Author: tfwee
Industrial REITs – CIMB
Relative resilience
• Industrial P/BV at 0.37x; appears resilient. The industrial sector looks attractive at an average P/BV of 0.37x, close to the REIT sector average of 0.34x. Resilience is underpinned by a historical time lag between changes in leading industrial indicators (including NODX, sea and air cargo throughput) and occupancy levels that could exceed 12 months.
• Expect further support from government for industrial users. The government traditionally supports industrial users by reducing industrial land and building rents, and dishing out rental and property tax rebates. We anticipate this assistance to continue as the manufacturing sector remains the single largest driver of Singapore’s GDP. We expect industrial REITs to benefit three ways from this: 1) reduced land rent payments for industrial REITs; 2) increased sustainability for REIT tenants paying land rent directly to JTC; and 3) increased sustainability of the other industrial property users, on which industrial REITs’ tenants are inter-dependent.
• Low tenant default risks. Within the industrial REIT space, we prefer REITs with low tenant default risks. These would be represented by large and diversified asset and tenant bases, limited concentration on single tenants and significant MNC representation.
• Good capital management. All three industrial REITs are comfortably geared at below 40% with no major refinancing needs over the next two years. Cash calls for MLT and CREIT are not likely in the current year. In terms of capital management, all three industrial REITs look well-positioned to weather the storm
• Maintain Overweight; A-REIT our top pick. Among industrial REITs, we favour AREIT for its least tenant default risk, attributable to its large and diversified asset base, and large and quality tenant base. We also like MLT for its geographical diversification which moderates its risk of asset concentration. CREIT is our least preferred stock for its smaller asset base and higher tenant-concentration risks.
PLife – Phillip
Good Health, In Good or Bad Times
We initiate coverage on Parkway Life REIT (Plife) with a fair value estimate of $0.95. The unique revenue model of Plife ensures rental income is inflation protected and provides unitholders with stable and growing dividend payout.
Plife is currently trading at 0.54 times price/book and we have a forecasted FY09F 10.4% yield. Although not the highest among the S-REIT, but resiliency of earnings give it an edge over the rest.
The initial portfolio of Plife consists of three private hospitals in Singapore. It has expanded its portfolio to include one pharmaceutical products distribution facility and 9 nursing homes in Japan. Total asset value increased 35% from S$774.6 million to S$1047.8 million. Revenue contribution is approximately 80% Singapore based and 20% Japanese based.
Plife has a revenue model that ensures rental revenue will not erode with rising inflation. The Singapore properties are under a master lease agreement with an inflation-linked formula to calculate rental. For the Japanese properties, part of the rental is also inflation-linked to Japan’s inflation. As such, unitholders are assured that dividend distributions are stable and not subjected to the cyclical economic cycle.
We believe Plife’s low gearing is a reflection of the management prudence. Current gearing is 24% and it has no near term financing requirement. Total debt is $250 million and the next round of refinancing is estimated to be in 2011. In 2008, Plife made $216 million of acquisitions of properties in Japan. We do not think Plife is aggressive in its growth strategy although we believe it is a tough balance in managing overseas acquisitions and ensuring the objective of stable distribution to unitholders as there are inherent foreign exchange risks. Plife strategy is to divest into mature countries with good legal framework and healthcare system while keeping its core focus in Singapore.
REITs – BT
Scrip dividends for Reits: why not?
IS THE use of scrip – instead of cash – as a way of issuing dividends to unitholders a violation of the basic characteristics of a real estate investment trust (Reit)?
One school of thought says that it is a violation as the scrip dividend scheme, if widely practised, runs counter to the objective of a Reit as a ‘stable, high-payout, pass through vehicle’.
This argument has its merits. But given the current unprecedented global financial turmoil, which has made many rethink previously established financial practices, the issue deserves a look from a different perspective. This is important as, like it or not, more trusts are likely to resort to scrip dividends amid an environment of credit squeeze.
If proper guidelines are in place on how cash conserved from issuing scrip dividends should be used, there is no reason why some Reits can’t take the scrip dividend route, even if it is a part scrip, part cash scheme with an opt-out option.
Given the present economic climate, asset values have dropped, sometimes in large percentages and there is very tight financial liquidity as banks seek to manage risks and minimise losses. The nature of business or life is that nothing is ever certain. We try our best to manage the challenges as they confront us.
Often times, we adapt, improvise, modify and even take a 180 degree-turn just to survive.
A Reit which had a good business model just two years ago is probably facing a different set of figures now. Falling asset values cause the net gearing to rise. Drops in consumer spending due to unemployment and other reasons bring lower yields as rentals fall. A very high degree of conservatism among financial institutions to minimise potential non-performing loans (NPLs) brings higher borrowing costs.
