Author: tfwee
REITs – DBS
Examining trough valuations
Going for high risk aversion. We re-iterate our view that the S-reit sector has been de-rated sufficiently for the prospects of slowing earnings growth momentum and possibility of capital value write-downs as well as refinancing concerns. The sector is trading at 7.6% FY08 yield or a 450bps above the current Singapore 10-year bond yield and a hefty 3.7% pt ahead of our projected peak bond yield of 3.9%. The 0.94x P/RNAV already reflects an average 20% cut in capital values across all property sub-segments. S-reits are also trading between 3.5-12% implied cap rates, as investors priced in a bear case scenario.
Office and hospitality sectors may lag: Granted that at this period of higher investor risk aversion, volatile capital value outlook and tight credit conditions, valuations are unlikely to approach previous highs in the short term, we believe that at the current level, much of the anticipated risks are factored in the S-reits lowered valuations. In terms of the various segments, the office and hospitality space poses the most downside risk given the former’s strong correlation to GDP growth and skewed supply/demand dynamics as well as limited earnings visibility in the short-stay accommodation segment.
Go for defensive: While we believe DCF-based measurements are still valid to give investors a longer term total return picture, we are ascribing a discount to these values to derive our price targets given current uncertain environment. Our strategy would be to prefer the more defensive S-reits, particularly those in the healthcare, industrial and retail space. Our top picks are Parkway Life Reit, which offers a highly defensive earnings model with minimal earnings downside risks and exposure into the growing aging population. While stock liquidity may be an issue, we believe this can likely be addressed progressively in the long term. Amongst the larger cap names, we maintain our buy rating on A-reit for its long lease expiry profile and CMT, Suntec and FCT as a suburban retail players with a diversified tenant base. Share prices of ART had been bashed down significantly and at the present level, we see value emerging given its steep discount to RNAVs.
Parkway Life Reit (PREIT SP, TP $1.35)
ParkwayLife REIT (PREIT) offers an exposure to the region’s growing need for healthcare facilities due to an aging population. It is currently trading at 0.8x of book NAV and offers a net dividend yield of 6.4% for FY08F and 6.8% for FY09F. Earnings downside risk is negligible thanks to its revenue model that is based on the higher of i) base rental of S$30m plus 3.8% of the adjusted hospital revenue; or, (ii) preceding year’s rental multiplied by [1+(1%+CPI of preceding year)]. Our DCF-derived target price of S$1.35 (6.3% WACC, 1% terminal growth) offers potential upside of 29%. In addition, refinancing risk is minimal with a low gearing of
10.2%. Maintain Buy.
CapitaMall Trust (CT SP, TP $2.96)
CMT remains one of our key picks due to its strong operational history with a proven expertise in optimizing asset yields through their various AEI activities. Moving forward, catalyst for growth will derive from I) rental reversion from the expiry of 69% of its portfolio income over FY09-10, ii) planned AEI activities amounting to $288m, largely from SSC and JEC, should boost bottomline in the medium term and iii) The Atrium purchase, which is pending completion, should grow NPI further when plans to re-position the asset is completed in 2010.
Ascendas REIT (AREIT SP, TP $2.33)
We like AREIT for its i) quality portfolio of industrial assets, which are enjoying occupancies in excess of 98%, ii) business and science parks exposure that is expected to remain robust on the back of over-spilling demand from office space crunch in the CBD. This segment makes up 25% of its total portfolio. iii) proven development capability which will are higher yielding compared to asset purchases. In this aspect, AREIT has S$309m worth of development assets in the pipeline. Iii) financial flexibility, AREIT management has adopted a prudent capital management strategy which is reflected in its gearing of 38.2%.
Frasers Centerpoint Trust (FCT SP, TP S$1.26)
Frasers Centerpoint Trust (FCT) offers exposure to Singapore’s suburban retail sector through its 3 sub-urban retail malls located in major population catchment areas in Singapore. Earnings should remain resilient given that it derives mainly from non-discretionary spending. In terms of portfolio growth, acquisition of Northpoint II scheduled to TOP by by 08/early 09 kickstarts its portfolio growth plans with other properties such as Yew Tee Mall and Bedok Mall to follow suit in 1H09 and 2010/11 respectively. FCT is expected to tap debt and capital markets for these purchases.
Suntec Reit (SUN SP, TP $1.55)
Suntec Reit offers investors exposure to a more defensive business model of office and retail assets through its portfolio of 1.9msf NLA. DPU growth over the next 2 years is derived from office lease reversions and higher retail rents. Plans to enhance Park Mall and add 67000sf of GFA could provide further upside to our projections in the medium term. Refinancing concerns have been largely allayed by putting in place a $420m club loan. Our price target offers total return of 15%.
