Author: tfwee
MI-REIT – Phillip
A String Of Purchases
Developments to-date. MI-REIT added 6 properties to its portfolio following our last report on 25 Oct.. Additionally, MIREIT made its first overseas foray into the Japanese industrial market with the purchase of the Asahi Ohmiya warehouse located in the Saitama Prefecture, in the Greater Tokyo area.
With the acquisition, MI-REIT effectively entered into a strategic alliance with Atlas Partners Japan (APJ), a Japanese real estate fund and asset management firm, as asset management of the property will be outsourced to APJ. This further strengthens MI-REIT’s presence in Japan as APJ will also source for acquisition opportunities and provide asset management support for MI-REIT’s future Japanese acquisitions.
Annual revaluations on six properties resulted in an increase of $9.8 million to book value. Together with an earlier revaluation carried out in September on another six properties, total revaluation added $47.6 million to its book over its initial value at listing. Including all annouced
acquisitions, MI-REIT counts 22 properties in its portfolio with an asset value of $646.9 million and average lease term to expiry of 6.64 years. All the acquisitions are expected to be funded by debt and this will bring gearing up to 39% for FY08.
MI-REIT will steer its portfolio towards an allocation of 50% in Singapore, 20% in Japan and the remainder spread across other Asian markets.
Valuation. With the 6 acquisitions, we raise our FY08 DPU assumption by 4.7% from 7.41 cents to 7.76 cents and a 3 years DPU CAGR of 9.78% At the closing price of $1.13, these translate to a yield of 6.7% for FY08 and 8.1% for FY09. We increase our 12 month forward fair value from $1.39 to $1.43. Cost of debt assumption is reduced slightly to 3.8% as the Japanese denominated borrowing has a lower cost of funding. Our projected earnings remain conservative as we do not factor in unannouced acquisitions. Maintain BUY.
Shipping Trusts – UOBKH
Singapore Shipping Trusts
Last week we hosted a roadshow for Rickmers Maritime (RMT) in Singapore and Malaysia. One of the key points raised during the roadshow was whether part of RMT’s dividend yield of 9-10% p.a. was a return of investor capital. Management disagreed with this general perception as RMT is retaining 25% of distributable cash for reinvestment. This differs from First Ship Lease Trust (FSLT) and Pacific Shipping Trust’s (PST) which pay out 100% of distributable cash.
RMT’s management said if the trust were a closed-end fund with no further equity injection, its equity would be intact (and would remain the same as the equity at beginning of the trust) when its initial fleet expires at the end of its economic life, some 30 years hence. By retaining 25% of its distributable cash, RMT’s equity will self-sustaining and invested into new ships. The retention of part of its distributable cash flow will ensure the perpetuity of RMT. We believe at current price, RMT offers great value as investors are effectively investing in a perpetual entity that pays a high dividend yield of 9-10% p.a.
Meanwhile, the other two trusts, PST and FSLT are forging ahead with ship acquisitions. PST recently announced the acquisition of two 1,800 TEU containerships from its sponsor. Pacific International Lines (PIL). These ships will be chartered back to PIL on a bareboat basis for eight years. This acquisition will enlarge PST’s fleet by 16%. FSLT recently acquired two 47,496 dwt product tankers from the Groda Shipping & Transportation group and were concurrently leased back to the sellers on a bareboat basis for a base term of seven years.
We remain positive on Singapore shipping trusts and have included them among our top defensive stock picks for 2008. Their defensive earnings are underpinned by long-term ship charter contracts of fixed charter rates for 5-12 years. Shipping trusts offer net yields of 9-12% p.a. and potential upside from accretive ship acquisitions. Maintain BUY on RMT (Target: US$1.19/S$1.72), PST (Target: US$0.50) and FSLT (Target: US$1.22/S$1.76).
Suntec – BT
Suntec Reit
Nov 30 close: $1.55
BNP PARIBAS RESEARCH, Nov 29
SUNTEC Reit has tumbled 14 per cent over past month: The share price of Suntec Reit has tumbled 14 per cent since the end of October, in line with the steep correction in the Straits Times Index (STI). We believe concerns over prior yield compression and the narrowed spread against risk-free instruments have been overstated.
To ascertain if this sell-down has been overdone, we used the dividend yield spread (over 10-year government bond yields) highs recorded during the June 2006 correction to determine the floor price of Suntec Reit. At current valuations, we think Suntec Reit has been oversold.
Trading at oversold levels: Suntec now trades at an FY08 yield of 6 per cent (up from 5.1 per cent as of Nov 1), or 307bp above the 10-year risk-free rate. This compares favourably against the previous peak (on June 15, 2006), where the stock traded at a yield spread high of 291bp and 223bp at IPO (in December 2004).
Benchmarking against a yield spread of 291bp, our estimated floor price is $1.62. From a required returns perspective, we think the stock has overshot its floor price by 2.5 per cent. Premising on a yield spread of 223bp, the floor price would have been $1.84, offering a 16.4 per cent upside to its floor price.
No downward pressure from US FFR on Singapore rates: Our US counterparts anticipate a further 25bp reduction in the Fed fund rate in December, following October’s 25bp cut. We, however, do not foresee any changes in Singapore’s risk-free rate. There is no statistical correlation between Singapore’s 10-year risk-free yields and the US FFR. This cements our view that any expansionary monetary policy measures by the US Fed is not likely to broaden the spread between S-Reit yields and the risk-free rate.
