Author: tfwee
StarHill – Macquarie Research Equities
Event
Post the change in shareholding of Starhill Global REIT (SGREIT) and its management early this year, we revise our estimates in light of the weaker economic outlook in 2009. Our DCF valuation and target price is now S$0.58 (from S$1.56 pre the strategic review) and we maintain our Outperform recommendation.
Impact
Given the significant increase in new Orchard Road supply of 1.2m sq ft within this year (660k sq ft from ION Orchard, 250k sq ft from Orchard Central, and 294k sq ft from 313 sq ft at Orchard), we expect prime retail rents to fall ~10−13% this year. We have assumed that SGREIT’s retail occupancy falls to 88−90% from 96−99% by 2010.
As the bulk of the revenue from Ngee Ann City is secured under the Toshin master lease, the focus will be on maintaining performance of Wisma Atria basement retailers. The potential uplift in basement traffic once ION Orchard opens by June 2009 could boost sales and may provide some support for renewal rents.
Gearing is one of the lowest in the sector at 31% and the company has healthy interest cover of 4.3x. The majority of borrowings of S$671m is to be refinanced only in September 2010. As its S$380m CMBS was collateralised against its Orchard Road assets, which were valued at S$1.8bn as of December 2008, we see little refinancing risk given the low 20% LTV. Management is looking to refinance this at the end of 2009/early 2010.
The 2009 budget provided for 40% commercial property tax rebates, which SGREIT will pass through to tenants, though possibly not across the board. The group is considering rebating loyal tenants but details are still being deliberated at the board level.
Earnings revision
FY09−11 DPU estimates were lowered by 22−30% on lower retail rents and occupancy, as well as higher interest rates upon refinancing.
Price catalyst
12-month price target: S$0.58 based on a DCF methodology.
Catalyst: Potential uplift in basement traffic once ION Orchard opens in June 2009. Better than expected renewal rents.
Action and recommendation
Maintain Outperform. The stock has no refinancing requirements this year, is trading at a 70% discount to NAV/unit of S$1.44 and offers an attractive 14.6% FY09 yield. In the retail space, our preference is for CapitaMall Trust (CT SP, S$1.07, OP, TP: S$1.45) as we believe suburban retail rents will be more resilient than prime in a downturn.
AREIT – DBS
Defensive attributes!
We believe that current price for A-REIT reflects a drastic 40% vacancy levels in its MTB(Multi-Tenanted Buildings) portfolio, which in our view is unlikely to occur. Earnings visibility is boosted by the fact that c43% of A-REIT’s income is locked-in over the next 7.6 years, based on our estimates. At current price levels, investors are getting an attractive FY10-11 yield of 11% for a blue –chip backed reit with strong financial flexibility, good access to credit and an experienced management team which will steer the reit to emerge stronger post the current recession. Maintain BUY, TP S$1.51 based on DCF.
Emerging stronger post recapitalization. With fresh capital of S$408m in its coffers post its recapitalization efforts, A-REIT has emerged as one of the financially stronger reits with a low gearing of 33%(rising to c37% post inclusion of new development properties). Interest cover is still expected to remain high at 4.2x over FY10-11.
Earnings resilience expected. Even with a 15% increase in vacancies assumed in its Multi-tenanted Buildings (MTB) portfolio, A-REIT is expected to sustain yields of 11% over FY10-11F, supported by its portfolio of Sales & Leaseback (SLB) properties (43% of revenues) backed by an average 7.6 yrs.
40% vacancy levels assumed in stock price. Based on our estimates, the current stock price assumes a relatively drastic scenario of a 40% drop in occupancy levels in its MTB portfolio. We view that the likelihood of such a scenario occurring is unlikely given pro-active efforts from the reit in engaging tenants and government initiatives to help SMEs reduce business costs.
Maintain BUY, TP S$1.51. We maintain BUY on A-REIT, TP $1.51 maintained based on DCF. Barring any unforeseen circumstances, we believe that A-REIT should deliver a relatively stable FY10-11 yield of 11%.
REITs – BT
Watch Reits loan-to- value ratio: report
WATCH the loan-to-value ratio of real estate investment trusts (Reits) rather than the leverage, OCBC Investment Research said in a report yesterday.
This comes as S-Reits’ financial statements give mismatched estimates of their debt and balance sheet strength, said analyst Meenal Kumar, keeping her ‘neutral’ rating.
‘Loan-to-value is more important than reported leverage,’ she noted.
