated earnings estimates assume the DRS will apply for the whole of FY09. Our new fair value estimate is S$0.58 (up from S$0.45 previously). This values FSLT at a 30% discount to our ‘normal’ case discounted FCFE value of S$0.83 (10% discount rate). We believe this is a fair reflection of the shipping environment today. Maintain HOLD.
Cambridge – BT
CIT aims to divest part of its portfolio
Deal to buy property at Tai Seng Avenue is now off, says CEO
CAMBRIDGE Industrial Trust (CIT) could divest 5-10 per cent of its property assets over the next 12-18 months as part of a long-term plan to ‘recycle’ its portfolio, chief executive Chris Calvert told BT.
‘What I want to achieve for the Reit (real estate investment trust) is a portfolio that we recycle a part of regularly so that we can maintain a modern investment-grade portfolio,’ said Mr Calvert, who took the helm of CIT’s manager Cambridge Industrial Trust Management from Wilson Ang Poh Seong in December 2008.
CIT owns 43 properties that were worth a total of $968 million at end-March 2009. Five or six of these have been identified as ‘non-core’ and could be sold, Mr Calvert said.
Proceeds could be used to pay off debt or acquire new properties.
CIT has to take care to keep its gearing down. It recently refinanced all existing debt through a $390.1 million syndicated term loan, leaving it with no refinancing obligations until February 2012.
But under the terms of this loan, if the trust’s loan-to-value (LTV) ratio exceeds 50 per cent, the lenders can draw on the Reit’s rental income to pay down debt and reduce gearing down to a more manageable level.
And if the LTV ratio exceeds 55 per cent, CIT will have breached the loan conditions, which means the lenders could take other steps to reclaim their money – including seizing CIT’s assets.
CIT’s gearing is now around 40 per cent. The Monetary Authority of Singapore has set a 60 per cent threshold for a Reit’s gearing.
Despite the fact that debt is locked in for the next three years, prudent capital management is a priority for CIT’s manager. The trust said in its first-quarter 2009 results announcement that it is looking at ways to strengthen its balance sheet.
But Mr Calvert emphasised that it is not a distressed seller. For its gearing to hit 50 per cent, the value of its property portfolio would have to fall more than 20 per cent, and this is unlikely, he said.
However, because of the soft outlook for the rest of this year, CIT’s property portfolio is likely to be revalued downwards.
Mr Calvert also said the trust will not go through with an earlier plan to buy 29 Tai Seng Avenue for $55.2 million. Late last year, the option agreement was extended to June 30, 2009 and completion was subject to market conditions supporting an equity fund-raising exercise.
CIT has decided not to acquire the property as it would not be yield-accretive for the trust, Mr Calvert said. Also, he does not favour an equity fund-raising exercise at present.
‘We don’t believe that going out and doing a highly dilutive rights issue is in the interest of the shareholders when there are alternatives,’ he said.
CIT’s stock closed at 38 cents yesterday. It has gained 38.2 per cent this year.
Shipping Trusts – UOBKH
Valuation Methodology Switched From DCF To P/B
Valuation method changed to P/B. We switch valuation methodology for the three Singapore-listed shipping trusts, namely First Ship Lease Trust (FSLT), Pacific Shipping Trust (PST) and Rickmers Maritime (RMT), from discounted cash flow to P/B, which is the common method for valuing shipping stocks.
Fair prices raised, but recommendations unchanged. We believe the P/B methodology will be more reflective of and responsive to the changing risk profile of the shipping trusts, as financing risks are reduced as and when the shipping trusts overcome their balance sheet hurdles on the back of easing of credit and a recovery in ship prices. The shipping sector (as proxied by container shipping stocks) typically trades at 0.5x P/B at a cyclical trough and 2.5-3.0x at a cyclical peak.
FSLT. We raise our fair price for FSLT from S$0.50 to S$0.64 based on 0.8x 2010 P/B of the container shipping sector because FSLT’s net gearing of 138% is quite comparable with the sector’s gearing of 143%. FSLT remains a HOLD.
RMT. We also increase RMT’s fair price from S$0.44 to S$0.76 based on a lower 2010 P/B of 0.4x, a shade below US peer Danaos’ P/B of 0.5x, because RMT would have a similarly very high net gearing of 4.0x assuming debt financing for the US$700m capex due in 2010 relating to the purchase of four containerships to be chartered to Maersk. While our fair price for RMT is 24% above its current share price, we maintain our HOLD call in view of its unfunded US$700m capex due in 2010. We see a re-rating in RMT should it manage to resolve this financing hurdle.
PST. Unlike the other two shipping trusts, PST has no loan-to-value covenants with its bankers. Its net gearing ratio of 1.0x is the lowest among the three trusts. We reiterate BUY on PST with a revised target price of US$0.37 (previously US$0.22) based on 2010 P/B of 0.9x, higher than the P/B ascribed to the other two shipping trusts given its stronger financial position.
Shipping Trusts – DBS
Concerns easing selectively
• Stability in container shipping rates should spark renewed interest in shipping trusts
• FSLT – given that it has no imminent refinancing or counterparty issues – is best positioned
• German ship-owners rescue CSAV, PST may breathe easier
• Too many uncertainties still for Rickmers
Liner companies looking to push rate hikes. Most of the leading container carriers, including Maersk and NOL are now looking to arrest the free fall in container freight rates through coordinated rate increases. While the problem of lower trade volumes, idle capacity and a huge orderbook will still need some solving, we may be seeing some stability in rates for the rest of 2009. This, combined with the improving sentiment about a global economic recovery in 2H09, should spur renewed confidence in container shipping stocks, and consequently, shipping trusts.
Visibility improving bit by bit. FSLT has a more diversified fleet than peers – with about 38% exposure to containers and 65% to tankers (oil, chemical, product). With the oil price in recovery mode, counterparty risk may be reduced. Moreover, FSLT has no big refinancing risks before 2012. Elsewhere, with the US$360m lifeline thrown to CSAV by German owners last week, PST’s fortunes may be looking up as well. However, RMT has to contend with unfunded capital commitments and an upcoming bullet loan repayment in FY10 and the picture still looks hazy.
FSLT is our top pick, upgrade to BUY. Given the healthy response to the 1Q09 dividend re-investment scheme, investors seem to be giving the thumbs up to FSLT’s attempt to align the interests of both short-term and long-term investors. As such, given the lack of nearterm concerns, we believe there is better visibility to FSLT’s dividend payouts, despite trading at much higher yields of about 25%. Hence, we upgrade the stock to BUY, and our DDM-based TP is revised up to S$0.71.
Upgrade PST to HOLD. We are also upgrading our call on PST to HOLD with a revised TP of US$0.20, given that the worst that can happen now on its CSAV charters is a 35% rate cut. Elsewhere, we maintain our HOLD rating on RMT with a revised DDM-based TP of S$0.50.