Author: tfwee
MI-REIT – BT
MI-Reit’s distributable income rises
Q4’s $5.8m boosted by rentals from new properties
STRONG rental contributions from its new properties lifted Macarthurcook Industrial Reit’s (MI-Reit) distributable income in the fourth quarter to $5.8 million, with distribution per unit (DPU) coming in at 2.22 cents.
Q4 distributable income was 19.9 per cent higher than its initial forecast, while DPU was 19.4 per cent ahead of estimates.
‘The 19.4 per cent higher than forecast DPU for 4Q FY08 was largely due to rental contributions from our acquisitions of nine yield accretive properties during the year. Of these nine properties, five were acquired during the fourth quarter,’ said Craig Dunstan, chief executive officer of the manager for MI-Reit.
These acquisitions increased the total value of MI-Reit’s investment properties by 75.5 per cent to $555.4 million, compared with its initial portfolio value of $316.5 million, he added.
MI-Reit’s net property income for the fourth quarter ended March 31 stood at $8.21 million, 38.1 per cent higher than forecast. Taking an earlier revaluation gain from its 12 properties into account, its net asset value per unit (NAV) was $1.29 at the end of March, 7.5 per cent higher than the NAV of $1.20 at its initial public offer in April 2007, it said in a statement yesterday.
Annualised DPU came in at 7.91 cents for the full financial year, beating forecasts by 6.7 per cent. The annualised yield worked out to be 8.03 per cent, based on the closing price of $0.985 per unit at the end of March. Full-year distributable income also beat estimates at $19.61 million.
Properties acquired in the last six months include new warehouse and logistics facilities in Yishun Industrial Park A and Defu Lane 10, as well as a manufacturing complex in Kallang Way which was acquired through a sale and leaseback agreement with Xpress Holdings.
Besides lifting rentals, these acquisitions also helped to reduce the reliance on a single property or tenant, said MI-Reit. As testament to the results, it said no single tenant contributed more than 20.3 per cent to total rental income in March this year.
Looking ahead, Mr Dunstan expects economic growth in the region to be moderated as a result of the US mortgage crisis and this may put a temporary halt to MI-Reit’s acquisition plans. However, he expects demand for industrial properties to remain strong across Asia.
MI-Reit shares closed at 96 cents yesterday, down 1.5 cents.
FSL – UOBKH
New Acquisitions Boost Distribution Yield To 14.8%
First Ship Lease Trust (FSLT) has entered into a conditional agreement to acquire three 4,250 TEU container vessels from a wholly-owned subsidiary of Taiwan-based Yang Ming Marine Transport Corporation (YML) for a consideration of US$210m. The three vessels are scheduled for delivery to FSLT by end-May, end-June and end- October this year. The vessels will concurrently be leased back to YML on a fixed basis for 12 years.
Acquisitions significantly boost DPU. FSLT has guided that the acquisition of the initial two vessels will be significantly accretive to FSLT’s distribution per unit (DPU), raising DPU for 2Q08 to 2.77 US cents (from 2.05 US cents) and from 3Q08 onwards to 3.05 US cents (from 2.87 US cents).
No guidance on third vessel as funding not secured. While FSLT has not provided guidance on the DPU accretion for the third vessel as financing has yet to be secured (US$60m required), we estimate the potential accretion at 0.07 US cents per quarter from 1Q09 onwards (assuming similar debt financing and charter terms as the first two vessels). We have assumed similar charter terms for the third vessel and have factored the acquisition into our earnings calculations. However, until the financing terms are clear, we are not factoring additional accretion to DPU from the third vessel into our forecasts.
The paradox: Rising DPU but falling EPU. We continue to like FSLT for its stable and visible distributions that are supported by its long bareboat charters that have an average remaining lease term of 9.2 years. FSLT offers investors an interesting paradox due to its aggressive depreciation policy that depreciates its assets at 5-7% p.a. As such, while this latest acquisition is DPU accretive, EPU has plunged as earnings after interest for these vessels are less than the associated depreciation (2008: -65.6%, 2009: -93.3%, 2010: -93.3%). However, we remind investors distribution yield should be the focus for FSLT and maintain our BUY recommendation on FSLT with a target price of US$1.24 (S$1.61).
SREITs – Moodys
Moody’s Sees Negative Outlook For Singapore REITs
The following is a press release from Moody’s Investors Service:
Singapore, May 22, 2008 — Moody’s Investors Service has a negative rating outlook for Singapore’s real estate investment trusts (S-REITs) over the next 12-18 months.
Despite overall sound fundamentals, negative market sentiment and tighter market liquidity have impaired the access of some issuers to the capital markets, Moody’s says in a new report.
The report is entitled “Singapore Real Estate Investment Trusts (S-REITs): Short-Term Refinancing Risks and Uncertain Capital Markets Weigh on Sector,” and is authored by Kathleen Lee, a Moody’s Vice President/Senior Analyst, and Kaven Tsang, an Assistant Vice President/Analyst.
“Materially tighter credit conditions are adversely affecting both the availability and price of debt at a time when a number of S-REITs face imminent refinancing needs,” says Lee, who is the lead author.
“At the same time, depressed unit prices of many trusts have reduced the attractiveness of equity funding and boosted leverage at some entities as they fund already committed acquisitions,” Lee adds.
As a result of these challenges, Moody’s in recent months has downgraded or put on review for downgrade three S-REITs and set outlooks for two others to negative.
