Author: tfwee
FSL – BT
FSLT’s bold move to woo US investors
WITH shipping trusts caught between the devil and the deep blue sea trying to boost volume while fighting investor ignorance, First Ship Lease Trust (FSLT) has embarked on a brave overseas foray to quote American Depository Receipts (ADRs) on the US-based International OTCQX trading platform in a bid to raise interest and unit price.
It’s a bold move and – should it prove successful – one that may be emulated by the other two shipping trusts wallowing on the Singapore Exchange (SGX). The theory is that exposure to the more mature US market will improve liquidity and expand the base of unitholders over the long term, according to trustee-manager FSL Trust Management’s president and CEO Philip Clausius.
FSLT certainly needs help. The trust has never regained its IPO price of 98 US cents or about $1.50 at the prevailing exchange rate. It hit a low of $1 in January and is now languishing around $1.10. There is a large dividend yield gap – that is, its units are underpriced – between FSLT (13-14 per cent yield) and US peers such as Seaspan Corp and Danaos Corp (7-8 per cent yield), which the trust hopes to close as more investors take up its units.
‘US investors tend to have a better understanding of shipping stocks due to a critical mass of shipping companies listed there,’ UOB KayHian Research said in a note last week.
While maintaining that FSLT has no regrets about choosing to list on SGX, senior vice-president and CFO Cheong Chee Tham hopes to appeal to this better knowledge of US investors through the ADR quotation.
He is keen to reach out especially to institutional and boutique investors who, due to their mandates, may not have been able to invest directly in FSLT units on SGX. ‘By doing this ADR programme, we are exposing the company to this particular group of investors or others who may not have heard of us,’ he said.
Both analysts and FSLT stress that it’s important to get a critical mass of investors interested in shipping trusts for the sector to take off. And Mr Cheong certainly hopes the US move will jumpstart this process. It is hoped that with greater coverage, more shipping trusts will choose to list on SGX.
But this may be too simplistic. Both Seaspan and Danaos have market capitalisations of more than US$1 billion, which dwarfs FSLT’s $550 million. And whether notoriously parochial US investors take notice of a small Asian-listed shipping trust is debatable.
Asian investors have not been impressed so far. ‘Liquidity for the trusts is not there. If it’s a down-cycle, why do you want to be in shipping and if up-cycle, then you should be in something more leveraged,’ said an analyst.
The few research houses that cover the trust, such as DBS Research and UOB KayHian, have ‘buy’ calls with target prices of $1.65 and $1.61 respectively. But others point to the chicken-and-egg factors of lack of choice and liquidity for staying away. These were the same reasons given for the laggard performance of real estate investment trusts when they were first listed back in 2002. Yet over the past six years or so, they have taken off and are seen as a viable investment option.
Perhaps shipping trusts will slowly gain popularity in the same way. But more may need to be done to nudge the process along. Actively reaching out to foreign companies may be one idea. For example, Lloyd’s List reported that Indian shipping companies will need as much as US$18 billion by 2012 for fleet replacement and will need to find ways to raise cash. These companies could be encouraged to come here to set up shipping trusts to raise funds.
Shipping Trusts – OCBC
Ships and sustainability
Priced or mispriced? The three Singapore-listed shipping trusts – Pacific Shipping Trust (PST), Rickmers Maritime (RMT) and First Ship Lease Trust (FSLT) – are currently trading at very high distribution yields of about 12- 15%, or a staggering 10,000 basis point spread over the 10 yr Singapore government bond yield. While this particular asset class is new to Singapore, similar structures exist elsewhere. The trusts have historically traded at a 300-500 basis point premium over their US peers. While the headline yield is attractive, it is not a free lunch (in our view) as it comes hand in hand with some significant debt and equity requirements.
