Author: tfwee
LMIR – OCBC
Retail story still compelling
Low gearing, sponsor support. We believe perceived risk will drive REIT performance in 2009. As of 3Q, LMIR has a very low leverage level of about 9% with no refinancing risk until 2013. LMIR is currently trading at a 68% discount to book, but those asset values do not reflect current exchange rates.
Retail focus still compelling. We think the retail story in Indonesia is still compelling. The country’s domestic economy offers some insulation from the global crisis. A Reuters poll indicates that while Indonesia will see some slowdown, it will be Southeast Asia’s best performer. The poll forecasted growth of 4.8% next year and 5.6% in 2010, thanks to still healthy consumption1 . LMIR’s portfolio of eight retail malls and seven retail strata spaces is strategically located within well-established population catchments across Indonesia. The portfolio boasts strong tenancy profiles with large anchor tenants such as hypermarkets.
Asset revaluation risk. We note that LMIR’s debt is SGD-denominated. The IDR has seen a large movement against the SGD over the past year. The continued forex volatility should be of limited concern to LMIR investors focused on income, as the trust has hedged both its SGD-denominated distributions and interest expense. However, forex volatility does create a major revaluation risk. LMIR’s assets are due to be revalued in 4Q08. The REIT’s portfolio will be revalued in IDR – this IDR value will then be converted back into SGD at spot rates. Risk appetite for the IDR has recovered from the lows of October. But with the level of volatility seen in the currency this year, the exchange rate on 31st December (which determines asset values) is anybody’s guess. This puts LMIR’s book value at risk – even if the IDR value of the portfolio stays the same. While revaluation gains or losses are non-cash in nature, it would affect LMIR’s gearing level and NAV.
Maintain BUY. In our last report, we had taken a more cautious view on our assumptions on rental growth, discount rate, and cap rates. We have also taken a fresh look at our valuation model, relaxing our fairly bleak expectations for the IDR-SGD. Our RNAV estimate for the REIT is S$0.55. Our fair value estimate of S$0.39 (prev. S$0.27) prices in a 30% discount to that estimate. Maintain BUY.
FrasersCT
Fundamental call still stands
Strong sponsor. We believe perceived risk will drive REIT performance in 2009. Sponsored REITs like Frasers Centrepoint Trust (FCT) are generally thought to have a lower risk profile as the sponsor is seen as a bastion of support for the S-REIT – especially financial support. FCT has a strong sponsor whose recent show of tangible financial support for newly affiliated Frasers Commercial Trust speaks volumes. FCT is geared at 28.1%, with 80% of its outstanding debt expiring only in July 2011. Our main balance sheet related concern is the financing of ongoing capital expenditure – FCT is currently using uncommitted drawn banking facilities for this purpose. The likely strength of lending relationships inherited from its sponsor alleviates our concern (somewhat).
Refining assumptions. We continue to like FCT’s suburban assets and their mass-market consumer focus. The malls are strategically located adjacent to MRT stations and bus interchanges, and enjoy captive markets with strong population catchments and limited alternative shopping choices. The primary focus is on non-discretionary spending and both Northpoint and Causeway Point have had a good track record in previous crises. However, we are refining our assumptions. We had previously assumed flat YoY reversionary growth in rentals. We are now pricing in a 5-7% decline per annum over the next two years (except for an expected uplift at Northpoint next year post-asset enhancements). This is in line with our assumptions for rental contractions at Suntec City Mall (est. 8-10% pa decline) and CapitaMall Trust (est. 5% pa). We have also refined our estimate for the value of FCT’s stake in Malaysian Hektar REIT.
Fundamental call still stands. FCT’s share price has continued to fall in tandem with the S-REIT sector. It is currently trading at a 53% discount to book value. However, we believe our fundamental call still makes sense. In our opinion, FCT’s current portfolio lacks critical mass. FCT was in the process of building a scale portfolio on the back of a clearly defined sponsor pipeline. Unfortunately, even the best laid plans can go awry. FCT has now postponed its expansion plans indefinitely, citing credit market conditions. We believe that the pace of acquisitions will dramatically slow across the S-REIT sector because of the rising cost of capital, overstretched balance sheets, and limited access to capital. While slowing growth is a sectorwide problem, its importance to FCT is above average (in our opinion). Maintain HOLD. Based on the adjustments described above, our fair value estimate drops from S$0.72 to S$0.62.
