Author: tfwee
KREIT – DBS
Pricing in cloudy sector outlook
Story: K-REIT reported a 34% y-o-y jump in 3Q08 revenue to S$13.9m, led by higher rental rates and occupancies. However, NPI grew by a lower 27% to S$9.5m due to an increase in expense ratio to 31.2% arising from higher property taxes. Distributable income grew 35% to S$15.2m, translating into 2.34cts DPU.
Point: The better performance was the result of organic growth from positive rental reversion, as well as inclusion of contributions from ORQ. Its portfolio occupancy remained strong at 99.4%, while office rents were stable in the quarter. An estimated 1.5% of portfolio NLA was renewed during the quarter, and the lag effect between new and previous rates boosted average rents by 0.8% qo-q to S$7.43psf/mth. Looking ahead, anticipated slower economic growth and the worsening global financial crisis will dampen demand for office space and rental growth.
Coupled with an increasing supply of new office space coming onstream over the next two years, rental rates and capital values are likely to soften. This will likely moderate DPU growth going forward. Meanwhile, refinancing concerns have abated after K-REIT managed to secure a revolving loan facility that extended its loan maturity profile to 1H2011.
Relevance: Like other office REITs, K-REIT’s share price tumbled amid concerns over the office sector. Current valuations are inexpensive at 10.6% FY09F DPU yield and implied asset value of S$870psf vs its Dec 07 valuation of S$1,707psf. However, it lacks a near-term catalyst given anticipated negative newsflow on the office sector. Our RNAV of $1.16 has factored in a 35% decline in office rents over this cycle. Maintain Hold recommendation with a price target of S$0.93, based on 20% discount to RNAV.
Shipping Trusts – DBS
Shipping woes spreading to trusts
Shipping industry concerns bearing down on share prices. Concerns on all three shipping trusts – First Ship Lease, Pacific Shipping Trust and Rickmers Maritime – have been on : (a) stability of revenues, cashflows and DPUs; (b) rising counterparty risks; (c) availability of credit lines; and (d) fast declining asset values.
Revenue sustainability. Leases are locked in. FSLT’s has an average lease term of 9 years with the earliest lease coming up for renewal in 2014. For PST, the average lease term is 7 years, with the earliest coming up for renewal in 2013. In the case of RMT, the average lease term is 7 years, with the earliest lease expiring in 2012.
Counterparty risk is low for now. RMT currently operates twelve container vessels leased out to blue-chip charterers – Italia Maritima, CMA CGM, AP Moeller Maersk, Hanjin Shipping, Mitsui OSK. For PST, of the 11 vessels it owns and operates, 10 are leased back to Sponsor PIL while 1 is to CSAV. FSLT has 8 charterers. So far, we gather from management of all three shipping trusts that all payments have been prompt. However, we are aware that there is room for renegotiation (down) of leases for a short period should any of the lessees face headwinds from slowing trade. We also understand any loss in revenue will have to be made good for when the lessee is able to and/or when the cycle turns.
Financing/Credit lines intact for PST and FSLT. For FLST, the earliest debt facility comes up for refinancing in Apr 2012. However, it will need to amortise US$5m per quarter from Sep 2010 to Apr 2012. In PST’s case all loans are on an amortising basis. For RMT, it will need to repay US$130m, a short term debt facility in 1Q10. Of the 3, both PST and FSLT have noncommitted capex. RMT has an aggressive capex program of US$1.3bn to acquire 13 (two have been delivered). Out of this, US$712m of funding requirements for vessel deliveries in FY10 have yet to be finalized.
Best pick in this environment – FSLT. Our preferred pick in this sector is FSLT. No uncommitted capex program with no refinancing of any loan until 2012. Maintain Buy for FSLT with a TP of S$0.97. We downgrade PST (Hold, TP S$0.29) and RMT (Hold, TP S$0.63).
AREIT – CIMB
Bulk of refinancing secured
• Performance on track. A-REIT’s 2QFY09 results were in line with Street and our expectations. DPU of 4.01cts for the quarter grew 14.2% yoy, forming 26% of our forecast of 15.4cts for FY09. Gross revenue of S$97.3m was up 21.3% yoy due to continued strong rental reversions from Business and Science Park and Hi-Tech segments, as well as additional revenue contribution from completed acquisitions. These include 8 Loyang Way 1 (SKP) in May, 31 International Business Park (Creative) in June and completion of Pioneer Hub BTS in August. 1H09 DPU of 7.9cts was also in line with expectations, forming 51.3% of our full-year estimate.
• Refinancing for bulk of FY10-11 debts secured. The management announced that it had secured a $200m bilateral loan from its relationship bank that could be used for its refinancing of its nearest major debt of S$300m CMBS due in Aug 09. Tenure of the loan is three years. Borrowing spreads was attractive at under 120bps. Additionally, management also expects to refinance its term loan facility of S$300m due in March 2010 with its existing relationship bank for a tenure of two years. All-in cost of A-REIT’s total debt of S$1.9bn as at 30 Sep 08 stood at 3.25%, up marginally from 3.16% from the last quarter. Asset leverage stood at 41.4% in
the same period.
