Author: tfwee
AREIT – CIMB
Sailing the storm
• Maintain Outperform. We expect A-REIT’s income streams to come from its current development projects as well as built-in rental increases on its long leases. Additionally, management had been able to secure refinancing for S$500m of debt on a long-term basis almost one year before debt maturity on attractive rates and without the need to pledge assets or rental streams. This speaks volumes about the strength of its banking relationships. Reducing secured borrowings will afford AREIT more financial flexibility going forward.
• Resilient demand and diversified tenant risk. We expect new demand for industrial space to soften in tandem with an expected economic downturn. Nonetheless, existing demand is expected to stay resilient, with a lagged effect of about 18 months between a business slowdown and actual cutbacks in space. AREIT also has minimal tenant concentration risk with a tenant base of 860 as compared with MLT (224) and CIT (43).
• Unchanged DDM target price of S$2.17 (discount rate 8.7%). We continue to like A-REIT for its relatively resilient income streams anchored by long lease tenures, and leadership (through parent Ascendas) of the built-to-suit market. A-REIT remains the best proxy for business and science park space, the highest-quality segment of industrial space in Singapore. Maintain Outperform.
REITs – CIMB
Ripe for the picking
• Looking cheaper than ever. YTD, the Singapore REIT index has fallen 56% (vs. the STI’s 48% decline), driven by fears of REITs’ inability to secure refinancing, and falling rents and occupancy in an economic downturn. Average P/BV for the S-REIT sector has fallen to 0.51 while average yields have doubled to 14% in the last two months.
• REITs with strong credit and risk metrics get gold. Despite the credit crunch, there are still REITs that exhibit strong credit and diversified risk metrics. The presence of strong sponsors and government-linked sponsors is advantageous at this juncture. To these, banks are not only willing to lend but lend on more favourable terms. Some REITs have even managed to move away from borrowings that require pledges on their assets or rental income, thereby retaining financial flexibility.
• Asset devaluation risks small, financing ability not impaired yet. Most of the REITS are still within safe gearing levels. This implies a low risk of breaching impairment levels and could mean debt funding would still be available to them.
• Look for efficiency. In the midst of the credit crunch, acquisitions and asset enhancements requiring significant outlay would be difficult, particularly in 2009. More attention should be focused on the operational efficiency of the REIT manager in pushing every dollar of rent from the top down to the distribution level. CDLHT stands out as an efficient REIT manager with a remarkably close match between its revenue growth (222%) and DPU growth (211%), in our comparison.
• Overweight on S-REITs; top picks are PLife and CCT. With the strong selldown of REITs, we see an opportune time to accumulate positions. We maintain our Outperform ratings on A-REIT, CIT, FCT and PLIfe. We upgrade CCT and MLT to Outperform from Underperform and Neutral respectively. We maintain our Underperform on ART but downgrade CDLHT to Underperform from Neutral. While PLife remains our top pick for its limited earnings downside and strong financial flexibility, CCT emerges as a deep-value pick with the lowest P/BV of 0.28x among REITs under our coverage, and below the S-REIT average of 0.5x. We believe that all negatives have been priced in and forward yields at 12.2% (CY09) look attractive.
Link – Table
PLife – DBS
On long term financing post 3Q
Comment on Results
3Q08 results within expectations. Net property income ended at S$12.47m with gross revenue at S$13.35m. While property expense to gross revenue for its Singapore Portfolio reduced by 1% from 1Q08 to 3Q08, the REIT’s overall net property margins decreased slightly to 93.4% (from 93.6% in 1Q08) due to its Japanese properties. 9M NPI now forms 73.6% of our full year forecasts. A DPU of 1.71 cents was announced and to be paid on 5 Dec (book closure – 12 Nov).
Refinanced all short-term debt pursuant to 3Q. As of 3Q08, PREIT still has short-term debt of S$201.9m in its balance sheet. However, pursuant to that, management has replaced all its S$201.9m shortterm facilities into 3-year long-term facilities, which has been committed and drawn down in Oct/Nov. Weighted average costs of funds for PREIT stands at around 2.85%. They have also entered into a interest rate swap to secure 100% interest rate fixing and a long term 5 year JPY/SGD forward contract to hedge 100% of net cash flow from its Japanese investments.
Recommendation
On track to meet our FY08F forecasts. On 9 Oct, it was announced that its Singapore Hospital minimum rental rate based on the 1%+CPI formula will be revised upward by 6.25% for the period from 23 Aug 08 to 22 Aug 09. In 4Q, with a higher minimum guaranteed rental for its Singapore hospitals and full contribution from its 7 recently acquired Japanese nursing homes, we expect PREIT to meet our FY08F forecasts and DPU estimates of 6.8cents.
