Author: tfwee
StarHill Gbl – UOBKH
Highlights from Company Visit
Benefitting from opening of linkway. Shopper traffic at Wisma Atria increased 48% yoy in Jun 09 after the basement linkway connecting Wisma Atria to Orchard MRT station was reopened on 3 Jun 09 (closure lasted more than two years). Shopper traffic at basement was the heaviest and more than doubled compared to last year. We understand that many basement tenants experienced 10-50% increase in sales since Jun 08.
Worst fear did not materialise. ION Orchard did not affect business at Wisma Atria, confounding most sceptics. Shopper traffic to Wisma Atria actually increased by another 30% after the opening of ION Orchard on 21 Jul 09. Wheelock Place, ION Orchard, Wisma Atria and Ngee Ann City are linked to Orchard MRT station via an underground passageway. The opening of ION Orchard has attracted more shoppers to malls in the vicinity.
Enhancing Wisma Atria. Accessibility to Wisma Atria has improved with escalators from Orchard MRT station linked to new entrance at Wisma Atria Level 2 (new side entrance). Management plans to invest S$100m on asset enhancement initiative for Wisma Atria, which will add 40,000sf of prime retail space fronting Orchard Road. The planned extension is ideal for duplex stores, which are highly visible. Management is also evaluating feasibility of converting some car park space into retail space to further increase lettable area. Starhill Global REIT (SGREIT) needs to liaise with Isetan before finalising its plan.
Neutral impact from opening of IRs. The opening of the two integrated resorts (IRs) will lead to competition for shoppers. Local consumers will likely flock to shop at the IRs, especially during the initial stages. This will be offset by increasing tourist arrivals generated by the IRs. Orchard Road is consistently the most visited attraction in Singapore with 6m visitors each year. This means that three out of every five tourists make a point to shop at Orchard Road. Besides having late night shopping on Saturday till 11pm, Singapore Tourism Board (STB) will also work with Orchard Road Business Association (ORBA) to organise more activities along the pedestrian walkways to attract tourists and Singaporeans to Orchard Road.
New malls well taken up. Over 75% of retail space at Marina Bay Shoppes within Marina Bay Sands has been committed. Marina Bay Shoppes with 800,000sf of retail and restaurant space will offer 300 stores with an international mix of luxury brands when opened in early 2010. At Orchard Road, CapitaLand’s ION Orchard is 94% committed when it opened in Jul 09 while Far East Organisation’s Orchard Central is 80% committed when it opened in Jun 09. 313@Somerset by Land Lease is already 90% committed and is scheduled to open in Nov 09. Therefore, a significant portion of new supply of retail space at Orchard Road and nearby areas is already well taken up, supported by buoyant consumer confidence and domestic consumption.
Deteriorating outlook for office portfolio. Office occupancy for Wisma Atria and Ngee Ann City was 92.0% and 94.9% respectively at Jun 09. Occupancy could continue to deteriorate due to tenants relocating to low-cost alternatives offered by business parks. Office rentals are likely to be under pressure as a result of a massive 2.8m sf of office space being completed next year. The two office blocks at Wisma Atria and Ngee Ann City accounted for only 18.4% of total revenue in 2Q09.
China: recovery from Chengdu earthquake. Revenue contribution from Renhe Spring Departmental Store grew 42.6% yoy to S$3.6m in 2Q09 (10.8% of total revenue) due to recovery after Chengdu earthquake in May 08. The high-end mall houses premium foreign brands such as Prada, Dunhill, Bally, Hugo Boss, Ermenegildo Zegna, Chopard, Longines and Rolex and rental is largely based on gross turnover. The mall is fully occupied at Jun 09.
Working on regional expansion. SGREIT is on lookout to acquire retail assets in the region after raising S$337.3m from its recent 1-for-1 rights issue. It is evaluating opportunities to acquire assets in Australia and United Kingdom from distressed sellers as capitalisation rates in both markets had risen significantly. In China, SGREIT has the right of first refusal to acquire two more shopping malls in Chengdu from partner Renhe Spring Group. In Malaysia, SGREIT could acquire Starhill Gallery and Lot 10 in Kuala Lumpur from Starhill REIT listed on Bursa Malaysia but the process is likely to be protracted as this is a related-party transaction.
