Author: tfwee
REITs – BT
Trusts’ resilience boosts Reit index
Better than expected results from Reits for Q2, revised GDP forecasts lead investors to turn positive on outlook
INVESTORS are heaving a sigh of relief – and putting some money back into the stock market – following better-than-expected results from some real estate investment trusts (Reits).
The FTSE ST Real Estate Investment Trusts Index has risen by almost 4 per cent on heavier trading volume since Reits started posting results a week ago. It closed at 494.82 yesterday.
Generally, results released so far ‘are either in line, if not slightly above’ expectations, said DBS Vickers analyst Lock Mun Yee.
Despite concerns about falling rents and occupancies in the office sector for instance, CapitaCommercial Trust (CCT) and K-Reit Asia have managed to post year-on-year increases in distributable income and distribution per unit (DPU) for their latest financial quarter.
CCT’s operating results exceeded the expectations of OCBC Investment Research analysts Meenal Kumar and Foo Sze Ming. It was ‘able to achieve new rents 45 per cent higher than previously signed rents, despite the 17.5 per cent quarter-on-quarter decline in Grade A office rent in 2Q 2009’.
Some retail Reits also displayed resilience amid the recession. Frasers Centrepoint Trust, which manages a portfolio of suburban malls, achieved a slightly higher DPU for the last financial quarter compared with a year ago.
And considering how the hospitality industry has been hit by the downturn and the spread of H1N1 flu, the year-on-year fall in Ascott Residence Trust’s DPU in the latest quarter did not surprise many. In fact, the market could have been comforted by the trust manager’s observations – that the sector is showing signs of stabilisation.
Ascott Reit’s unit price has gained more than 9 per cent since results were released last Thursday morning.
Of course, investors’ outlook could have improved even before they got a glimpse of the Reits’ results. The government recently revised its GDP forecast upwards and stock markets have been enjoying a long rally.
Ms Kumar and Mr Foo believe that ‘the price performance is more a function of outlook rather than Q2 performance’. Looking back further, the FTSE ST Real Estate Investment Trusts Index breached the 400-point mark in as early as May, and has risen by more than 16 per cent since.
While market forecasts have become rosier, a robust recovery has yet to take shape and investors could remain jumpy.
Ms Kumar and Mr Foo advise investors to continue paying attention to Reits’ balance sheets – the risk of falling asset values still exists and that could increase gearing levels.
DBS Vickers’ Ms Lock also said that Reits’ operational strength will come into focus, as they try to maintain earnings under ‘moderated economic conditions’.
Cambridge – Phillip
Cambridge Industrial Trust reported results for 2Q09. CIT recorded gross revenue of $18.5 million (+2.8% yoy, flat qoq), net property income of $16.0 million (+0.9% yoy, flat qoq) and distributable income of $10.7 million (-13.8% yoy, +0.04% qoq). DPU for 2Q09 is 1.345 cents.
Gross revenue is stable with slight growth over the quarters. Occupancy rate improves slightly from 99.2% in 1Q09 to 99.5% in 2Q09. Distributable income has however decreased since 1Q08 to 1Q09 before improving slightly in 2Q09. The main reason for the decrease is the progressively higher interest cost CIT paid on its loans. CIT has maintained a gross margin of approximately 0.9x. Distributable income margin dropped from 0.7 in 1Q08 to the 0.6x level. We expect it to maintain at this level as interest payment should not varies much for the remaining term of loan.
Property portfolio was revalued downwards by 9%. Portfolio value fell from $967.7 million to $880.3 million. Correspondingly, gearing rises from 39.8% to 43.8%. CIT single loan maturity of $390 million is due in 2012. A point of concern is that further portfolio valuation drop may starts to breach bank covenants. CIT needs to maintain a LTV ratio below 0.55 and interest cover above 2.2x. Currently CIT has a LTV of 0.46 and interest cover of 3.2x. We estimate portfolio value will have to fall a further 17% before the LTV covenant is breached.
Our revenue forecasts have assumed a portfolio vacancy of 3%. Portfolio performance in the last two quarters was lower than our assumptions. We thus revise our vacancy assumption to 1%, still slightly conservative compared to CIT actual occupancy rate. We have also revised down the management fee following the downward revaluation of the portfolio. We raise our DPU forecast from 4.73 cents to 4.93 cents. Fair value is raised marginally from $0.44 to $0.45. In view of the recent run-up in price, we lower our rating from Buy to Hold.
FCT – OCBC
3Q NPI boosted by Northpoint
Pays out 1.94 S cents. Frasers Centrepoint Trust (FCT) posted S$21.2m in gross revenue, up 1.8% YoY and 0.5% QoQ. The REIT will distribute S$12.1m to unitholders, up 4.1% YoY and 4.4% QoQ. The YoY and QoQ improvements in distributions are due to a 100% payout this quarter versus a 95% payout in 2Q09 and 3Q08. Excluding the payout difference, distributions would have slipped. Results beat our expectations.
