Author: tfwee
FCT – OCBC
Acquisitions approved at EGM
Results in line. Frasers Centrepoint Trust (FCT) reported S$23.3m in 1Q10 revenue, up 19.6% YoY and down 6.2% QoQ. The strong YoY growth was due in large part to the income boost from the completion of asset enhancement works at Northpoint (NP). Meanwhile, we attribute the QoQ weakness to the FRS39 accounting adjustment at 4Q earnings – this is a typical 4Q blip for FCT. FCT will distribute 1.91 S cents for the quarter, up 14.4% YoY. On a QoQ basis, the payout represents a 6.4% decline but this is primarily due to retained cash from previous quarters boosting distributions in 4Q09. Excluding retained cash, the decline is 2% QoQ.
Portfolio performing well. The portfolio continues to perform well especially as occupancy picks up at NP. The retail mall is occupied at 95% as of Dec 09 versus 90% three months ago and 52% a year ago. The manager said that committed occupancy at NP stands at 99% as of end-Dec 09. The overall portfolio enjoyed occupancy of 98.6%. Leases renewed / replaced this quarter enjoyed a 3.9% increase over preceding rents.
Acquisitions approved at EGM. Unitholders yesterday approved the acquisition of two retail malls from FCT’s sponsor Fraser & Neave [FNN, NOT RATED]. FCT will pay S$164.6m for Northpoint 2 (NP2) and S$125.7m for YewTee Point (YP), at 5.78% and 5.87% net property income yields respectively, based on FCT’s forecast of forward income. The manager expects the completion of the acquisitions to be no later than July 2010. FCT will raise equity of up to 152m units (24.3% of existing units) to partially fund the purchase. The exact structure, issue price and timing of the equity fund raising (EFR) will be determined later based on “market conditions”. We assume the acquisitions are purchased on a 45-55 debtequity basis with equity raised at S$1.30.
Valuation. The manager said 95% of gross rental income is locked in for FY10. We have raised our retail rent growth rates from 0% to +5% per annum for FY10 and FY11. This is line with the revisions to our CapitaMall Trust [HOLD, FV: S$1.83] earnings estimates. At the same time, we have made some upwards adjustments to our cost of debt estimate, which brings our assumed WACC higher. Our fair value estimate slips slightly from S$1.49 to S$1.47. FCT is currently trading at 1.15x NAV and a 5.8% FY10F yield. Maintain HOLD. Key re-rating catalyst would be how (and at what issue price) FCT executes the planned acquisitions.
Suntec – Phillip
Full Year 2009 Results
• Full year revenue of $253.1 million, net property income of $192.2 million, distributable income of $189.6 million.
• 4Q09 DPU of 2.887 cents, bringing full year DPU to 11.703 cents.
• Total asset value of $5.2 billion.
• Maintain hold recommendation with fair value of $1.21
.
Results within expectations
Suntec REIT recorded full year revenue of $253.1 million (+5.4% y-y), net property income of $192.2 million (+5.5% y-y) and distributable income of $189.6 million (+13.1% y-y). Full year DPU was 11.703 cents (+6.2% y-y). Suntec REIT full year results came in better than our projections (revenue +4.1%, net property income +2.3%, distributable income +7.3%, DPU +10.8%). The increase in revenue is backed mainly from higher office rental achieved in 2009. For FY2009, office portfolio accounted for 47% of gross revenue while the retail portfolio accounted for 53% of gross revenue.
We continue to see weakness in asset valuation. In the property valuations as at 31 Dec 2009, Suntec City recorded 3.8% decrease in value, while Park Mall and Chijmes held steady valuations. One Raffles Quay also recorded 11.7% devaluation. Including Suntec convention centre, which was acquired in September 2009, Suntec REIT has total asset value of $5.2 billion.
Quarterly results review
The office portfolio continues to see weakness in reversionary rent. New leases were contracted in 4Q09 at an average rate of $7.11 psf per month, which was the lowest in the 2-year periods from 1Q08 to 4Q09. However we could observe that the rate of decline has slowed. We believed the drop in rental could also be attributed to management trying to strike a balance in maintaining the office occupancy rate. Office occupancy has increased from 94.8% in 2Q09 to 96.8% in 4Q09. On the other hand, retail occupancy has dropped slightly from 99.1% in 3Q09 to 98.1% in 4Q09. Suntec REIT has managed to achieve relatively high portfolio occupancy amidst the recession and we think management has done a good job in maintaining this.
Capital management
Suntec REIT has total debt of $1,752 million and gearing (debt/assets) of 33.3%. It has no near term refinancing concern. The next loan maturity is in 2011 with loan amount of $632.5 million.
Forecasts
We retain our gross revenue forecasts and made slight changes to our DPU forecast. We forecast FY2010E revenue to decrease 5% before registering growth in FY2011E. Our DPU forecast for FY2010E is 8.49 cents, translating to a yield of 6.4%. Suntec REIT will be issuing the remaining of the 69 million deferred units this year. We believe average office rent may be bottoming for Suntec REIT, however we think spot office rent may be sticky for a while and do not expect a quick pick-up. We utilized a lower WACC assumption in our DCF valuation and raised our fair value from $1.14 to $1.21. We maintain our hold recommendation.
FSL – OCBC
Manager offers a more positive outlook
Results in line. FSL Trust (FSLT) announced US$24.5m in 4Q09 revenue, down 4.6% YoY and 0.6% QoQ. The revenue decline was because of the Geden charters that are pegged to US$ LIBOR and re-set quarterly (this volatility is offset by the interest costs on the two vessels which are also floating). Net cash generated from operations of US$16.2m rose 0.8% YoY but fell 8.4% QoQ. The QoQ decline was due to higher interest margins as per the amended loan facilities which lowered loan-to-value covenant requirements from 145% to 100% for two years. FY09 revenue and cash earnings were within 0-3% of our estimates.
