Author: tfwee
ART – OCBC
Long term growth, albeit with near-term volatility
Part of a strong franchise. We are re-initiating coverage on Ascott Residence Trust (ART). ART owns a portfolio of serviced residence and rental housing properties in the pan-Asian region. The REIT’s properties are managed by The Ascott Group (Ascott), the serviced residence arm of 47.2% stakeholder CapitaLand. Ascott is the world’s largest international serviced residence owner-operator and has a 25-year industry track record. Its serviced residence brands enjoy world-wide recognition and strong award-winning reputations. ART’s highly diversified portfolio spans 11 cities in seven countries with no country contributing more than 25% of total FY08 revenue. ART trades at one of the highest forward yields within the S-REIT sector. It is also trading at a 68% discount to last reported NAV.
Near-term yield volatility. RevPAU is the key metric driving ART’s earnings and distributions performance. 4Q08 RevPAU showed the first impact of global economic events. ART’s China properties saw a 43% drop in 4Q RevPAU to S$127, as rates and occupancy fell post-Olympics. ART’s Singapore properties saw a 12% decline in 4Q08 RevPAU to S$230. We expect RevPAU to remain volatile (and on a downtrend) with demand for corporate travel impacted by the current macroeconomic turmoil. We are estimating DPU of 6.6 S cents for FY09F (down 24% YoY) and 6.2 S cents for FY10F (down 7% YoY). These figures are roughly 6-7% below consensus.
A viable investment option. While we agree that yields will decline in FY09-10F, ART’s current valuation seems to be pricing in a perpetual bear case. In our view, current share prices reflect a belief that business conditions deteriorate to a certain extent and then stay that way. The investment question then breaks down into two components: 1) A volatile (but still comfortable) yield over the next two years, and 2) A very low “floor” valuation that leaves ample room on the upside. We believe ART is a viable investment option for investors who can accept the near-term yield volatility and judge ART on the basis of its long-term prospects (which we think are sound).
Re-initiating with BUY rating. Our SOTP value of the trust is S$0.76. This incorporates our assumption of an equity issue of S$160m at the S$0.45 price level. Our fair value estimate for ART is S$0.57, at a 25% discount to our SOTP value. Key risks to our estimates include a worsethan- expected deterioration in the economic outlook in ART’s operating markets, a larger-than-expected cash call or more-than-expected dilution, and higher debt costs.
CMT – OCBC
Less attractive risk-reward proposition
Flat QoQ revenue growth in 1Q09. For 1Q09, CapitaMall Trust (CMT) reported gross revenue growth of 11.1% YoY or flat QoQ to S$134.5m. Net property income increased by a smaller 9.1% YoY and 7.5% QoQ to S$92.4m due to higher operating expenses from the acquisition of The Atrium and the opening of the Sembawang Shopping Centre. Unrealised forex loss of S$11.4m was recognized on the translation difference of syndicated loan but had no impact on cashflow. Reported balance sheet had not taken into account the Rights issue and the post-Rights issue balance sheet is likely to have a net gearing ratio of 29.2%.
Expecting further downside in retail rents. Conditions in the retail scene deteriorated further in 1Q09. Within CMT’s portfolio, only tenants in trade sectors such as supermarket, books & stationery, department stores and beauty and health related sectors experienced increase in consumer spending. Some of the trade sectors that have been perceived defensive and performed well in 4Q08, such as food & beverages sectors experienced turnover decline in 1Q09. With the recent downgrade of Singapore 2009 GDP growth to -6% to -9%, we are seeing increasing risk of further deterioration in consumer spending in the coming quarters. Declining turnover would translate to higher occupancy costs for tenants and this raises more doubt over the sustainability of high rental rates going forward. As such, we are now forecasting rent decline of -10% (from -5%) for CMT’s retail portfolio.
Downgrade to HOLD. Our revised DPU estimates have been lowered to 9 S-cents for FY09 (previously 9.1 S-cents) and 9.3 S-cents for FY10 (previously 9.4 S-cents). Risk-reward proposition may not look as attractive as before, with the worsening outlook and the recent increase in share price. Nevertheless, CMT has already locked in 90% of FY08 gross revenue (~S$460m) for FY09 and this will provide strong DPU visibility for FY09. Our fair value estimate has now been lowered to S$1.21 (previously S$1.26). CMT is now trading at our estimated FY09 DPU yield of 7% and for 1Q09, it will be distributing 1.97 S-cents to unitholders (annualized yield: 6.2%). While CMT has retained S$3.3m of taxable income (exclude CRCT distribution) in 1Q09, it is still committed to pay out 100% of its taxable income to unitholders for FY09. For now, we see limited share price upside and with no near term catalyst in sight, we are downgrading CMT to HOLD.
PST – BT
Pacific Shipping charterer planning capital boost
PACIFIC Shipping Trust (PST) yesterday took the initiative to give an update on developments at one of its charterers, major Latin American line Compania Sud Americana de Vapores (CSAV), which earlier this week said it was in discussions to strengthen its financial position by about US$750 million.
CSAV, which charters two of PST’s 12 vessels, on Monday said that as part of a financial strengthening plan, it recently appointed HSH Corporate Finance to oversee a restructuring plan to strengthen its operating cash flow and consolidate its South American franchise.
Among CSAV’s plans to boost capital is the decision to significantly increase its equity base. Thus, next to the capital increase of US$130 million currently being implemented, the company will ask its shareholders for an additional equity increase of US$220 million. Ship owners have also been asked to contribute US$400 million to the equity base of the company.
