Author: tfwee
FSL – DBS
Steady going for now
No major surprises from FSLT in 1Q09. As per guidance, FSLT announced a DPU of 2.45 UScts, which amounts to a payout ratio of 73%. While this is lower than DPU of 3.08 UScts in 4Q08 (100% payout), actual operating cash generation in 1Q09 of US$16.9m was better than 4Q08 cash generation of US$15.4m, highlighting that the business model is still holding up well. The residual cash was utilized to prepay US$4m of loans. Meanwhile, the DIstribution Reinvestment Scheme will apply for 1Q09, and unitholders may choose to receive part or all of their distributions in the form of new units. Any reinvested income will again largely be used for loan prepayments.
Maintain HOLD, TP revised to S$0.48. Results look solid enough. While revenue was down slightly (3%) q-o-q to US$24.8m, lower interest expenses meant that net profit was up from US$0.5m in 4Q08 to US$1.5m in 1Q09. EBITDA margin also came in at a healthy 93.3%.
And FSLT keeps lenders happy. Of the US$16.9m cash generated, DPU payout amounted to US$12.3m and the residual cash of US$4.6m was used towards a voluntary loan prepayment of US$4m in 1Q09. We view this move as positive, as it signals strong cash position to lenders and enables FSLT to negotiate better terms, in case any loan covenants are breached going forward.
But we stay cautious for now. Management updated that all 8 lessees have been making full and prompt payments and no renegotiation attempts have been made till now. For 2Q09, the DPU guidance was maintained at 2.45 UScts. However, we still lack visibility about charterers’ finances, and CSAV’s recent restructuring efforts show that ship operators are not out of the woods yet. As such, we retain our HOLD call, while our DDM-based TP is revised down to S$0.48.
CCT – OCBC
Looking beyond the weak office market outlook
Wide tenant base mitigates tenancy risk. Tenancy risk for CCT is wellmanaged, with a wide base of 540 tenants. CCT’s maximum exposure to a single tenant is ~13% of its monthly gross rental income and this comes from RC Hotels. The top ten tenants contribute approximately 50% of monthly gross rental income. Other than RC Hotels and Standard Chartered Bank, the remaining tenants each contribute 5% of CCT’s monthly gross rental income.
Strong landlord-tenant relationship minimizes tenant turnover. CCT has maintained good relationship with its tenants. This is seen from the long term relationship between CCT and some tenants who have stayed with CCT since its establishment. Some tenants, such as Standard Chartered Bank, have also taken up long term lease contracts with CCT.
S$282.3m of gross rental locked in for FY09. CCT’s income visibility remains very healthy for FY09. At the end of FY08, CCT had already locked in 79% (~S$282.3m) of its forecast gross rental income for FY09. As prime and Grade A office average rents continue to decline, rental upside from lease renewals is expected to decline but the impact is mitigated by the small % of expiring lease in FY09.
An equity fund raising may be needed by 2011. While we do not foresee major issues with the refinancing of borrowings due in FY09 and FY10, chances of an equity fund raising appear to be higher in FY11 with the significant liquidity needs. Total borrowings due for refinancing in FY11 could increase to S$1,006m if convertible bonds holders exercise early redemption option. With the declining valuation of its properties, gearing level is expected to trend upwards and CCT may also have to consider equity fund raising to keep its gearing level in line with the S-REITs sector’s gearing level.
Go for the yield and assets; re-initiate with BUY. We advise investors to look beyond the weak office market outlook and focus on the quality of CCT’s assets and the DPU yield of CCT over the next 2 years. For FY09 and FY10, we still expect CCT to deliver DPU yields of 12.3% and 10.5%, respectively. Having a strong sponsor in CapitaLand could also provide support to CCT if there is any need for fund raising. We derive a RNAV estimate of S$1.06 per share for CCT and we peg our fair value estimate at S$1.06, which is at par to its RNAV. We re-initiate coverage on CCT with a BUY rating.
KREIT – DBS
Cloudy outlook
K-reits results were in line with expectations, with the effect of positive rental reversions offset by declining occupancy, as weak demand for office space amid rising supply dragged on rental rates and DPU performance. Office concerns have been well documented and share price appears to have largely factored in a deteriorating operating environment. While valuation is inexpensive at implied NPI yield of 6.8% and DPU yield of 12.4%, near term catalyst is lacking. Maintain HOLD with TP of $0.80.
1Q09 results in line. Kreit reported a 29% yoy rise in revenue to $14.8m, lifted by positive rental reversions vs a year ago. NPI and distribution income improved 19% and 38% yoy to $10.8m and $15.7m respectively, as the impact of higher property taxes was offset by reduced interest expense following its rights issue. However, quarterly operating performance was eroded by c9% as higher portfolio rents (+5.9% qoq to $8.06psf vs $7.61 psf in 4Q08) was offset by lower occupation of 95.8%. Both Bugis Junction and Prudential Tower saw take up moderating to 88-92%, and higher costs.
Challenging times. Looking ahead, Kreit’s strategy is to retain tenants and manage cost efficiently amid difficult market conditions. While its portfolio seems fairly resilient with a long WALE of 5.5 yrs and 28% of its leases on LT structures, maintaining occupancy would remain
challenging with new supply coming in over the next 2-3 years. Our assumptions of a 15% vacancy and 50% peak/trough rental declines till 2010/11 translate to an average DPU decline of 3% pa.