Business model relies on external financing… Vessels decline in value as they age and the shipping trusts address their need for fleet renewal either indirectly or directly by using their cash earnings to: (1) pay out the depreciated asset value as fair compensation for the loss in equity value (which increases the headline yield number but is not income), (2) partially repay debt and preserve net asset value or (3) retain and use towards buying new vessels. Debt-funded assets are also depreciating and the principal value must eventually be repaid (or refinanced). On top of this, all three trusts have ambitious growth plans. The cash earnings generated and retained by the trusts is not enough to fund these growth plans internally.
…in an uncertain world. Keeping in mind an aggressive payout policy (of varying degrees) and aggressive growth plans (across the board); we believe that the shipping trust model relies extensively on external financing. We believe that in today’s market conditions, there is limited investor (or even lender) appetite for structures that are reliant on debt and equity expansion to sustain their business and growth model. The weakening outlook for the shipping industry is a further complication. Based on the risk-reward quantum in play today, we downgrade our rating on the shipping trust sector from Overweight to NEUTRAL.
We peg our fair value to ‘floor value’. In the current climate, we prefer to continue to value the shipping trusts on a discounted free cash flow to equity basis. On this ‘floor value’ basis, we have a BUY rating on PST [fair value: US$0.41], a BUY on RMT [fair value: S$1.22], and a HOLD recommendation for FSLT [fair value: S$1.20]. Our top pick is RMT because of its relatively less aggressive payout policy and the credit facilities it already has in place to partially support its growth plans.
Reit – BT
Fitch Ratings has on Tuesday noted that the Australian Reit (A-Reit) reporting season has concluded with many A-Reits reporting significant declines in profitability due to a reassessment of the carrying values of underlying assets.
Current accounting standards require changes in asset values to flow through the profit & loss statement, resulting in a significant turnaround in A-Reit reported results.
Most A-Reits have revalued a significant proportion, if not all, properties within their portfolios, undertaken by either independent valuations or by directors’ valuations, and usually a combination of both.
As anticipated by the agency on 12 August 2008, Australian property capitalisation rates have begun to rise, and the impact of these rises has started to flow through to valuations of properties held by A-Reits.
While sales evidence remains low, valuers have begun to adjust their capitalisation rate expectations upwards and property valuations have begun to contract where rental rises are unable to offset the rises in capitalisation rates.
The recent increases in capitalisation rates have been generally at or below the lower end of the 50-150 basis point range predicted by the agency in August 2008.
This is a result of the market being at the early stages of a readjustment phase that will see further rises in capitalisation rates.
‘The property cycle has definitely peaked and Fitch expects further downward adjustments in A-Reit property values, particularly secondary properties, as the present credit crunch reaches out more broadly into the property markets, forcing a reappraisal of values,’ said David Carroll, Director with Fitch’s Reits team in Sydney.
With the global credit crunch affecting property markets and values, there has been a significant refocusing by the A-Reits to protect their current credit metrics.
The A-Reit reporting season has seen a re-evaluation of property values with some assets marked down, a lowering of growth expectations, reductions or deferments of developments, changes in distribution policies to pay distributions from cash earnings, changes in executive management and an increasing intent to sell non-core or secondary properties to focus on higher quality core properties that should better weather the changed market conditions.
This reporting season has also seen several A-Reits mark down carrying values of property related businesses purchased in markets outside Australia during a more expansionary market phase.
On a more positive note, Fitch is not seeing tenant defaults as yet and occupancy rates remain high in most Australian markets the agency monitors, allowing property generated cash flows to remain strong.
The recent interest rate cut by the Reserve Bank of Australia should assist debt coverage ratios to remain relatively stable, although this may be offset by rising debt margins as existing debt facilities mature and are rolled into new facilities that in most instances will see higher margins being charged.
Fitch will continue to monitor the credit metrics of the A-Reits sector and provide commentary and analysis of the sector as devel opments occur.
First Reit – BT
By LYNETTE KHOO
First REIT said on Monday it has signed an agreement to buy a healthcare logistics and distribution centre in Singapore for S$42 million.
