Author: tfwee
AREIT – BT
Ascendas-Reit Q2 net rises 14.8% to $53.3m on additional rental income
ASCENDAS Real Estate Investment Trust (A-Reit) yesterday reported net distributable income of $53.3 million for its second quarter ended Sept 30, 2008. This is 14.8 per cent higher than a year ago.
Fuelled mainly by additional rental income from completed acquisitions and development projects, gross revenue rose 21.3 per cent year-on-year to $97.3 million.
Distributable income per unit (DPU) was 4.01 cents, up 14.2 per cent from the same period last year. Based on the six months to Sept 30, annualised DPU stands at 15.8 cents. This translates to an annualised yield of 8.4 per cent based on the $1.87 closing price of units on Sept 30.
The ‘sustainable financial results’ were achieved amid a ‘turbulent global financial market and a slowing economy,’ said A-Reit manager Ascendas Funds Management (S) chief executive Tan Ser Ping.
First-half gross revenue, net distributable income and DPU all increased from a year earlier.
With credit concerns growing in the market, A-Reit said that it remains committed to prudent capital management.
For instance, it has entered into fixed-rate hedging for 76.7 per cent of its debt for the next 3.93 years at a weighted average cost of 3.25 per cent. It is also getting a $1 billion medium term note programme ready in November to diversify funding sources.
For A-Reit’s portfolio of 88 properties with a total book value of around $4.5 billion, the overall occupancy rate was 98 per cent at Sept 30.
As current average passing rents within the the portfolio remain lower than market spot rents, A-Reit expects to see positive rental reversion for most leases due for renewal in the rest of the financial year.
Barring any further deterioration in the external economic environment, the manager believes A-Reit is well-placed to deliver a DPU for the current financial year ‘in line with its recent performance’.
A-Reit’s unit price ended 16 cents lower at $1.51 yesterday.
Shipping Trusts – OCBC
Sharp sell-off across sector
Pessimism rules the seas. We attended Marine Money’s Asia conference earlier this week where the mood of both speakers and participants was overwhelmingly pessimistic. Conversation was focused on two key themes:
1) consequences of the current credit crisis on ship and trade finance; and
2) unfavorable industry outlooks, especially for the container and dry bulk sub-sectors.
Sharp sell-off across trusts. First Ship Lease Trust (FSLT); Pacific Shipping Trust (PST); and Rickmers Maritime (RMT) were all in attendance. ince our last sector report dated Sept 10, the shipping trusts have seen a sharp sell-off in share prices (FSLT down 61%, RMT down 58%, and PST down 37%). We attribute the decline to both transient fears: today’s abnormal credit conditions which have paralyzed equity markets; and to more enduring concerns: the trusts’ extensive use of leverage and overall industry concerns.
Beware the fine print. FSLT announced last week that its lenders had invoked the market disruption clause (MDC) as the reference rate on the loans, the US$ LIBOR, did not accurately reflect the lenders’ actual cost of funds. With increased interest costs, FSLT reduced its DPU guidance for 4Q08 by 1%. PST and RMT told us that some version of the MDC also exists in their loan documents but it has not been invoked as of now. The MDC is a standard clause in almost all loan documents. In our view, the next bit of fine print to watch is loan-to-value.
Multiple layers of risks. There is a very real risk of a large depreciation in underlying asset and rental values. Falling asset values can breach a loanto- market value covenant, triggering a technical default (and potentially distressed sales). We note that PST is the only shipping trust without a version of this clause in its loan documents. Meanwhile, counterparty risk is also becoming more of a concern – a charterer default or rate renegotiation could stress cash flows, endangering distributions or debt repayments. Committed capex is another possible stressor.
The recent sell-off is an overcorrection (in our view) but market logic is trumping everything else at present and we believe we could see further value destruction. We maintain our BUY ratings on PST and RMT, and our HOLD rating on FSLT but place all our fair value estimates under review as we work in latest developments. We believe the trusts will continue to be barraged by negative news flow on the shipping industry.
SREIT – BT
Falling rents may take shine off S-Reits
SINGAPORE-LISTED real estate investment trusts, or S-Reits, are now finding favour with analysts.
UOB Kay Hian, for example, upgraded the S-Reit sector from market weight to overweight earlier this month due to the ‘overwhelmingly attractive’ yield spread. JPMorgan similarly said in a recent report that the Reit model is not broken. The research firm has ‘buy’ calls on seven S-Reits. Analysts from other research firms have also been recently issuing ‘buy’ calls on several Reits here.
This is quite a reversal from a year ago, when the S-Reit sector was considered unattractive. Many Reits were facing concerns about their ability to refinance debt amid the credit crunch. Acquisitions, which had been fuelling growth, were also becoming harder to come by.
But now, some of these Reits are seen to be sources of stable, visible and recurrent income in uncertain times. Yields are also at historic highs as stock prices continue their downtrend.
Analysts are now saying that debt refinancing will not be an issue for all Reits. For one, strong sponsors could act as lenders of last resort for Reits and prevent any fire sale of assets. Retail and industrial Reits are the most exposed to refinancing risk. So investors are encouraged to buy those Reits with strong sponsors and avoid certain sectors.
But the one thing that has been largely overlooked in most analyses is the impact of falling rents.
