Category: A-REIT
REITs – JPM
More fund raisings to come?
• Starhill Global REIT (SGREIT SP; NR) to raise equity. SGREIT announced that it proposes to raise S$337million through 1-for-1 rights issue at S$0.35 per rights unit. The fund raising will be fully underwritten with YTL Corporation committing to up to 75% of the total number of rights unit. Proceeds from the rights issue, according to management, will be used to pare down some of its existing debt, and to capitalise on AEI and acquisition opportunities.
• S$5bn capital raised for the sector, how much more do we need? We estimate that S$5bn capital has been raised from the S-REIT sector with S$2.9bn from equity capital market and S$2.1bn from debt capital market (including debt extension) The sector is currently geared at 31% with interest coverage ratio comfortably at above 4.0x on our estimates, with no more debt refinancing for most of the S-REITs over the next 6 months. That said, we are still looking for about S$1bn equity capital to be raised in the space to convert some of the debt to permanent capital.
• Opportunistic capital raising to come? Despite the substantial amount of equities being raised YTD, J.P. Morgan S-REITs index has increased by 30% since its March low. Share prices for some of the S-MID cap REITs have more than doubled from the trough, which in our view could help to propel management’s decision on potential opportunistic equity capital raisings. In addition, the ever closing gap between the listed and public real estate could provide trust management with more reasons to further strengthen its balance sheet.
• Our top picks for large-cap S-REITs remain A-REIT and CMT, which we believe would generate more than 15% in total return at this level. Our picks amongst the SMID-cap S-REITs are FCT and AIT.
Link – Tables
AREIT – BT
Four banks to help A-Reit raise $275m: report
Three development projects completed by the Reit in FY2009, says CIMB
ASCENDAS Real Estate Investment Trust (A-Reit) is said to have hired four banks to help it raise $275 million to pay maturing debt.
According to a Bloomberg report that quoted an unnamed source, Australia and New Zealand Banking Group, OCBC Bank, Natixis and Standard Chartered plan to syndicate a three-year loan to other banks by mid-July.
In response to a query from BT, Tan Ser Ping, CEO of the trust manager, said: ‘We have always been and will continue to explore opportunities to increase and diversify our sources of debt funding.’
Stanchart and OCBC declined to comment on the Bloomberg report.
‘The banks may provide indicative pricing to lenders as early as next week,’ the report quoted its source as saying.
A-Reit’s major debt that needs refinancing this year is $300 million of commercial mortgage-backed securities due in August.
‘Refinancing of this loan has already been taken care of through a committed term loan of $200 million and another $100 million from equity raised in January 2009,’ Mr Tan said.
Separately, CIMB-GK Research issued a research note yesterday, maintaining a ‘neutral’ on A-Reit, with a target price of $1.63. The report was based on feedback during a recent roadshow in Kuala Lumpur.
‘Management admits that the outlook for the industrial market remains poor,’ the report said. ‘It expects occupancy of its sale-and-leaseback buildings to hold at 100 per cent, and that of its multi-tenanted buildings to decline.’
The report said the decline will come from existing tenants.
At the same time, CIMB pointed out that A-Reit completed three development projects in FY 2009 – Pioneer Hub, 15 Changi North Way and 3 Changi Business Park Crescent – which will contribute to the current year’s top line.
As far as acquisitions are concerned, ‘management is more inclined to be conservative in view of unpredictable access to capital’, the report said.
A-Reit closed at $1.57 yesterday, down eight cents.
AREIT – CIMB
On the road
Feedback from KL roadshow
During a recent Kuala Lumpur roadshow, AREIT fielded questions from investors on the operational resilience of its portfolio and forward strategy.
Falling occupancy + positive reversions + completed development projects = flat NPI. Management admits that the outlook for the industrial market remains poor. It expects occupancy of its sale-and-leaseback buildings to hold at 100%, while that of its multi-tenanted buildings to decline. The decline is attributed to the downsizing of existing tenants, rather than complete relocations. AREIT estimates a retention rate of 70% for existing tenants for FY10 (80% in FY09), and assumes that space given up will not be taken by new tenants. This would result in a 5% fall in portfolio occupancy.
Positive reversions. Current average market rents for Business & Science Parks and the Hi-Tech segment have declined 15% (to S$3.50 psf/month) and 10% (to S$2.70 psf/month) from Dec 08, respectively. Despite a narrowing gap between passing rents and market rents, management believes that rentals for both segments could still benefit from positive reversions of 10-15%. Management rationalises that there remain incentives for most tenants to accept moderate increases in rents given a favourable rental gap and costs of relocation.
Development projects. AREIT completed three development projects in FY09: Pioneer Hub, 15 Changi North Way and 3 Changi Business Park Crescent. These would contribute to the current year’s topline. The multi-tenanted building and amenity centre in Changi Business Park, and Expeditors’ build-to-suit project at Airport Logistics Park will be completed in 2009.