The loan-to-value ratio is used to determine the fair value of an asset against the loan that is financing its purchase and can indicate losses from non-payment that may be recovered by selling the asset.
Most fourth-quarter results from the S-Reits were in line with Ms Kumar’s expectations, but she said that this is not a sign of a stable market.
‘This quarter’s performance was not evidence of stability or invulnerability but more a function of timing lags,’ she said.
She added that indicators such as reversionary rents – the change in income after a rent review or renewal of a lease – at Suntec City have fallen 11 per cent on a quarterly basis.
‘The same inertia played out in net asset values,’ she said.
‘Overall, we feel cap rates used by the independent valuers still do not fully reflect the downward trend in capital values.’
As a result of this lag, Ms Kumar said reported balance sheet figures are ‘under-estimating leverage and over-estimating balance sheet strength’, adding that the market is now valuing S-Reits at an average 61 per cent discount to their reported net asset value.
She noted that unit prices ‘more than reflect the realities of falling capital values and refinancing risks’. ‘The focus is now on how deeply S-Reit earnings will be affected by deteriorating economic conditions – and consequently what is the ‘real’ distribution yield,’ she said.
With more equity fund-raising such as rights issues expected among S-Reits, Ms Kumar said the issues will need underwriters to secure funding amid stiff competition.
‘The strength of the sponsor and the size of its stake will make a difference,’ she said.
REITs – OCBC
4Q CY08 report card
4Q earnings steady. S-REITs within our coverage universe generally delivered a fairly steady set of 4Q CY08 results. The results were in line with our expectations, excluding LMIR Trust. CapitaMall Trust and Suntec REIT reported similarly marginal QoQ increases in distribution income of 0.3% and 0.6%, respectively. Frasers Centrepoint Trust experienced some disruptions from asset enhancement works at one mall, but its other properties enjoyed both earnings growth and strong occupancy levels. We believe this quarter’s performance was not evidence of stability or invulnerability but more a function of timing lags. In fact, other indicators like reversionary rents – achieved office rents at Suntec City fell 11% QoQ – point to a different trend.
No big NAV shake-up yet. The same inertia played out in net asset values. Excluding FCT (year end: Sep); the other S-REITs carried out their annual property revaluations in 4Q CY08. CapitaMall Trust registered a marginal 1.9% increase in property values over its last valuation in June 2008. Suntec REIT saw property values fall 7% against its 3Q CY08 revaluation. LMIR Trust also recorded a revaluation deficit, the bulk of which was driven by the adverse SGD-IDR movement over the year. Overall, we feel cap rates used by the independent valuers still do not fully reflect the downwards trend in capital values.
LTV is more important than reported leverage. Because of this timing lag, we believe reported balance sheet figures are under-estimating leverage and over-estimating balance sheet strength. In fact, the market is currently valuing these S-REITs on an average 61% discount to reported NAV. Lenders’ appetite for loan-to-value (LTV) have fallen because of both an expectation of falling capital values and a decreased appetite and capacity for risk.
Maintain NEUTRAL view. In our view, unit prices more than reflect the realities of falling capital values and refinancing risks. We feel the focus is now on how deeply S-REIT earnings will be affected by deteriorating economic conditions – and consequently what is the ‘real’ distribution yield. Meanwhile, we continue to believe S-REITs will need to re-capitalize their balance sheets. The recent equity fund raising announcements from bluechips like Ascendas REIT (raising S$408m) and CapitaMall Trust (S$1.23b) have set the tone for the year. However, the sector is competing for limited resources – for instance, we believe rights issues would need to be underwritten in order to succeed. Once again, the strength of the sponsor (and the size of its stake) will make a difference.
Link – Table
CCT – BT
CCT gets Moody’s downgrade
Moody’s Investors Service Tuesday downgraded CapitaCommerical Trust’s (CCT) corporate family rating to Baa2 from Baa1 and the senior unsecured ratings to Baa3 from Baa2. The outlook for both ratings is negative.
‘The downgrade of CCT’s ratings reflects the company’s strained credit metrics, particularly debt to EBITDA leverage and EBITDA/interest coverage which are in excess of 10 times and around 2.5 times respectively. These metrics are anticipated to weaken further to the extent that they would not be consistent with a Baa1-rated Reit,’ said senior analyst Kathleen Lee
‘Furthermore, Moody’s expects it will be difficult for CCT to improve these metrics over the intermediate term, as its operations will likely continue to be impacted by the slowing economy and constrained capital markets, which could be further exacerbated by upcoming new office completions from 2009 onwards,’ Ms Lee added.