CMT – OCBC
Uncertainties over refinancing and rental rate outlook
Refinancing is still our focus for 2009. Going into 2009, refinancing of borrowings will remain the overhanging concern for CMT. CMT had not done any refinancing in 3Q08, but management assured that there is sufficient cash and bank facilities to refinance its borrowings due in December 08 (S$187.5m) and May 09 (S$80m). While previously we had assumed that part of the borrowings be refinanced by the medium term notes (MTN) programme, there is now little investor appetite for MTN, meaning that CMT would not be able to draw down its untapped MTN facility for refinancing.
Credit rating could be at risk. Recent spate of downgrading of S-REITs’ credit ratings reflects the cautious stance that rating agencies had taken on S-REITs and has also raised further concerns on their credit health. In May, rating agency Moody’s confirmed CMT’s A2 rating but revised its outlook to negative due to its weakened financial profile following the acquisition of Atrium@Orchard. We believe that the risk of credit rating downgrade is higher now given the current tight credit market and slowing retail rental rates. A downgrade could potentially raise CMT’s cost of refinancing and affect its future distributions.
Cautious over retail outlook. In light of the worsening economic and job outlook, consumer spending could continue to slow down in 2009. To reflect this, we have already taken a more conservative stance in our retail rental rate expectations and expect annual decline of 5% in rental rates for FY09 and FY10.
Maintain BUY. We remain optimistic that CMT should be able to refinance its near term borrowings, given its portfolio of quality assets, track record of good access to the debt market and backing of a strong sponsor, CapitaLand. Earlier, we have also already factored in an increase in borrowing costs of +100bp for FY09 in anticipation of higher borrowing cost due to the tight credit market. We are expecting a FY09 DPU of 15.1 S-cents which translates into a yield of 9.4%. Based on a 15% discount to our RNAV forecast, we are maintaining our fair value of S$1.94 for CMT. As upside to share price is still 21.4%, we keep our BUY rating on CMT.
REITs – OCBC
Perceived risk will drive performance
The growth story is unwinding. Since its establishment in 2002, the SREIT sector has flown on the back of a soaring property market. Portfolio sizes expanded on the back of acquisitions and revaluation gains. Unit prices had also followed suit. The REITs behaved like growth instruments – the focus was on capital appreciation, not yield. This golden era ended quite decidedly this year. The growth story, built on a bull market (rising asset prices) and a cheap market (easy credit), has seen a massive reversal. No thanks to a collapse in unit prices, the sector is now trading at an average 20% trailing yield and a 63% discount to book.
Perceived risk new driver. We believe the sector’s performance will be driven by perceived risk, as measured by the strength of their balance sheets and the quality of their underlying income. Based on reported data, some S$4.4b of debt is due for refinancing in the next nine months until September 2009. Refinancing poses a major challenge for the sector, especially with securitized financing no longer in play and lenders mindful of loan-to-value in a falling market. We feel revaluation losses have a high probability of breaching self-imposed and lender-preferred gearing targets. An equity recapitalization may be necessary. In the midst of such uncertainty, we believe sponsored REITs are likely to show outperformance. On the income side, earnings and distributions are threatened by a rising cost of capital and potential rental declines. Our view is that REITs may benefit from diversification, but will have to watch out for forex-driven revaluation risk.
Recommendations. We have a NEUTRAL rating on the sector. We generally think S-REITs are oversold. As capital appreciation-seekers abandon the sector en masse, we see a new ‘REIT as value’ story emerging. While we expect share price volatility to continue for these institutional favorites, value hunters have an opportunity to selectively pick up some good assets at what we think are really good valuations. We expect substantial declines in capital values and rentals in the office sector – but to a large extent unit prices already reflect these concerns. The impact of global events on the retail and industrial sectors has been slower to register in market consciousness. The industrial sector is quite leveraged as a whole and it may be too early to make the call that risks are fully priced in. Within our coverage universe, we have BUY ratings on Suntec REIT (fair value: S$0.90), CapitaMall Trust (fair value: S$1.94) and LMIR Trust (fair value: S$0.39).
Cambridge – Nomura
First look
Following its announcement of a new CEO, Cambridge announced after market close it had agreed to the terms of a 3-year syndicated loan to refinance all existing debt facilities. While the eventual cost is higher than our expectation, it is far lower than the market was pricing in prior to the announcement. This development should allay much of the refinancing concern over the S-REITs. Pending drawdown of this loan, we keep our DPU forecasts and other assumptions unchanged.
Refinancing at higher cost, but risk largely abated