“As we look ahead, difficult market conditions have increased the likelihood of event risk affecting credit profiles through merger or divestiture activity”, Lee says, “Better-off S-REITs may take advantage of the attractive valuations of those peers that face liquidity problems or trade at high discounts to net asset value.” She adds, “Likewise, some entities may reconsider their strategic profiles to realize greater value for their unit holders.”
Tsang says, “At the same time, the fundamentals of Singapore’s property market remain firm as high occupancy rates support yields and cash flows.” He adds, “Most S-REITs retain good quality assets that will allow them to benefit from this trend.”
In addition, the report notes that Singapore’s economy is slowing but still solid and an easing in benchmark interest rates following the U.S. lead and the continued strong inflow of foreign funds should provide ongoing support to the sector’s fundamentals.
The report is available at www.moodys.com.
MMP – UOBKH
Minor disruption from earthquake in Central China
Minor disruption from earthquake in Central China. MMP REIT owns Renhe Spring Department Store located in Chengdu, the capital city of Sichuan Province. The mall experienced tremors and aftershocks during the recent earthquake. The building was successfully evacuated. Preliminary assessment indicates no major damages for the new five years old building. The company has engaged structural engineers to conduct a detailed inspection. The mall will be open for business once MMP REIT secures clearance from the local authorities.
The earthquake is unlikely to have a material impact on financial performance in FY08 due to profit guarantee from Renhe Spring Group. Renhe Spring Departmental Store contributed 11% of total revenue in 1Q08.
Renhe Spring Department Store. The acquisition of Renhe Spring Department Store for Rmb350m, or S$70m was completed in Aug 07. The mall houses premium foreign brands such as Burberry, Prada, Dunhill, Ermenegildo Zegna, Gucci and Hugo Boss. The property achieved sales of Rmb263m in 2006, an increase of 23%. The mall will be linked to Chengdu’s new subway system in 2010. The vendor Renhe Spring Group provided guaranteed net profit of Rmb26.4m for four years, equivalent to a net distribution yield of 7.5%.
Maintain BUY. MMP REIT provides FY08 distribution yield of 6.41%, an attractive spread of 4.06% over 10-year Singapore government bond yield at 2.35%. Our target price is S$1.55 based on two-stage dividend discount model (required rate of return: 7.85%, terminal growth: 2.5%).
SREITs – BT
Switch to S-Reits for their defensive nature: analysts
AGAINST the backdrop of uncertainty facing property developers, analysts advocate taking defensive positions in real estate investment trusts (Reits).
While there have been concerns about Reits as the credit crunch dried up their acquisition activity in the past six months, these worries now pale in the face of weightier concerns about slower home sales and falling home prices surrounding developers.
‘We believe the Singapore residential property sector could see a bursting of a bubble that has been created from exuberant expectations and liquidity over the past two years,’ Credit Suisse analysts said in a report this month. ‘We advocate switching from riskier residential exposure to S-Reits.’
Echoing these views are CIMB-GK analysts Donald Chua and Janice Ding. In a report yesterday, they said: ‘We remain confident in S-Reits for their defensive nature and attractive yields of 6.2 per cent on average and general positive outlook for property rents in the medium term.’
In particular, CIMB-GK prefers Reits with larger asset portfolios that can provide sustainable and stable income streams, experienced management teams with established track records and strong sponsors with quality assets to inject into the Reits.
‘We are also more inclined towards Reits with material Singapore-based assets in view of the strengthening Sing dollar,’ the CIMB-GK analysts said.
This makes industrial and retail Reits the brokerage’s top picks, given their defensive and stable income, and hospitality Reits in view of rising demand and rents.
Even though industrial rents rose some 32 per cent last year, they are still about 30 per cent below their peak in 1996. Hence, the analysts reckon there is still room for stronger catch-up in industrial rents as Singapore’s manufacturing moves towards knowledge-based industries such as research and development and the biomedical sector.
In addition, the longer weighted average leases for industrial space and the lower likelihood of industrial tenants terminating their leases before expiry give industrial Reits further defensiveness in their income stream.
Elsewhere, retail rents have shown the greatest resilience during economic downturns, and tenants also showed the least propensity for cutbacks in demand for space in poor economic conditions, the CIMB-GK analysts said. Efforts by the government to boost Singapore as a financial and tourism hub also bode well for the retail sector.
They noted that between the last rental peak in 1996-1997 and the rental trough in 2003-2004, retail rents fell the least – by 34 per cent, compared with 45 per cent for industrial rents and 54 per cent for office rents.
‘Furthermore, the retail segment also has the greatest potential to grow organically via enhancements to facades, layouts and tenant mixes,’ they added. ‘This trait further enhances the defensive nature of retail Reits, particularly when prices may not be conducive and funding for acquisitions may not be readily available.’
Credit Suisse analysts also favour retail Reits for their more defensive nature, particularly CapitaMall Trust and Frasers Centrepoint Trust.
For investors with a higher risk appetite, CIMB-GK analysts recommend hospitality Reits, which hold growth potential from expected increases in business and leisure travel but are seen to be most vulnerable to external risks.
In contrast, the outlook for property developers is more clouded. CIMB-GK said its models have factored in 10-20 per cent declines in property prices in the mid-luxury segment, but it has upgraded its rating on the sector to ‘neutral’ from ‘underweight’ due to current low valuations.