• New S$25.6m BTS at Airport Logistics Park of Singapore (ALPS). The management announced that it has secured a new BTS project from Expeditors Singapore Pte Ltd. A-REIT will develop a logistics facility at the ALPS for the tenant for S$25.6m. The 11,430sqm facility is expected to complete by Dec 09 and will be leased to Expeditors for a period of 5 + 5 years. Assuming a net development yield of 9%, we estimate a positive increase of 0.3% to the DPU with this addition.
• Maintain Outperform, increased target price of S$2.17. We add to our model the new BTS development and increase our earlier revenue contribution assumptions from FY09 acquisitions to 60% up from 40% to reflect more precise timing of contribution. Our DPU estimates for FY09-11 increases by 0.3-2.1% Our DDMderived target price (discount 8.7%) increases marginally to S$2.17 from S$2.16. Maintain Outperform.
AREIT – DBS
Resilient even in turbulent times
Story: Ascendas REIT (AREIT) released 2Q08 results that were within expectations. Gross revenues and NPI grew 21% yoy to S$97.3m and 72.6m respectively. Main contributors were from (i) positive rental reversions from expiring leases and (ii) additional rental income from various 3rd party completed acquisitions and development projects; HansaPoint@CBP which received TOP in Jan’08. Distributable income also increased 16% to $53.3m, translating to a DPU of 4.01cts.
Point: Moving forward, we expect outlook to turn challenging on the back of potential slowdown in Singapore’s economy, leading to softening demand for industrial space. While we expect some moderation in rents and occupancy levels moving forward, AREIT should still be able to ride out these turbulent times given that (i) long lease expiry portfolio of 5.5 years, of which 49% are Sale-Lease Back Buildings that were mostly signed on as long term leases, and (ii) prudent capital management that should limit the impact of rising interest rates on DPU. As such, we are adjusting our rental & occupancy rates (-5 to 10%) and interest rates assumptions (+50bps). Imputing the above changes, our DPU forecast for FY09F-FY11F are to 15.6 Scts (0%), 15.0 Scts (-10.5%)and 15.1 Scts (new estimate) respectively.
Relevance: AREIT currently offers at an attractive DPU yield of c.10% over FY09 – FY11, backed by quality properties located in major industrial hubs in Singapore. Maintain BUY, TP$2.10 based on parity to our RNAV estimate.
K-Reit – SGX
K-REIT Asia Achieves Higher YTD September 2008 Distribution Per Unit
- Distributable Income increases by 173.8% year-on-year and outperforms forecast by 13.6% due to strong rental reversions and additional contribution from One Raffles Quay.
- Net property income increases by 31.1% year-on-year to $27.8 million.
- Portfolio achieves 99.4% committed occupancy as at 30 September 2008.
K-REIT Asia Management Ltd, the manager of K-REIT Asia, is pleased to announce that K-REIT Asia achieved a distributable income of $40.8 million for the period from 1 January to 30 September 2008 (“YTD September 2008”), up 173.8% from that for the same period in 2007. This was due mainly to higher rental rates achieved for new and renewed leases and income contribution from K-REIT Asia’s one-third interest in One Raffles Quay Pte Ltd (“ORQPL”).
Higher gross rental income from K-REIT Asia’s initial four properties, namely Keppel Towers, GE Tower, Prudential Tower and Bugis Junction Towers, drove up net property income by 31.1% year-on-year to $27.8 million for YTD September 2008.
On the back of the rise in distributable income, 3Q 2008 DPU amounted to 2.34 cents, resulting in a YTD September 2008 DPU of 6.28 cents.
Challenging Market Conditions Ahead
Against the backdrop of heightened uncertainties in the financial markets, average prime rents and average Grade A rents remained unchanged at $16.10 psf and $18.80 psf respectively in 3Q 2008, as reported by CB Richard Ellis (“CBRE”). During the quarter, the core CBD vacancy rate remained low at 3.8%.
The average monthly gross rent of K-REIT Asia’s portfolio increased by 67.7% year-on-year to $7.43 psf in September 2008, driven by positive rental reversions and contributions from ORQPL. Excluding ORQPL, average gross rent in September 2008 was $5.99 psf for the initial properties. K-REIT Asia achieved 99.4% committed occupancy as at 30 September 2008.
Despite testing market conditions ahead, the long-term fundamentals for Singapore remain intact, as it transforms into a global city, supporting office demand. Singapore continues to be an attractive business destination in Asia as it diversifies beyond being an international financial hub and establishes multi-hubs in other areas such as biomedical, pharmaceutical, air transport, telecommunications and education.
Capital Management
K-REIT Asia has no debt refinancing requirements until 2011. Its aggregate leverage remains low at 27.6% as at end-September 2008.
Going Forward
According to advance estimates from the Ministry of Trade and Industry, Singapore’s real GDP declined by 0.5% in 3Q 2008 from 2.3% growth in 2Q 2008, due mainly to a contraction in the manufacturing industry, which accounts for a quarter of the economy. Given the worsening of the global financial crisis, the Singapore government has revised its full-year growth forecast to about 3% from 4 – 5%.
Despite the economic slowdown, the Manager of K-REIT Asia expects to achieve its forecast distribution of 7.53 cents per unit or 10.09 cents per unit (based on weighted average number of units) for the financial year ending 31 December 2008, as shown in the circular dated 9 April 2008.
The current volatile market conditions may present investment opportunities for quality assets. The Manager is monitoring the market and continuing its efforts to seek out such opportunities selectively.