Taken together, these three factors threaten to sink many a less sturdy Reit. Unitholders don’t want to see their Reits collapse due to refinancing failures, a view shared by those against the scrip dividend practice.
Scrip dividends have been with us for a long time. The argument is that if you bought into a business, getting a bit more of the business is often a good thing so long as sound management prevails. Though it’s perhaps unfortunate that in today’s context, more companies resort to it for different reasons.
Reitholders who had invested even a year ago are looking at large losses on the prices of their units. Many Reits are trading at substantial discounts to net tangible assets (NTAs) or initial public offering (IPO) prices.
Real estate is fundamentally a medium to long-term investment. From this viewpoint, the current guidelines for Reits to distribute at least 90 per cent of their distributable income to qualify for tax benefits should perhaps be re-examined. This percentage and the accompanying tax benefits could be reduced on condition that the amount not distributed as a result of a scrip dividend be set aside for paying debt. A regulatory requirement to ensure that the retained earnings are correctly deployed to mitigate the accompanying drop in cash distribution is important. Savvy long-term investors may then shift their focus on short-term DPUs (distribution per unit) to net gearing and cash balances. This allows for Reits to be built on sturdier ground to stabilise them from regular oscillations in asset values and economic cycles.
There are investors who look forward to putting their money in a Reit that has a good portfolio with very little gearing. It has to do with times past where we often looked upon debt as a burden and tried to pay cash for our purchases if possible.
A well-managed Reit that can reduce its gearing regularly over time may even end up with zero gearing or a net cash surplus position. Owning more shares in such a Reit is probably the best real estate investment one can make. It pays ‘good yields’ as there is little financing costs and insulates unitholders from bankers who keep the umbrella when it starts to pour. And a Reit built on ‘solid sturdy ground’ may trade close to or even above their NTAs in good times, a far cry from today’s deeply discounted prices.
FCT – BT
Moody’s confirms FCT’s Baa1 rating; outlook negative
MOODY’S Investors Service yesterday confirmed the Baa1 corporate family rating of Frasers Centrepoint Trust (FCT). The outlook for the rating is negative.
This concludes the review for possible downgrade initiated on Oct 20, 2008, said Moody’s.
‘The rating confirmation reflects FCT’s good franchise value and relatively stable income stream supported by its well-located suburban retail assets. In Moody’s opinion, these assets are at the lower end of the asset risk spectrum as they mainly provide tenants with non-discretionary household items,’ said Kathleen Lee, a Moody’s vice-president/senior analyst and lead analyst for the trust.
‘The confirmation also factors in the trust’s manageable debt maturities and with banks with good relationships with its sponsor, Fraser Centrepoint Ltd (‘FCL’), to facilitate gradual conversion of its short-term debts to term and/or committed banking facilities, which will support its ongoing capital expenditure needs,’ noted Ms Lee. ‘FCT’s conservative financial policy also generates good credit metrics relative to its peers,’ she added. A reflection of this is the debt/Ebitda of six to seven times.
The outlook for the rating is negative reflecting the trust’s asset concentration exposing it to the weak economic environment and property market conditions in Singapore. Furthermore, these conditions render uncertainties in the level of tenant occupation and achieved rentals at Northpoint upon completion of the renovation works expected by Q2 2009.
A return to a stable outlook is unlikely at this stage given the inherent weaknesses in the trust’s operating profile and its limited financial flexibility amid the weak operating environment. Conversely, the ratings could face downward pressure if progress is not made in securing committed medium-term bank facilities to fund the trust’s ongoing capital expenditure over the next few months, and/or should headroom in its unitholders’ funds covenant fall away due to material asset impairments or worse-than-expected rental or occupancy conditions.
Mapletree – BT
By KALPANA RASHIWALA
Mapletree Logistics Trust Management Ltd (MLTML), the manager as manager of Mapletree Logistics Trust said on March 16 that it has no plans for any equity fund raising exercise.
MLTML also clarified that MapletreeLog is not the subject of the various media articles over the weekend which reported on Mapletree Industrial Trust (MIT), a private trust which owns a portfolio of ex-JTC factories and is managed by a different management team from MLTML. The articles had reported on MIT saying it could not afford to give its tenants the rental rebates they wanted.
MapletreeLog is a Real Estate Investment Trust listed on Singapore Exchange with a pan-Asia portfolio of warehousing and logistics facilities.
‘The manager also wishes to reiterate that as per MapletreeLog’s distribution policy stated in the prospectus dated 18 July 2005, it will distribute at least 90 per cent of its taxable income to unitholders. MapletreeLog’s distribution policy remains unchanged,’ MLTML added.