Maintain Buy, TP: S$1.19. We adjust our TP slightly to S$1.19, based on DCF as we factor in a higher WACC (WACC 6.7%, terminal growth 1%) as a result of a higher adjusted beta – due to recent increased share price volatility. We view PREIT as a defensive counter, providing stable gross rental revenue due to its Singapore hospital rental structure (higher of hospital revenue or 1%+CPI%), replacement of short-term debt by longer-term facilities, and the relatively resilient healthcare sector. At current price, dividend yield stands at around 9.0% and 9.7% for FY08F and FY09F.
PLife – BT
P-Reit remains optimistic on outlook
AMID challenging market conditions, the manager of Parkway Life Reit (P-Reit) remains optimistic about its outlook and has already repositioned its finances so that it can be more flexible.
The healthcare property trust yesterday reported a third-quarter income available for distribution of $10.3 million, boosted by higher rental rates and income from recently acquired properties.
The performance brings the distribution per unit (DPU) for the three months ended September to 1.71 cents, or 0.15 cents higher than its earlier forecast of 1.56 cents.
In the same quarter last year, income available for distribution was $4.1 million. The huge disparity was because the healthcare property trust was only listed midway through Q3 last year.
‘Despite challenging market conditions, we remain optimistic about our medium and long-term prospects,’ said Justine Wingrove, CEO of Parkway Trust Management, the Reit’s manager. ‘This is due to several factors, namely, our rental lease structures that protect against downside risk while providing for good future rental growth, our low gearing, a 100 per cent occupancy across the portfolio and investment grade credit rating of BBB+.’
P-Reit, which holds the Mount Elizabeth, Gleneagles and East Shore hospitals in its Singapore portfolio, posted gross revenue of $13.3 million. It was higher than the forecast of $11.5 million due to a variable rent component pegged to the Consumer Price Index (CPI) which pushed up the minimum rental rates. After subtracting expenses of $877,000, the net property income came to about $12.5 million.
Contribution from its Japan portfolio, including nursing homes and pharmaceutical facilities, came to $1.1 million.
The quarter also saw the mainboard-listed trust diversify its credit facilities. It entered into three-year facilities worth $100.6 million in September. The facility was fully drawn last month to partially refinance short-term debt. A separate three-year revolving credit facility of $100 million has also been secured.
‘By replacing short-term credit facilities with longer term facilities, P-Reit faces no refinancing risk,’ explained Ms Wingrove. ‘In terms of future growth, adequate and diversified financing sources that have been secured will also provide us with the flexibility and acquisitive power to support our future expansion.’
P-Reit also has in place a $500 million multi-currency medium-term note programme, which may be used to fund future acquisitions. Its gearing stands at 19.7 per cent.
The trust has an asset portfolio of $1 billion. For the first nine months of this year, total distributable income came to $30.1 million, on the back of $37.7 million in gross revenue. DPU so far is five cents.
Shares of P-Reit slipped two cents yesterday to close at 76 cents.
PLife – CIMB
There’s money in the bag
• Performance on track. 3Q08 results were in line with Street and our expectations. DPU of 1.71cts forms 26% of our forecast of 6.57cts for FY08. Gross revenue of S$13.3m was up 6.9% qoq on contributions from Japanese assets acquired earlier in the year. YTD DPU of 5.0cts forms 76.1% of our full-year estimate, in line.
• Borrowings refinanced on 3-year terms, cost of debt fixed. In October, management secured S$200.6m from two 3-year loan facilities that would fully refinance 99% of its total debt of S$202m previously drawn on short-term facilities. The all-in cost of debt of 2.85% is hedged for three years. Over and above current borrowings, management has in place more than S$100m of long-term facilities and S$250m of short-term facilities that could provide ammunition for potential acquisitions, when opportunities arise. Separately, net cash contributions from the Japanese assets are hedged for five years, mitigating risks of forex fluctuations.
• Changes in assumptions. As 99% of the total debt has been fixed for three years, we see limited risk for interest costs and lower our cost of debt assumption to 3.2% (from 4%) for FY09 onwards. YTD, PLife has fulfilled 70% of our acquisition forecast of S$250m for FY08. Although the company has in place funds to fulfil our acquisition target for the year, we take a conservative view and remove our acquisition assumptions for FY08-09.
• Maintain Outperform; lowered target price to S$1.30 from S$1.46. Our DPU estimates for FY08-9 increase by 9-12% on lower interest-rate assumptions, while FY10 estimate declines by 12% on the removal of acquisition assumptions. Our DDM-derived target price (discount rate 8.1%) drops to S$1.30 from S$1.46. It is laudable that management had been able to secure long-term facilities at a low cost of debt particularly on an unsecured basis. We continue to like PLife for its attractive forward yields of more than 10% with limited downside risk to earnings. Maintain Outperform.