Ascott Residence Trust (ART SP, TP S$0.94)
Ascott Residence Trust (ART), as the first Serviced Residence REIT, offers exposure to the Asean booming serviced residence industry. We believe ART presents the least earnings risks amongst the hospitality peers with a regional portfolio exposure that reduces country specific risks. In addition, its average portfolio lease of 8 months should delay an impact of a downside in spot rates. In addition, potential acquisition
Link – Table
MP REIT – BT
Moody’s downgrades MP Reit’s ratings
Moody’s Investor Services has on Monday downgraded the corporate family and unsecured ratings of Macquarie Prime Reit (MP Reit) to Baa2 and Baa3 respectively. The outlook for the ratings is stable.
The credit rating agency said this concludes the rating review for downgrade which commenced on Feb 26 2008 after MP Reit announced a comprehensive strategic review.
‘The downgrade reflects overall weaker financial flexibility for the trust, which has resulted in its recent refinancing requiring a second ranking security being granted over its assets, due to the strategic review’ says Kathleen Lee, Moody’s vice president and lead analyst for the trust.
‘In addition, whilst the refinancing is welcome, it highlights the relatively limited access the trust has to bank / debt markets given the security and the fact the new loan is only for two years,’ adds Ms Lee.
As a result over 90 per cent of its debt is now maturing at the end of 2010 in a rather unusual lumpy maturity profile and with a large exposure to the currently shut CMBS market.
‘The need for a second ranking security and the large amount of debt maturing at one time is highly unusual for an investment grade entity’, commented Ms Lee.
The rating downgrade was also in part driven by the ongoing strategic review which creates significant uncertainty surrounding the reit’s future operating and strategic profile.
On the other hand, the rating continues to be supported by MP Reit’s good quality asset profile, its ability to generate stable and recurring incomes and its sound financial metrics with TD/TA leverage at 28%, EBITDA/Interest at 4/0x and Debt/EBITDA at 8.3x. This operating profile and financial metrics remain solidly investment grade and counterbalance the weaknesses outlined.
The outlook is stable reflecting these strengths and the limited refinancing risk before 2010.
Upward pressure on the rating is unlikely in the next near term given the ongoing strategic review, the Reit’s limited financial flexibility and the lumpy debt maturity profile.
On the other hand, downward rating pressure could emerge if the strategic review results in asset sales narrowing the Reits operating profile or an increase in leverage.
Credit metrics that may evidence such pressure could include fixed-charge coverage (EBITDA/ interest) falling below 3.0x, debt to EBITDA exceeding 10.0x and total debt to assets exceeding 45% on a sustained basis. A change in the ownership of the manager or the relationship with Macquarie Bank might also be negative but would depend on who was replacing them.
MP Reit was listed on the main board of the Singapore Stock Exchange in September 2005. Its original portfolio consists of strata ownership of two parts of two landmark retail /office properties, Wisma Atria and Ngee Ann City, both on Orchard Road, Singapore’s premier street for shopping and tourism. In 2007, MP expanded its geographical reach by adding 7 retail properties in Japan and another retail property in Chengdu (China) which raised the value of its portfolio from S$1.93 billion to S$2.21 billion as at end-2007.
MI-REIT – BT
Three MI-Reit properties gain $1.3m in revaluation
Revaluations raise carrying amount for portfolio to $554.1m from $553.6m
THREE properties under MacarthurCook Industrial Reit (MI-Reit) have gained $1.3 million in value from a year ago in the latest revaluation exercise.
MI-Reit’s manager, MacarthurCook Investment Managers (Asia) Ltd, yesterday released new independent valuations for seven industrial properties as at Sept 1. The value of four other properties remained unchanged from the previous year.
Together, the seven properties were valued at $227.6 million as at Sept 1, against $226.3 million a year ago.
Their total book value as at June 30, 2008, was $227.1 million.
The revaluations have raised the carrying amount for MI-Reit’s portfolio to $554.1 million, up from $553.6 million reported on June 30, 2008.
MI-Reit has 21 properties in its portfolio – 20 in Singapore and one in Japan. Independent valuations for the remaining 14 properties will be obtained throughout the financial year.
For the first quarter ended June 30, MI-Reit reported a distributable income of $6.62 million, 68 per cent higher than in the same period last year.
This followed a 94 per cent increase in net property income to $9.12 million.
Distribution per unit (DPU) rose 55 per cent year-on-year to 2.35 cents in 1Q09. In a press release last month, MacarthurCook Investment Managers (Asia) said that it expects to deliver a DPU that is in line with recent performance for the coming year.
While the US economic slowdown and global inflation could affect Asia, ‘we expect the demand for industrial properties in Singapore and in the Asian region to remain healthy on the back of strong prospects for Asia, albeit at a less brisk pace’, said CEO and executive director of the Reit manager, Craig Dunstan.
‘Given this economic scenario, organic growth in the portfolio will drive returns in the near future,’ he added.
‘However, we expect to resume our active acquisition growth strategy once capital market conditions improve.’
MI-Reit’s units gained 0.5 cents yesterday to close at 76 cents.
The counter has slid around 29.6 per cent from the start of the year.
CCT – BT
CCT signs up leases for 77,900 sq ft in 2 office towers
CAPITACOMMERCIAL Trust (CCT) says 77,900 sq ft of office space at Capital Tower and One George Street has been renewed or newly committed for between two and three years.