No near term visibility. At the current share price, valuation for Kreit is inexpensive with implied NPI yield of 6.8%. However, give the ongoing sector headwinds, we are hard put to find near-term re-rating catalyst and maintain our Hold call with a TP of 0.80.
FSL – BT
FSL Trust to give DPU of 2.45 US cents for Q1
Firm doing well with stable cash flows from lease portfolio
FIRST Ship Lease Trust (FSL Trust) will distribute US$12.3 million or a distribution per unit (DPU) of 2.45 US cents to its unitholders for the first quarter ended March 31, 2009, FSL Trust Management Pte Ltd (FSLTM), the trustee-manager, said yesterday.
The DPU of 2.45 US cents represents a payout of approximately 73 per cent of the total distributable cash flow for the quarter.
This is lower than the DPU of 3.08 US cents in Q408 and 2.59 US cents in Q108, which were based on a 100 per cent payout ratio.
The cash retained in Q109 has been primarily applied towards a voluntary loan prepayment of US$4.0 million, it said.
The distribution re-investment scheme (DRS) will apply for the Q109 distribution.
Eligible unitholders will thus have the option to receive their distributions in the form of new units, cash, or a combination of both.
Philip Clausius, chief executive officer of FSLTM, said: ‘Whilst the global shipping and capital market conditions remain challenging, FSL Trust’s business continues to perform well with stable cash flows from the lease portfolio.’
‘We have started to prepay some debt voluntarily, as a signal to our lenders, and as reaffirmation of our commitment to be proactive and prudent in our capital management.
‘ The board has decided to apply the DRS this quarter in order to increase its scope of voluntary debt repayment.’
Of the total revolving credit facilities of US$515 million secured by FSL Trust, US$513 million have been utilised to acquire the additional 10 vessels post IPO.
FSLTM made a voluntary prepayment of US$4.0 million in Q109, which reduced the outstanding loan amount to US$509 million.
The loans are fully secured on all of FSL Trust’s vessels. The facilities are provided on a floating rate basis.
FSL Trust said it has hedged its interest rate risk through natural hedges or interest rate swaps to fix the interest rates until the maturities of the facilities.
All vessels in FSL Trust’s lease portfolio are fully financed and there is no committed capital expenditure that requires additional funding.
It said it does not have any loan refinancing needs until 2012. FSL Trust is also in compliance with all of its covenants under the credit facilities with its lenders.
It added that there is no immediate need to raise substantial capital.
For Q209, the trustee-manager is providing a DPU guidance of 2.45 US cents, which represents approximately 75 per cent of the projected distributable cash flow.
The cash retained, together with any proceeds from unitholders who have elected to receive their Q109 distributions in units under the DRS, will be principally used to reduce the outstanding loan balance.
FSL Trust units closed up two cents at 43 cents yesterday.
KREIT – BT
K-Reit Asia’s Q1 DPU tumbles 48% to 2.38 cents
KEPPEL Land’s listed trust K-Reit Asia says distribution per unit (DPU) fell to 2.38 cents in the first quarter of this year, down 48 per cent from 4.6 cents a year earlier, on an enlarged share base after a rights issue.
K-Reit issued 396.9 million new units – more than doubling the total number of units – in the May 2008 issue.
The fall in DPU was despite a 37 per cent surge in distributable income as the office trust achieved higher rents from new and renewed leases.
Distributable income for Q1 March 31, 2009 rose to $15.7 million, from $11.4 million a year earlier.
Besides better rental income, K-Reit benefited from lower borrowing costs and lower income tax due to a reduction in the tax rate.
Net property income of $10.8 million was 18 per cent higher than $9.1 million in Q1 2008.
The growth was underpinned by higher gross rental income from K-Reit’s properties – Keppel Towers, GE Tower, Prudential Tower and Bugis Junction Towers.
Gross rental income rose 29 per cent year- on-year to $14.5 million.
The trust had borrowings of $577.6 million at end-March. None of the amount is repayable in a year or less.
‘K-Reit Asia remains in a healthy financial position, with low aggregate leverage of 27.6 per cent at end-March 2009,’ the trust said in a statement.
‘It has no immediate refinancing concerns as its existing loans will mature in 2011.’
The trust set up a $1 billion medium-term note programme recently to provide it with greater funding flexibility.
K-Reit Asia acknowledged that the office sector softened in Q1.
Average prime and Grade A monthly rents fell 34.4 per cent and 34 per cent year-on-year to $10.50 per sq ft (psf) and $12.30 psf respectively, according to data from CB Richard Ellis.
But the trust said its portfolio still enjoys positive rental reversions and has a diverse tenant business mix.
Income from its one- third interest in One Raffles Quay also remains sustainable, with income support lasting until end-2011, K-Reit said.
Given the uncertainties ahead, the trust will emphasise tenant retention and is looking to achieve greater operational and cost efficiency.
It will also make selective asset acquisitions should opportunities arise.
K-Reit units lost 0.5 cent to close at 68 cents yesterday.