4Q DPU of 1.5 US cents; 1Q guidance the same. DPU was flat QoQ but fell 51.3% YoY to 1.50 US cents because of a lower payout policy. The current payout represents 55.6% of net cash generated from operations versus 96.3% a year ago. FSLT is using the retained cash to repay roughly US$8m in loans per quarter. FSLT is guiding for a 1Q10 DPU of 1.50 US cents (flat QoQ, down 39% YoY), equivalent to an annualized yield of about 14%. The manager said it would continue to limit guidance to one quarter ahead until FSLT was “well and truly through” the crisis.
What next? The manager said it was “well advanced” to deploy the US$28.3m net proceeds from the Sep 09 placement towards acquisitions. FSLT re-iterated its focus on attaining asset yields of about 15% and unlevered IRR of 11-12%. The manager also said its minimum threshold for charterer credit health is BB- or equivalent. Note we don’t expect FSLT to gear up on the proceeds in the near-term.
Manager offers a more positive outlook. In Nov 09, FSLT had to postpone its senior unsecured notes offering but it said it is open to re-visiting the offering in coming months. While the cost of unsecured debt is likely to be significantly higher vis-à-vis the current facilities, it would benefit FSLT (in our view) by reducing the ratio of secured debt to collateral. The manager presented a fairly positive outlook of both the industry and its prospects in 2010. FSLT believes it has “moved past the point of highest counterparty default risk in this cycle”. It further guided that while 2009 was about “putting its house in order”, 2010 would be about slowly returning to a growth strategy. Maintain HOLD with S$0.53 fair value or 2.2% total return.
Suntec – DMG
Earnings within expectations; BUY
Stable 4Q09 earnings; earnings in-line. Suntec REIT reported 4Q09 results DPU of 2.89¢ (+1.0% YoY; -1.2% QoQ). FY09 DPU (including deferred units) came in at 10.9¢, broadly in-line with ours and consensus estimates. Net property income fell 1.4% YoY on the back of lower retail rental income. Suntec will trade ex-4Q09 distribution on 29 January. Maintain BUY, DDM-based TP of S$1.56 (S$1.45 previously), implying 6.5% yield at fair value.
Suntec retail occupancy slipped marginally. Suntec REIT’s portfolio office occupancy improved 0.4ppt QoQ to 96.8%. Both Park Mall and One Raffles Quay remains 100% occupied while Suntec City office registered a 0.5ppt QoQ improvement in occupancy to 95.3%. In contrast, Suntec’s retail occupancy saw a slight occupancy decline of 1ppt to 98.1%, due largely to the 1.4ppt decrease in Suntec City mall’s occupancy, which now stands at 97.6%.
Gearing at healthy 33% despite asset writedown. Suntec REIT undertook an asset devaluation of S$274m (or 5%) in Dec 09, bringing its portfolio AUM to S$5.1b, inline with our expectation. Its recent cash call of S$153m was used to repay debt facilities, hence capping its gearing to 33.3%, inline with large cap peers such as CMT, CCT and A-REIT, which boasts gearings of between 30-33%. We do not foresee further cash calls in the near term in view that asset values are likely to remain intact in 2010.
Tenant retention remains key focus in 2010. The focus on tenant retention remains paramount for Suntec REIT, in view that the bulk of leasing activity currently involves replacement demand, i.e. tenants moving from older office blocks to newer ones. Suntec REIT currently offers up to 2-months rent free to ensure that its effective rates are competitive vis-à-vis new office landlords. We believe Suntec REIT will likely register negative rental reversion in 2010 in view that the pace of systemic leasing activity is unlikely to match up with the colossal supply of ~2.7m sqft of un-leased office space that will be injected into the system this year. We adjust our FY10 DPU estimate from 9.3¢ to 10.1¢ to account for lower interest cost and raise our TP to S$1.56 (from S$1.45). At our TP, stock still offers attractive yield of 6.5%, above its heyday yields of 4.6%.
FCT – CIMB
Positive rental reversions
• Results in line; maintain Outperform. 1Q10 DPU met Street and our expectations (26% of our estimate). Net property income (NPI) grew 24% yoy, thanks to positive rental reversions and increased contributions after the asset enhancement of Northpoint. We expect Northpoint II and Yew Tee Point to contribute from 2HFY10. We maintain our estimates and DDM-based target price of S$1.73 (discount rate 7.9%). We see stock catalysts coming from distribution growth and occupancy resilience.
• NPI of S$15.9m, up 24% yoy. The growth was mainly attributed to positive rental reversions (average +1.3% p.a.) at Causeway Point and higher contributions from Northpoint after the completion of asset enhancement work in Aug 09. Average rents at Northpoint increased 20% from S$11psf to S$13.20psf after refurbishment. Distributable income of S$12m grew at a slower pace than NPI, by 4% yoy due to
higher interest expense on additional debt drawn down to finance capex.
• Portfolio occupancy grew 1.3% pts to 98.6%. Northpoint’s occupancy improved the most, by 5.2% pts to 95.1%. Committed occupancy was 99% as at Dec 09.
• Asset leverage of 29.7%; NAV unchanged at S$1.22. Debt due in FY10 is only S$10m or 2.9% of FCT’s total debt.
• Northpoint II and Yew Tee Point to contribute. Earlier this month, FCT announced the acquisition of Northpoint II and Yew Tee Point from its sponsor, FCL. We expect these two assets to add to distributable income from the second half of this year. But as expiry leases in 2010 are limited to 5% of FCT’s gross rental revenue, we expect organic growth to be rather muted in forward quarters.