Three companies account for the leases – JPMorgan Chase & Co, BHP Billiton and Shinhan Bank.
CCT did not reveal the rents.
But a spokesman said: ‘Given the Grade A quality of Capital Tower and One George Street, they are in line with rates achieved at comparable Grade A office buildings – between $16 to $20 per sq ft per month (psf pm) – in the respective micro-markets.’
In July, CCT said it expected 4 per cent of leases at Capital Tower to expire in 2008.
Separately, CCT said yesterday that CapitaLand, which has a 30.92 per cent stake in the Reit, will lease 1,313.2 sq ft of office space at Capital Tower for three years for a total sum of $449,125.92.
CCT described the space as an ‘unconventional office unit located on the ninth storey’.
It said the terms of the lease were reviewed by CB Richard Ellis, which confirmed the rent is at market level.
Based on the total rent, the monthly rent works out to about $9.50 psf pm.
JPMorgan Chase & Co is one of CCT’s top-10 blue chip tenants, contributing about 3.3 per cent of the trust’s gross rental income. It will now occupy an extra one-and-a-half floors at Capital Tower.
BHP Billiton, which has several offices in the CBD, will renew its lease at Capital Tower.
This follows a recent report last month that said BHP Billiton is leasing about 150,000 sq ft at Tower 2 of the upcoming Marina Bay Financial Centre, slated for completion in the second quarter of 2010.
At One George Street, new tenant Shinhan Bank has taken space to grow its business footprint in Singapore.
Lynette Leong, CEO of CCT’s manager said: ‘The lease commitments are definitely encouraging news.’
She said she is confident the trust will delivering its forecast distribution per unit of 10.61 cents and 12.34 cents for the financial years ending 2008 and 2009 respectively.
Following the completion of the acquisition of One George Street on July 11, CCT’s asset size is close to $7 billion, which is ahead of the $6 billion target it set itself by 2009.
REITs – Kim Eng
S-REITs update
Prices of S-REITs have declined over the past one month since the release of the quarter ended June results, with CDL Hospitality (CDLHT) and Ascott Residence declining as much as 18-22%. While recent valuations reflect expectations of slower acquisitions and rental growth, we observed two positive developments: 1) refinancing issues have been cleared up and 2) yields spread have widened. But despite reduced gearing, managers will focus on organic growth in the foreseeable future and de-emphasizing acquisitions.
Hospitality and office/retail REIT had a good quarter but the going will get tough
High hotel occupancy rates over the past year and sustained retail/office rental growth benefitted CDLHT and Suntec Reit (SUN) in the period ended Jun 08, evident from their strong YoY DPU growth of 44% and 30%, respectively. SUN and FCT delivered good QoQ growth of 8.4% and 7.4%. Annualized DPUs of S-REITs were generally in line with consensus FY08 estimates. Unfortunately, most sounded rather cautious on the outlook which spooked the market.
Organic growth seems to be the only saving grace
Management teams have generally highlighted the lack of yield accretive acquisitions. Even if there are, REITs face difficulty tapping the capital market in this environment. We focus on REITs with organic growth potential. The organic growth of CCT (Rating: Buy) will be driven by rental reversions with about 41% of the office leases expiring between 2009 and 2010. The weighted average rental of leases expiring in 2009 and 2010 for 6 Battery Road is approximately 45% below the current micro-market rentals. Office rentals are likely to remain resilient until a substantial supply of prime office space come onstream in 2010, allowing CCT’s rentals to catch up with the market.
Refinancing woes resolved
The debt profile of S-REITs has generally improved, with no immediate need to tap the capital market for fund raising. It is notable that SUN has refinanced its remaining bridge loans with S$400m unsecured club loan extended by several banks at highly competitive spreads, a sign of a hopeful credit situation for REITs with strong credit standing. K-Reit has also seen an improvement in gearing ratio from over 54% down to 28% after its rights issue. REITs with lowest gearing include CDREIT, FCT and Plife Reit.
Fear of potential write-down of capital values overplayed
While fears of a potential write-down of capital values are valid given the steep discounts to NAV, a write-down will not affect cash distribution as least in the medium term as rentals have been locked in leases. We do not see a write-down coming for the retail REITs CMT and FCT due to the AEIs. In the office space, recent transactions done at average prices of $2400 psf in 1H08 reflect still tight office supply. REITs with low gearing are also preferred as they would be far from hitting the maximum allowable gearing limit in the event of a write-down. Some commendable names are CDLHT, PLife Reit and FCT.
Lower bond yield widens spread
Weekly average 10-yr SGS bond yield decreased from a high of 3.9% mid-Jun to 3.2% end-Aug. 12-mth SIBOR decreased from a high of 2% to 1.75% over the same period. 5-yr SGD swap also declined 100bp to 2.9%. The projected yield of 6.3% for CCT (Buy) offers an attractive 310bp spread over the 10-yr bond yield, while CDLHT (unrated) also offers an attractive yield spread with 9.7% projected yield.
Link – Table