Major refinancing in 2010. Commercial mortgage-backed securities (CMBS) of S$380m and term loan of S$190m will mature in Sep 2010. Proceeds from its recent rights issue will be utilised to partially repay the term loan. SGREIT plans to stretch debt maturity of new debt facility over several years to prevent lumpy refinancing in the future. Ability to secure refinancing has improved with support from sponsor YTL Corporation. SGREIT has expanded its network of relationship banks through referral from YTL.
Sponsor confident of prospects for SGREIT. YTL has acquired and exercised 45.6m nil-paid rights bought through open market purchases, thus increasing its stake in SGREIT from 26.5% to 28.9%.
REITs – Phillip
Results Review
From the recently concluded financial results for the quarter ended 30th June 2009 (except Saizen REIT which is announcing on 27 August 2009), we observed that on a year-on-year basis, out of the 18 REITs that have announced their results, twelve reported revenue growth, one REIT reported flat revenue growth while five REITs reported negative revenue growth. Accordingly, nine REITs registered DPU growth while the other half have DPU erosion. A closer observation reveals that the hospitality sector fare the worst with both Ascott REIT and CDL Hospitality REIT recording decrease in gross revenue as well as lower DPU. For industrial sector, all four industrial REITs recorded lower DPU although only MacarthurCook Industrial REIT recorded lower gross revenue. The office and retail sectors prove to be more resilient with most of the REITs reporting higher gross revenue as well as DPU. The most stable sector continues to be healthcare.
On a quarter-on-quarter basis, eight REITs reported revenue growth, one REIT reported flat revenue growth while nine REITs reported negative revenue growth. Accordingly, eleven REITs have DPU growth while six have DPU erosion and one with constant DPU.
The sectoral performance came as no surprise to us as we have long espoused the same order of revenue stability. The hospitality sector shows the greatest revenue volatility because revenue is sourced from direct visitor stays and these are mainly short term in nature compared to the tenant leases of the other sectors which are longer term and have locked-in rates. The industrial sector REITs have stepped-up rent escalation while the office sector REITs are still enjoying positive rental reversion from expiring leases. However from the quarter-on-quarter performance, we can see that the gross revenue for the industrial, office and retail sectors have all declined compared to mostly increases for the year-on-year performance. This may indicate higher vacancies or lower reversionary rents. While the hospitality REITs scored the worst performance on year-on-year basis, the quarter-on-quarter results provide some degree of respite. Ascott REIT has turned in a revenue growth and CDLH Trust recorded a much lower percentage of revenue decline. This could indicate that the tourist arrivals are picking up and we believe the hospitality sector would be the first sector to show signs of a recovering economy.
REITs – CNA
Opportunities for investors in Asian REITs amid rebound
Asian real estate investment trusts (REITs) have bounced back strongly in the first half of 2009, according to a recent analyst report by property consultancy CBRE. Their total market capitalisation rose 14.3 per cent for the period.
Analysts said on Thursday this performance was driven by improving credit conditions, government support for re-financing – especially for Japan REITs (J-REITs) – and successful rights issues as recently seen for Singapore REITs (S-REITs).
Other positive signs include the fact that many large-cap Asian REITs have managed to grow their rental income recently. In Singapore, the latest financial results of several REITs have performed up to or beyond analysts’ expectations.
Frankie Lee, head of property equities, Asia, Henderson Global Investors, said: “REITs have definitely rebounded very strongly, coming out of the issues of refinancing and also the cyclical downturn in the fiscal market. I think going into the second half, there’s still potential upside because some of the REITs are actually quite financially strong now, given some of the recapitalisation that they have done.
“REITs in Japan and also in Australia… can actually outperform further ahead because right now, the valuation is still very favourable. On the other hand, the asset markets have not really recovered as strongly as in other parts of Asia.”