3Q NPI boosted by Northpoint. Causeway Point (CP) and Anchorpoint (AP) registered a 7% and 7.7% QoQ drop in net property income (NPI)respectively in 3Q09. Margins fell as revenue recorded smaller QoQ changes of -3% and 0.2% at the two properties. AP also saw occupancy fall from 99.5% three months ago to 93% though the manager did say committed occupancy stands at 97.2% there as at June. The erosion in NPI at these two properties was offset by gains at Northpoint, where asset enhancement (AEI) work is finally drawing to a close. The combination of rising occupancy and higher post-AEI rents led to a 35% QoQ increase in NPI at the mall. Consequently, NPI was up 0.1% for the overall portfolio.
What next? 97% of NP’s NLA has already been leased or is in advanced stages of negotiations with tenants. The manager is projecting a 20% increase in average rents at the mall from S$11 per square foot per month to S$13.20 psf pm. This should flow through to 4Q09 results. Meanwhile, FCT issued S$75m 3-year fixed rate notes in June, which it will use to repay short-term debts. Gearing is expected to consequently fall to below 30%. AEI plans at CP, which were postponed, could potentially be resurrected now that the macro picture and credit market look to be stabilizing. But CP is the portfolio’s key revenue driver and investor appetite for DPU stability may be a constraint. Meanwhile, the manager said two malls in the pipeline were “ready for acquisition”. Financing and pricing of any acquisition is still a question mark, however, in our opinion.
Valuation. We have increased our earnings estimates to reflect the positive rental reversions achieved in 9M09 as well as the post-AEI support from NP. We still expect declines in achieved rent in FY10, however. We are also lowering our cap rate assumptions by 40 basis points. Our new fair value estimate is S$0.95 (prev: S$0.75), at par to our SOTP value for FCT. We are estimating yields of 7.2% and 7.7% in FY09 and FY10. Maintain HOLD.
PST – DBS
DPU cut will add little value
• Plans to cut payout from current 90% to potentially 70% from 3Q09
• FY10 DPU forecast reduced by 20%
• Gearing, distribution policy already conservative
• We see limited strategic potential of this move, downgrade to FULLY VALUED, TP US$0.22
2Q09 results, payout in line. Pacific Shipping Trust’s 2Q09 results were in line with expectations and consistent with 1Q09 performance – with revenue of US$15.5m and net distributable cash of US$5.8m. The Trust paid out 90% of total cash generated (after debt repayment)- as per its practice in previous quarters – and DPU amounted to 0.99UScts per unit, compared to 0.98UScts in 1Q09 and 1.09UScts in 2Q08.
Rationale behind DPU cut is not clear. The Trustee Manager will be reviewing its distribution policy, with a view to reduce payout and conserve more cash from 3Q09. Management anticipates that payout for 3Q09 would not be lower than 70%. Given that PST is already the most conservative among the three shipping trusts in terms of distribution policy and gearing – distributable cash is only arrived at after accounting for debt repayment every quarter – we are not sure how the proposed DPU cut will add value. While management remains on the lookout for opportunistic acquisitions, the US$1.5-2m additional cash that can be saved per quarter does not look to be realistically significant for any transaction.
Looks expensive on FY10 basis. On other fronts, the discussions with troubled customer CSAV are still ongoing and we look for a ~30% charter rate cut at worst. Adding the impact of the cut in payout, we reduce our FY09 and FY10 DPU forecasts by 8% and 20%, respectively, and downgrade the stock to Fully Valued at a TP of US$0.22 (target yield of 12% on FY10 DPU). Having gained 72% YTD, the stock – trading at 10.7% FY10 yield – looks expensive compared to its peers.
CMT – DBS
Slowly but steadily
• 2Q09 results within expectation
• Occupancy remains high, slight positive rental reversion
• Maintain Buy with TP $1.68
Still holding ground. CMT reported a 10.4% rise in Q2 revenue to $138.6m while NPI improved 12.2% to $93.8m. Distributable income of $67.9m (DPU 2.13cts) was 15.8% higher than previous period. On a qoq basis, all operating metrics continued to show positive growth of 3%, 1.5% and 8.5% respectively. The group took a $276.2m deficit in the value of its assets, lowering book NAV to $1.56.
Occupancy levels sustained. The better sequential performance was due organic growth with 223728sf of NLA being renewed at rents 1.5% higher than previous levels. Portfolio occupancy remained at a high 99.7%. The growth in bottomline was also aided by lower interest cost at the group repaid loans with the rights proceeds. Outlook is ‘cautiously optimistic’ with a slight 2.2% recovery in pedestrian footfalls. However, tenant sales psf growth remained anemic at this point. Trade sectors that continue to do well were basically necessity shopping. CMT has a remaining 13.9% of GRI to be renewed this year with another 36.5% and 25.7% in FY10 and FY11 and we expect them to be able to recontract these at modest but positive improvement over previous levels.
Maintain Buy. Management’s ability to grow rents despite the challenging conditions while maintaining a high occupancy level underlines its good track record as retail property managers. We have lifted FY09 and FY10 DPU to 8.6cts and 9.1cts on higher portfolio occupancy assumption of 99% vs an earlier 95%. The stock is currently trading at 5.5-5.8% DPU yield and offers a 12% total return.