Rents will fall across most sectors – that much is certain. Office trusts, such as K-Reit Asia and CapitaCommercial Trust, will be among the first to be hit.
The massive upheaval in the banking system means that financial institutions are unlikely to continue with any expansion plans yet to be executed. Other businesses will have reduced access to bank credit and scale back expansion plans. With a reduced appetite for space and looming new office supply coming onstream in 2010, landlords are losing their bargaining power and rents will inevitably fall.
Kim Eng Research, for one, expects prime Grade A office rents to fall by up to 15 per cent by the end of 2009.
Rentals for retail Reits will also fall. Already, there are signs from retailers in Reit properties that they cannot afford the high rents being charged at the moment. Retail spot rents are being hit by slowing economic growth and falling visitor arrivals amid increasing supply. Goldman Sachs yesterday said that it expects retail rental rates to fall 15 per cent between now and 2010.
Reits here typically renew their leases on a revolving basis, with a certain fraction of tenants re-signing every year. So those tenants who signed three-year leases last year could be stuck forking out high rentals for another year or two. But tenants renewing their leases soon will ask for lower rents. In a couple of years – say, by 2010 – the bulk of a Reit’s tenants could be paying lower rents, leading to lower rental incomes for S-Reits. Their yields are not likely to look so attractive then.
Analysts are now beginning to factor falling rents into their calculations. Goldman Sachs yesterday downgraded K-Reit from ‘buy’ to ‘neutral’. ‘We have been positive on K-Reit, given its attractive pricing relative to book value and our expectation that organic growth for the next two years at least will still find good support from positive rental reversions,’ said the firm in a report. ‘However, we underestimated the focus by investors on the direction of spot rents and were not sufficiently conservative in terms of how far Singapore office rents could decline from their peak.’
However, even with falling rents factored in, S-Reits can be attractive, some maintain. After imposing worst-case operating assumptions for each property sub-segment, including a blowout of financing costs and accelerating the rental reversions to the entire portfolio, Daiwa Institute of Research’s David Lum still estimates that all S-Reits could deliver recurrent worst-case yields of at least 6 per cent per year.
But whether making ‘buy’ or ‘sell’ calls for S-Reits, it’s important to factor in the impact that falling rents will have on S-Reit rental incomes over the next 2-3 years. Refinancing is not the only concern.
AREIT – CIMB
Holding fort
• Two built-to-suit (BTS) projects completed and near 100% occupancy. Two of A-REIT’s BTS development projects have been completed and are nearly fully taken up. Indicative average gross rents suggest net yields of 9%, in line with our initial estimate.
• Changes in assumptions. As the global financial turmoil plays out, we expect slowing global and domestic economies to result in declining occupancy rates at AREIT’s multi-tenanted buildings. We have also cut our acquisition assumptions, and increase the cost of debt used in our model for FY10-11.
• Downgrading DPU forecasts; target price lowered to S$2.16 from S$2.60. Our FY09 DPU forecast remains unchanged while our FY10-11 forecasts have been lowered by 7-15%, reflecting our reduced earnings estimates. Following our adjustments, we have a new DDM-based target price of S$2.16 (discount 8.7%). This represents a total yield of 38.5% from a 9.2% forward yield and potential price upside of 29.3%. We remain convinced that with its spread-out debt maturity, optimal asset leverage, “A3“ credit rating, and strong sponsor in Ascendas, A-REIT will be able to access funds for refinancing. We continue to like its quality assets,
diversified tenant base and visible earnings. Maintain Outperform.
PLife – BT
Parkway Life Reit raises rentals in line with CPI
PARKWAY Life Reit’s manager says it has raised the rent at Singapore hospitals under its portfolio by some 6.25 per cent, in line with the rise of the consumer price index (CPI).
Parkway Trust Management, manager of the Reit, said the revised rates will be effective from Aug 23 this year to Aug 22 next.
The new rental rates are based on the CPI+1 per cent formula. ‘Based on the information obtained from the Singapore Department of Statistics, the CPI for the first year of the term has been agreed at 5.25 per cent,’ Parkway Trust Management said in a statement.
About 80 per cent of Parkway Life Reit’s revenues come from its Singapore hospitals, consisting of Mount Elizabeth Hospital, Gleneagles Hospital, East Shore Hospital as well as 40 medical suites in Mount Elizabeth Medical Centre and the Gleneagles Medical Centre.
‘With the Singapore hospital properties as the main contributor to the performance of PREIT, the long leases and annual rent review pegged to CPI+1 per cent ensure there is downside protection and that our unit holders continue to enjoy stable and sustainable returns,’ said Justine Wingrove, chief executive officer of Parkway Trust Management.
From Aug 23 last year, the day it was listed, to June 30 this year, total gross rental revenue from the Singapore hospital properties in its portfolio was $40.75 million.
Apart from the Singapore hospitals, Parkway Life Reit also owns nine nursing homes and a pharmaceutical products distributing and manufacturing facility, all in Japan. It continues to eye assets in China, India, Japan, Malaysia, Singapore, Australia and Thailand for acquisition.
On Sept 30, the Reit’s portfolio size stood at $1 billion. Shares of Parkway Life Reit ended down 2 cents at 90 cents yesterday.