Main concern is economic recovery, rather than supply. About 3.5m sq m of industrial space is expected to enter the market over the next three years This represents a 3% increase p.a. based on a stock of 35.3m sq m as at Mar 09. In mitigation, take-up for about half of the Business & Science Park segment has been pre-committed while more than half of the Hi-Tech and Light Industrial supply will be built by industrialists for their own use. Management’s main concern is economic conditions, which determines the demand for industrial space.
Future acquisitions. Although acquisitions are possible with property yields in excess of 8% and borrowing costs of 4%, management is more inclined to be conservative in view of unpredictable access to capital. For the same reason and other operational reasons, it sees the probability of M&As among industrial REITs as limited.
Valuation and recommendation
Maintain Neutral and target price of S$1.63. Guidance of flat net property income is more conservative than our own estimates which have assumed moderate growth of 4.7%. However, our assumption for average of debt for FY10 is higher than guidance (4%), at 4.3%. Overall, we believe our assumptions reflect a realistic performance for AREIT this year.
P/BV for AREIT has risen to 1.0x, a premium over the sector average of 0.6x. At this level, we believe AREIT is fully valued. Maintain Neutral and DDM-based target price of S$1.63 (discount 8.7%).
AREIT – MS
Steady as She Goes – Initiating at Equal-weight
Initiating coverage of Ascendas REIT with an EW rating and S$1.70 price target: A-REIT is our new sector top pick, with 11% upside. We like A-REIT for its high dividend yield of 8.5% for F2010e and 8.7% for F2011e, supported by long-term leases, a diversified tenant base, and its ability to generate inorganic growth via development of built-to-suit properties. A-REIT is now our sector top pick, given its high dividend yield compared with other large cap peers, limited risk of further capital raising, and recent underperformance (since STI low in March 09) that we believe to be unjustified. At current levels, A-REIT is trading at a 12m forward yield premium of 2.6% and 2.8% to CCT and CMT – high compared with the historical yield premium of 1.7% and 1.0%, respectively.
Long-term leases provide stability: A-REIT’s portfolio of sale and lease-back (SLB) properties, which are typically occupied by single tenants, contributes ~50% to net portfolio income, we estimate. These leases typically run for 5-15 years with annual step-up clauses and provide A-REIT with income stability.
Development capability supports dividends: Since its IPO in 2002, A-REIT has completed or is currently in the process of completing a total of 11 properties worth ~S$650mn. Built-to-suit properties have higher yields than acquired properties and long-term tenants that give stability to the portfolio. A-REIT has executed its previous built-to-suit properties well, we believe, and should continue to attract tenants seeking built-to-suit properties.
Risks to our call – Positive: Vacancy levels rise more slowly than expected; A-REIT announces new development projects. Negative: Faster-than-expected rise in vacancies and fall in rentals; loss of a large tenant in one of A-REIT’s single-tenanted buildings.
REITs – MS
Still the Best Way Forward
Maintain In-Line view: S-REITs remain our preferred sector exposure within the Singapore property space at least for 2009. S-REITs have not disappointed in terms of refinancing their debt. Indeed, they recapitalized their balance sheets 6 months ahead of our expectations. At least for 2009 and to a certain extent 2010, there is less risk of S-REITs cutting their dividend payout due to pressure from rising leverage. We remain comfortable that the recent fall in commitment rents will be marginally negative for 2009 earnings given that the brunt of the decline will be felt only in 2010 and 2011. A near-term positive catalyst for S-REITs is if the benchmark interest rate remains low after its recent decline.
We have a new sector top pick – A-REIT: We initiate coverage on A-REIT with an EW rating and price target of S$1.70, suggesting 11% upside from current levels. We like its 8.5-8.7% FY2010-11E dividend yield, the highest amongst its larger-cap peers, and find its recent underperformance unjustified. See our note, Steady as She Goes, published June 9, for details.
What’s new: We have revised our earnings forecasts by -1% to 39% for F2009-10E and raised our price targets by 17-112%. Given the improvement in liquidity in the equity market, investors may be willing to pay a premium above intrinsic value. Hence, for stocks that have recently recapitalized, we assign a 30% probability to our bull-case NAV and a 70% probability to our base-case NAV to calculate our price targets. We are maintaining our EW ratings on CapitaCommercial Trust, CapitaMall Trust, and CDLHT, and are downgrading Suntec REIT to Underweight given its 23% downside risk from current levels. We maintain our UW on ART.
Our investment philosophy for the S-REIT sector remains intact. Given that all the property segments – office, retail, industrial, and hospitality – are seeing oversupply for 2009-2010, the playing field is level. Moreover, all the S-REITs within our coverage are backed by strong parents and quality assets within their respective segments.