Experts believe that one of the main challenges that will persist for most REITs will be to reduce their financial leverage. CBRE said this is especially so for those which have seen sharp drops in value for their assets, which may lead to potential breach in loan-to-value ratio covenants.
Another challenge is in growing distributions amid the current trend of falling rents. CBRE noted, for instance, that more than three quarters of J-REITs expect to see a drop in distribution dividends for the upcoming reporting period.
While the downturn has hurt many REITs in the region, market watchers said it has also helped investors to filter out the better buys.
Roger Tan, vice president, SIAS Research, said: “In good times, all REITs can raise debts, but it’s the bad time that determines whether the REITs are good or bad. In bad times, only the good REITs are able to repay or refinance their debts.”
Other criteria to consider include the potential of the REIT’s underlying assets and the track record of the REIT manager.
Most experts expect to see further recovery of the Asian REIT market next year, in line with a wider global economic recovery.
But they expect it to be a slow journey, with acquisitions and initial public offering activities unlikely to recover to pre-downturn levels in the near term.
A-REIT – CNA
Moody’s upgrades mainboard-listed Ascendas Reit’s outlook
Credit ratings agency Moody’s has upgraded its outlook on the rating for Singapore mainboard-listed Ascendas Reit.
It has now given the firm an outlook of “stable” rating, up from “negative”.
Moody’s said the upgrade reflects Ascendas Reit’s better credit metrics.
It noted that Ascendas Reit has been making ongoing efforts to improve its capital management, thereby strengthening its balance sheet and enhancing its financial flexibility.
However, Moody’s remains cautious of weaknesses in Ascendas Reit’s operating environment and the new supply of industrial properties coming on-stream, although it said that any weakness will be manageable, given Ascendas Reit’s good quality assets and improved financial workings.
REITs – DBS
Time to be selective
• 2Q09 results in line or at higher end of estimates
• Outlook stabilizing, sector recapitalization largely over
• Focus shifting to acquisition opportunities
• Top picks include CDL HT, ART, FCT, Suntec, MLT
Results generally in line. Sreits continued to put on a good showing in 2Q09, with yoy revenue, NPI and
distribution income growth of 9.2%, 11.7% and 8.2% respectively. On a qoq basis, revenue remained flat while
NPI and distribution income remained in positive territory. The key driver to this set of better results was the ability of retail and office landlords to retain high occupancies despite falling rents as well as better cost management; while hospitality players were able to partially offset a weaker topline with more prudent expense control measures.
Outlook stabilizing. Outlook for retail landlords appear to be stabilizing amid a moderated GDP projection and improving, but still lower yoy, retail sales. FY09 income had been largely secured with only a small quantum of renewals left for the rest of 2009. For office landlords, rentals are expected to be renewed positively in 2009, although negative reversions are expected to start kicking in from 2010 on weak supply/demand fundamentals. Hospitality landlords expect a better 2H09 vs 1H09 with improved forward booking patterns.
Sector has been substantially recapitalized, focus moving to acquisition opportunities. Sreit sector gearing
has declined to 31% with the $3.7b of capital raisings issued YTD. At this point, we believe any further capital raising exercises would be opportunistic or to fund new acquisitions given the current much lower cost of capital. In addition, the credit environment is starting to ease with strong liquidity flows and declining corporate credit spreads. We believe that Sreits that are likely to be better placed to benefit from acquisition growth as driver, would be those with sponsorbacking as well as Sreits in the industrial segment.
Top picks. Sreit sector is currently yielding a weighted average 7.5% on our FY10 estimates and trading at 0.76x P/bk NAV. Within the sector our top picks would be those with near term catalysts such as CDL HT and ART, which are key beneficiaries of the IRs and is projected to experience a recovery in earnings on the back of a better tourism outlook. We continue to favour retail landlords such as FCT for its suburban retail exposure and strong asset injection pipeline as well as Suntec on valuation grounds. Amongst industrial players, we prefer MLT for its higher than average yield of 9.4% and attractive P/NAV multiples.