Time to say good BUY; TP of $2.39: We maintain our BUY rating and a target price of $2.39. Prospects for Suntec Reit to expand organically remain strong considering that 70 per cent of its office portfolio leases are due for expiry in FY08-09.
The stock currently trades at a 28 per cent discount to its NAV of $2.20. Offering a prospective yield of 6 per cent, we believe the stock now trades at oversold levels, which provides investors a good level for entry.
BUY
MI-REIT – BT
MI-Reit acquires office, warehouse building for $25m
Powermatic will lease back the property for 5 years
MACARTHURCOOK Industrial Reit (MI-Reit) has signed an agreement to acquire an office and warehouse facility in the Tai Seng industrial precinct for $25 million.
Under the agreement, Powermatic Data Systems, which is listed on the Singapore Exchange, will lease back the property at 135 Joo Seng Road for five years with the option to extend for another five years. The lease will commence upon the completion of the acquisition, which is scheduled for February 2008.
The property was transacted at the initial yield of 7.3 per cent, and will be accretive to MI-Reit’s distribution per unit following completion, said MacarthurCook Investment Managers (Asia) Ltd (MCKIM), the manager of the Reit.
Chris Calvert, CEO of MCKIM, said: ‘We are pleased with the acquisition of 135 Joo Seng Road. The inclusion of SGX-listed Powermatic as one of our tenants further enhances our portfolio, of which approximately 70 per cent is comprised of SGX-ST listed companies or their subsidiaries.
‘This acquisition provides unitholders with the twin benefits of medium to long-term income stability and also the opportunity for capital and rental value growth, which will form the steadily increasing demand for quality office accommodation in the Tai Seng industrial precinct.’
The inclusion of the property in MI-Reit’s portfolio will further contribute to income stability through enhanced tenancy and property diversification, and reduced exposure to its largest tenant, UE Tech Park Pte Ltd, from 31.6 per cent to 29.4 per cent of portfolio income, MCKIM said.
With the latest acquisition, MI-Reit will have total investments of approximately $642.6 million in 22 properties.
It intends to finance the acquisition wholly with debt but may consider alternative means of funding as appropriate. Assuming 100 per cent debt financing, the acquisition will increase MI-Reit’s committed gearing level from 36.7 per cent to 39.5 per cent.
a-iTrust – Goldman Sachs
Source of opportunity
We initiate coverage of A-iTrust with a 12-month sum-of-the-parts/DCFbased target price of S$1.66 and a Neutral rating. We like A-iTrust’s development potential, enhanced by a 20% development limit (10% for SREITs), but see the Singapore Industrial REITs offering a better risk/reward for industrial REITs. For example, Pan-Asian logistics REIT Mapletree is trading at a 240 bp yield over A-iTrust, and also operates in a sector where we see abundant acquisition opportunities.
A-iTrust is Singapore’s first listed Indian property business trust, offering exposure to the fast-growing IT services sector in India. Spun off from parent Ascendas, we believe A-iTrust will enjoy stable organic growth from seed investments in four business parks over the next five years, and has a built-in development pipeline of about 4.2 mn sq. ft. of SBA (super built-up area), potentially doubling its current portfolio of 4.7mn sq. ft. We think A-iTrust’s investment platform also offers good acquisition growth potential. We see acquisitions for A-iTrust fueled by its right of first refusal (ROFR) over income producing assets from parent Ascendas and the Ascendas India Development Trust, a private fund with committed capital of S$500mn (target of S$1bn in investment value).
Catalyst
A-iTrust operates in the world’s largest center for IT and ITES outsourcing with a 55%–60% global market share. With the Indian IT services sector expected to reach US$60bn in exports and US$13– US$15bn in domestic revenues by 2010 (projected FY2000-10E CAGR of 29%), prospects for rental growth in business parks space appear to be good. We expect near-term share price performance to be driven by strong pre-commitments on two recently completed buildings, namely Crest, the second building at International Tech Park Chennai (ITPC) and Vega, the fifth building at the V. In the longer term, we see the unveiling of plans for development of its 2.7mn sq. ft. special economic zone (SEZ) pipeline as a further catalyst.
Valuation
We derive our 12-month target price of S$1.66 using a DCF base-case per share value of S$1.06 and land bank NAV per share of S$0.60 (land bank = 2.7mn sq. ft.). By geography, we estimate that 45% of 08E NPI will come from Bangalore, 40% from Hyderabad and 15% from Chennai. We see its conservative capital structure — 4.1% at its listing in Aug 07 — increasing to 22% post the planned development projects in International Tech Park Bangalore (ITPB) and ITPC by FY09, implying debt capacity of S$220mn (35% regulatory debt/asset limit). A-iTrust is trading at yields of 4.2% FY0E8 and 4.9% FY09E, underpinned by a solid 3-yr DPU CAGR we project at 12.9%. We like A-iTrust’s unique growth model and Ascendas parentage, but believe much of its potential is already priced in the shares.
Key risks
Regulatory risks and a slowdown in the Indian IT services sectors could result in rental pressures.