The plan seems to have found positive reception among investors with CSAV’s shares rising earlier this week.
Details of the proposal are being worked out. The company is asking charterers for a temporary reduction of charter hire payments of about 30 per cent, part of which will be capitalised.
PST chief executive Alvin Cheng, however, clarified that participation in the scheme is on a voluntary basis and the trust has not received further details about what is expected of it. ‘We feel very positive that CSAV has undertaken this exercise to improve its cash position,’ he said.
While Mr Cheng conceded that there may be revenue reduction with some effects on distribution per unit, he maintained that PST would not be too adversely affected. He added that it is difficult to give guidance on what the impact will be until further discussions with CSAV.
‘Despite the potential revenue reduction, PST’s business model and fundamentals remain sound and stable. Our cash conservation strategy thus far will provide us with sufficient headroom to meet our current financial obligations. We will provide our unitholders with updates on CSAV’s restructuring plan as and when the details are confirmed,’ said Mr Cheng.
PST shares closed unchanged at 17 US cents yesterday.
Cambridge – CIMB
Holding fort in a difficult time
• We visited six of CREIT’s industrial properties recently, accompanied by members of its asset and property management teams, followed by a meeting with its new CEO, Mr Chris Calvert.
• Concerns we have include the fact that only 30% of its master tenants are endusers of its industrial space and CREIT’s heavy reliance on its top 10 tenants for its gross revenue.
• Short-term performance looks stable. We take comfort that management is managing its tenants and sub-tenants much more tightly, and taking steps to ensure tenant sustainability. Limited lease expiries of only 5.4% over the next four years add some certainty to occupancy sustainability.
• Maintain Outperform at S$0.53. Although there remain issues in CREIT’s portfolio, we are fairly confident that CREIT is not likely to face too much distress in the short to medium term. At 0.37x P/BV, CREIT remains more attractive than its two larger competitors AREIT (0.79x) and MLT (0.52x). Potential price upside of 89% and above-average yields of 17.5% make CREIT attractive despite uncertainties in the manufacturing sector. We maintain our Outperform and target price of S$0.53 (discount 9.6%), still based on DDM valuation.
REITs – BT
Reits not sure-win investments
THE Saizen Real Estate Investment Trust (Reit) saga should dispel several widely held myths about the Singapore Reit sector – that the trusts are no-brainer investments; that they are duty-bound to pay out dividends; and that the most important thing to consider when assessing whether a Reit is worth putting your money into is the possible returns from the trust’s portfolio.
Saizen Reit, which in February said that it was not going to pay a distribution for Q2 2009 in order to conserve cash and pay off its loans, has more recently said that it aims to resume payments as soon as possible. But investors may have to wait as long as June 2010, which is when the Reit said it expects to resolve its funding issues.
Prior to those announcements, the trust, which gets its income from residential rental properties in Japan, put out a proposal that would allow it to pay dividends in the form of Reit units – rather than cash – but later said it would not proceed with the plan after deliberations with the Singapore Exchange.
For unitholders, this means that they may not get any income from their holdings in the Reit for more than a year. These investors, who probably bought into the Reit to be ensured of a stable source of income, could now have no such income until mid-2010.
The most important thing for a newcomer to the sector to note is that Reits are not required by law to pay out dividends. Singapore-listed Reits have to distribute to unitholders at least 90 per cent of their distributable income, in order to enjoy tax transparency – which means exemption from paying corporate tax at the Reit/vehicle level on the portion of income they distribute.
But this tax break only applies to those Reits with assets based in Singapore. Reits such as Saizen, which have all of their properties in Japan, do not qualify for the above-mentioned tax transparency treatment. This means that they do not have the same incentive to pay out 90 per cent of their distributable income that Reits with all their assets based in Singapore do.
The Reit sector here has been drawing investors by advertising high yields (which have gotten even higher as Reit stock prices have fallen by quite a bit over the past year). But these yields – as Saizen Reit has proven – are not always guaranteed.
The other thing that this whole saga has highlighted is that when evaluating whether a Reit is worth putting your money into, it is not enough to just consider the viability of the Reit’s business. One must also look at how the trust initially financed its property portfolio.
By all accounts, Saizen Reit’s income stream seems to be stable. The trust, which has a portfolio of 166 buildings with 6,000 rental homes in Japan, said rents and occupancies across its largely mass-market properties have remained stable since the current crisis began.
Rather, the problem is with the way those properties were financed when they were acquired. When building up its portfolio in the years leading up to its 2007 listing, Saizen relied solely on commercial mortgage backed securities (CMBS) loans to finance its buying. But the CMBS market all but shut down at the beginning of 2008.
The trust had already changed some of its loans to traditional bank loans by then, but the crisis meant that bank loans dried up, leaving it with six CMBS loans worth some 20.15 billion yen (S$303.8 million) in all – which Saizen couldn’t refinance.
Now, the trust has to draw on cash reserves, proceeds from a $41 million rights issue, operating cash flow and a short-term bridging loan to pay off five of these CMBS loans worth some 12.2 billion yen in all.
For the sixth CMBS loan, worth 7.95 billion yen, Saizen is looking for refinancing through a possible syndicated loan. In the worst-case scenario, if no refinancing can be found for the sixth loan, the trust may have to forfeit properties worth 10.3 billion Japanese yen, which were used as collateral for that CMBS loan tranche.
High yields and capital gains in the initial years of the sector’s growth have spoilt Singapore Reit investors, or worse still, lulled some into thinking Reits are sure-win investments. What happened at Saizen, hopefully, will serve as a wake-up call.