Author: tfwee
AREIT – Nomura
Forum takeaways
From the Nomura Asia Equity Forum: A-REIT confirmed it sees significant rental reversionary potential in its industrial portfolio, specifically business/science park buildings. While appreciative of the risks of a slowing economy, occupancy remains well over 90%, with the three-year lease structure underpinning cashflow surety.
Anchor themes
Higher warehouse supply, at 5.3mn sf in 2008F and 2.3mn sf in 2009F (versus the five-year average of 1.7mn sf) at a time of slowing economic activity (2008F GDP growth of 3%) is likely to adversely impact rental expectations and valuations.
Strong rental reversions are likely to underpin REIT cashflows. That said, increased concerns over the ability to refinance debt have seen REITs trade below book. In such an environment, investors need to focus on underlying asset values, with REITs with well-located assets beneficiaries of rising expectations of M&A activity.
Industrial demand still firm
AllCo – Nomura
Forum takeaways
From the Nomura Asia Equity Forum: we view the recent acquisition by Frasers Centrepoint as positive for Allco REIT unit-holders, providing the REIT with a clear asset pipeline and potential for lower funding costs. The core portfolio is exceeding expectations, with the enhancement of Keypoint on track. STRONG BUY.
Anchor themes
While office supply will remain tight over 2008F, we expect office rents to peak in 2H08-1H09F, before encountering cyclical declines of 13.7% in 2010F and 19.0% in 2011F, in light of the increased office supply.
Strong rental reversions are likely to underpin REIT cashflows. That said, increased concerns over the ability to refinance debt have seen REITs trade below book. In such an environment, investors need to focus on underlying asset values, with REITs with well-located assets beneficiaries of rising expectations of M&A activity.
Tiger REIT
REITs – OCBC
Staying defensive in times of uncertainty
What a difference a year makes for the REIT market! Last year, the “REIT as growth” story was birthed by benevolent circumstances. Markets were strong, credit was easy, and the Singapore economy was flying. The property market was booming and REITs became the surrogate for riding the wave.
Circumstances are no longer so accommodating. Share prices of retail/ office S-REITs (Singapore listed REITs) have fallen some 20 to 30% since July 2007, reflecting the breakdown in the credit markets and uncertainty about future growth prospects. Higher long term interest rates have steepened yield curves. We expect interest rate volatility to persist as inflation concerns shape central bank policy and prospects for a US rate hike.
Attractive from a defensive prism. The majority of the S-REITs are trading at steep discounts to net asset values (NAVs). REITs are trading at an average yield of about 7.7%, about 400 bps over the 10-year Singapore government bond rate. This de-rating has given investors an opportunity to take a fresh look at S-REITs as defensive vehicles offering stable cash flows and high yields.
Under-rented office portfolios could drive near-term DPU growth. We are quite positive on the office sector – the prospects of an economic downturn are hedged by limited supply. We expect office rentals to peak by year end and then hold or decline only marginally. This nevertheless implies significant upside for REITs with leases locked in two or three years ago, boosting rental revenues in the coming 1-2 years. For instance, a large portion of Suntec REIT’s office portfolio coming up for renewal is significantly under-rented at S$5-6 psf per month. We have a BUY rating on Suntec with a S$1.71 fair value estimate.
Outlook for retail segment is more uncertain. The outlook for the retail sector is more uncertain, with high economic uncertainty and increasing supply – about 1.2m sq ft of new retail space is coming on-stream over 2008-09 on Orchard Road alone. CB Richard Ellis expects a total 6.9m sq ft of new retail space between 2H08 and 2012, with the bulk (48.0%) coming on-stream in 2009. Marina Bay Shoppes by developer Marina Bay Sands is a major contributor – adding 800,000 sq ft; while ION Orchard adds about 663,000 sq ft. Notable suburban additions include the Big Box development at Jurong Regional Centre and CapitaLand’s Civic, Cultural
and Retail Complex at Vista Xchange.
Conclusion – Overall, we are positive on the office and industrial segments, but neutral on the retail segment. For the residential sector, we see pockets of weakness especially for high-end residential units, but fortunately the bigger listed developers have secured earnings for the next 1-2 years due to strong pre-sold units’ revenues, which will be recognised in 2008-2010. On the REIT space, present good yields for commercial space will continue to support rental income for REITs with exposure to good-class commercial assets.