This marks its first acquisition of a healthcare logistics and distribution centre and its fifth asset in Singapore, lifting its assets under management by 13 per cent to S$368 million.
The acquisition is expected to be completed three months after the temporary occupation permit (TOP) date, slated to be in July 2009.
Upon completion, First REIT will lease the centre back to the vendor Tech-Link Storage Engineering for six years at a commencement rental income of $3.23 million per annum with a built-in annual rental escalation and an option for Tech-Link to renew the lease for another seven years.
This is expected to provide an incremental annualised distribution per unit of S$0.33.
REITs – DMG
S-REITs: High But Not Dry, Cherry Picking The REITs (Overweight)
Respectable latest quarter operating performance, with robust DPU growth from the Office segment. Virtually all S-REITs have released their last quarter results. The sector as a whole chalked up a respectable 24.3% YoY and 6.4% QoQ gain in topline to S$777.0m, with NPI chugging along a similar direction, +24.6% YoY and +4.7% QoQ to S$566.4m. Sequentially, the Retail segment posted the highest growth in both topline and NPI, climbing 9.0% and 5.6% respectively. On a YoY comparison of the two metrics above, the Industrial, Office and Hospitality segments all notched a healthy 20 – 30% improvement. On the back of robust rental reversions, the Office segment was the quarter’s star performer, clocking a 46.1% YoY and 11.4% QoQ increase in DPU, outperforming that of the total DPU growth for the entire S-REITs sector, which measured a 23.0% YoY and 4.7% QoQ improvement.
Growth from within, earnings momentum to roll over into 2H08 and 2009. As a result of lease agreements which are typically signed for two to three years, most S-REITs should have already locked in their earnings at least until 2H08 and 2009, with some even beyond that, from our view. Coupled with 1H08 renewed leases contracted at significantly higher rates, we reckon that earnings momentum should continue into the next 1.5 years. For investors looking into high DPU growth potential for the current year, some of the REITs to watch out for include CDLHT (+24.7%) and MI-REIT (+21.0%). As for the subsequent year, two REITs which have the most DPU upside potential are CCT (+25.6%) and Suntec REIT (20.7%). Essentially, the core component of growth would be organic in nature.
Improved debt profiles and manageable financing costs for now, but refinancing concerns present themselves beyond 2008. The continued credit crunch notwithstanding, most S-REITs have managed to refinance their respective debts, as well as prolonging their debt expiry profiles. Aside from AiTrust, Fortune REIT and LMRT, we estimate that all-in-cost of financing for the remaining 17 S-REITs range from 2.5 – 4.0%, which is relatively healthy, from our angle. Aside from softening short-term interest rates, we believe this is also helped by the REIT managers’ prudent capital management skills. Additionally, the ability for S-REITs’ operating earnings to service their debt obligations remains strong, with virtually all of them having an interest coverage ratio of over 3X. However, as capital markets should continue to remain tight in 2009, or at least in 1H09, this spells heightened difficulties for REITs which need to refinance a major amount of debts due in 2009, including CDLHT, Allco REIT, MI-REIT, CIT, CCT and CMT.
Remain OVERWEIGHT on REITs sector, Suntec REIT as top pick. With unrelenting headwinds facing the property developers (-35.6% YTD), we continue to place our faith in SREITs for their earnings visibility, stable cash flows and defensive nature. Valuations have become more attractive, with the sector trading at a P/B of 0.82x. Further, the recent sector-wide correction of share prices and softening interest rates have led to S-REITs trading at 7.3%, representing a premium of 420 bps over 3.1% of 10-yr bonds. However, we believe that not all is nice and dowdy within the S-REITs space, and now is the ripe time to cherry pick. We prefer SREITs with robust organic boosters and resilient share price performances, namely Suntec REIT (Target price of S$1.87). For more risk-averse investors, we recommend Cambridge Industrial Trust (Target Price of S$0.79), which possesses long average lease tenures with built-in stepped up rentals.
Link – Table