Link – Performance Table
SREITs – ML
All about cost of debt
Downgrading S-REITs
We are increasing our cost of debt assumptions across the S-REIT sector. We reduce our FY09 and FY10 DPU estimates by an average of 5.3% and 6.4% respectively, while our price objectives are cut by an average of 16%. We are now forecasting DPU declines in 2009 for one third of our sector coverage. We reduce our rating on Cambridge Industrial, Ascendas India & First REIT to Underperform.
Increasing borrowing costs
We expect the all in debt costs for REITs to escalate to 5.0% (from 3.6% previously assumed) driven by a combination of factors including: 1) Rising credit spreads; 2) Reluctance of Singapore banks to increase loan book exposure to the property sector and 3) ML view that Asian central banks will need to raise interest rates in response to rising inflationary pressures.
Average debt expiry profiles for S-REITs 2.6yrs
Increasing debt costs are magnified in the context of the S-REIT sector given short debt expiry profiles. We have split out the debt expiry profiles of S-REITs under coverage and estimate that, on average, the weighted average debt expiry profile of the sector is 2.6 years which is half of that developed markets. Earnings will be impacted as early as 2009 as expiring debt is rolled over at higher rates.
Cutting our price objectives by average 16%
In addition to our earnings downgrades we have made changes to our DCF valuations assumptions. On a sector average basis we have increased our cost of debt and risk free rate by over 100bpts to 5.5% and 5.4% respectively. We are reducing our target gearing to 40% which is the level rating agencies begin to downgrade corporate credit ratings for S-REITs.
Sector outlook & valuation
The S-REIT sector is currently trading on FY08E yield of 6.2%, which represents a 280bpts premium to the Singapore 10yr government bond. While valuations are undemanding by historical standards we believe the availability and cost of debt and equity continues to present challenges for the S-REIT sector. We remain cautious on the medium term outlook for the sector which is highly reliant on capital markets for growth and is sensitive to interest rate movements. Our BUY calls continue to support REITs that we believe can deliver on organic growth.
Link – Tables
Rickmers – OCBC
Growth in an uncertain environment
RMT kicks off US$1.35bn acquisition spree. Rickmers Maritime (RMT) has kicked off a three-year acquisition spree costing US$1.35b, with the delivery of 4250-TEU containership MOL Dominance in early June. RMT will spend US$360m in total on the five Mitsui vessels coming in this year; US$276m on the four vessels slated for FY09; and US$711.6 on four megacontainerships worth US$711.6m to be delivered in FY10. RMT is geared at 0.77x debt-to-equity as at the end of 1Q08. On current equity levels of about US$400m, this implies a debt-to-equity of roughly 1.6x by end FY08, 2.3x by end FY09, and 4x by end FY10.
Gearing up in an uncertain credit environment. RMT plans to fund the contracted acquisitions using a combination of retained cash, debt and equity. RMT has already arranged for about US$627.5m in new credit facilities on top of about US$45m that remains unused from its IPO facility. We note that the terms of the new facilities are marginally more expensive at LIBOR 90-120 basis points versus the IPO facility costing LIBOR + 70- 90 basis points. The accelerated debt repayment schedule beginning in FY09 itself vis-à-vis the IPO facility is notable. Debt facilities for the US$711.6m vessels due in FY10 have not been arranged yet.
Equity injection inevitable by FY10. With the increased gearing and debt repayment schedule, RMT has no option but to inject new equity into the trust. However, the US$672.5m in unused facilities (before paying for MOL Dominance) give RMT some breathing space. We expect the trust to bypass the lackluster equity markets in 2H08 to get a higher price realization. However, an equity issue will be inevitable by FY10 in order to accommodate RMT’s debt repayment schedule and the US$771.6m vessels due in that year. We have phased in US$600m in new equity over FY09-11. This is a base case roadmap that will take RMT back to roughly 1x debt-to-equity levels by FY11, allowing it to pursue further growth opportunities. We conservatively assume the new equity is issued at current price levels of 80 US cents .
RMT’s aggressive growth plans are supported by its ability to run time charters with long term visibility. It has credit facilities in place that can cover its growth plans for FY08 and FY09. The only question is how far the market can recover to enable RMT to successfully issue new equity at a reasonable price. Maintain BUY with S$1.22 fair value.