Category: A-REIT
REITs – UOBKH
Assessing Risk Of Inflation
Bond yields have risen in both the US and Singapore. In the US, yield for 10-year Treasury bonds has increased 71bp from 3.12% as at end-April to the current 3.83%. In Singapore, yield for 10-year government bonds has increased 52bp from 2.04% as at end-April to the current 2.56%.
Huge drop in commodity prices virtually eliminates inflation. The Consumer Price Index in the US and Singapore are both in negative territory, falling 0.7% in Apr 09. The US Producer Price Index was -11.6% while Singapore’s Manufactured Producer Price Index was -16.6% in April. Inflation at both consumers’ and producers’ levels is almost non-existent due to the huge drop in crude oil and other commodity prices on a yoy basis.
Expect inflation to be more severe in the US. A study of yield curves indicates that the market expects inflation in the US to intensify going forward. Yield curve based on US Treasury bonds steepened by 30-36bp in May 09 and by another 30-49bp in the first week of June. Yield curve based on Singapore government bonds steepened by 11-57bp in May 09 but eased off by 5-11bp in the first week of June. The behaviour of the yield curves, especially in the first week of June, indicates that investors are concerned that the US could experience higher inflation in the future due to monetary and quantitative easing.
Maintain OVERWEIGHT. Singapore is well protected by a strong Singapore dollar, which is supported by fiscal prudence. The Singapore dollar has strengthened 5.5% from S$1.52 to S$1.44/US$ so far in 2Q09.
Current yield spread is 3.60%, higher than historical average of 3.22%. We expect yield spread to contract further due to normalisation in the credit markets. Refinancing risk has abated with partial resumption of lending activities in the local banking industry. We prefer switching to laggard retail and industrial REITs. BUY Frasers Centrepoint Trust (BUY/S$0.945/Target: S$1.44) and Ascendas REIT (BUY/S$1.60/Target: S$1.93). Our only BUY call for office REITs is K-REIT Asia (BUY/S$1.08/Target: S$1.16).
Link – Table
Office REITs – UOBKH
Office REITs – Outstripping Improvement In Fundamentals
The Federal Reserve extended the TALF programme to commercial mortgage-backed securities (CMBS) starting 1 Jun 09, hence the optimism and rally for S-REITs. However, we believe the rally in the past two weeks for office REITs has already factored in the improvement in fundamentals.
Office rentals still falling but at a slower pace. Due to the ongoing financial crisis, rentals for prime office space corrected 6.8% in 4Q08 and 30.0% in 1Q09 to S$10.50psf pm after hitting a peak of S$16.10psf in 3Q08. The Raffles Place micromarket registered the steepest fall of 17.9% in 4Q08 and 28.5% in 1Q09 to S$10.50psf pm. Our survey of office REITs indicates that office rentals have fallen by a slower 5-10% so far in 2Q09 due to an improvement in market sentiment.
Deals starting to flow. There are more transactions in the secondary market for strata office space recently. Capital value for Suntec City Office Towers has rebounded 10.8% to S$1,781psf ytd. Capital value for International Plaza has similarly rebounded by 9.2% to S$1,100psf. Unlike in previous recessions, there has been no distress or fire sale in the office market during the current recession. As such, cap rates have been stable.
Revaluation results in higher gearing. We remain concerned about the correction in office rentals due to new supply coming on stream. A total of 8.3m sf of office space will be completed from 2Q09 to 2013, representing 11.5% of total stock. A markdown in the value of investment properties on revaluation will result in higher gearing and potential rights issues.
Maintain OVERWEIGHT for REITs. Current yield spread is 3.61%, higher than the historical average of 2.97%. We expect yield spread to contract further as credit markets normalise. Refinancing risk has abated with the potential reopening of the CMBS market. We prefer switching to laggard retail and industrial REITs. BUY Frasers Centrepoint Trust and Ascendas REIT. Our only BUY for office REITs is K-REIT Asia.
Link : Table
REITs – ML
Growth momentum limited; Maintain cautious stance
Bulk of equity issuance completed
YTD S-REITs have raised S$2.5bn in new equity (19% of end 2008 market cap). While we believe that the bulk of the sector funding has now been resolved, we maintain our cautious stance. YTD S-REITs are up 13%, underperforming both the STI (+27%) and developers (30%). We expect underperformance to continue as we are unable to identify significant catalysts that will re-rate the sector.
Appetite for acquisitions limited
Improvements in the debt and equity markets bode well for the outlook for REITs given the capital intensive nature of the business model. Despite this we struggle to see how REITs will be able to achieve significant growth momentum over the next 12 months. We believe REIT managers will continue to maintain a conservative stance with regards to gearing and that without an appetite for further acquisitions, earnings upside will be limited to organic growth.
Growth outlook still muted
Given the downturn in the property market, no sub-segment has been spared and both rentals and occupancies are under pressure. In particular, we expect operating metrics for the office and industrial sub-segments to weaken. Looking across the S-REITs, we expect an average of 4% negative DPU growth in 2009 and 2010 respectively. This is driven primarily by lower rentals, higher debt costs and the dilution from recent equity issuance.
CMT remains our preferred S-REIT pick
Our preferred exposure to the sector remains CapitaMall Trust given its weighting to the retail sector which we believe will fare relatively better verses other property sub segments. We remain negative on the industrial exposed A-REIT and expect its operating metrics to face further downward pressure. Given our expectation that the office market will not show signs of recovery until at least 2012, we would also avoid office-exposed CapitaCommercial Trust and Suntec.
AREIT – JPM
Built-to-suit development for SingTel – a long-term accretive deal
• New built-to-suit development announced. A-REIT announced that it has secured from SingTel a built-to-suit development project of a 9- storey hi-tech industrial building. The estimated total investment for the building, land and equipment is estimated at S$175.4million and the project is expected to complete by 1Q2010. Upon completion, SingTel will lease the entire building for an initial tenure of 20 years with annual rental escalation, and an option to renew for a further 10 years on expiry.
• Fine-tuning our estimates. Upon completion, annual DPU accretion would be about S$0.28cents/unit based on management estimates, and we have therefore raised our DPU estimates from FY11E onwards by about 1.5 -2% p.a. Our FY10 estimate for gearing has also been increased to 38.7% to account for the additional borrowings.
• Long-term accretive deal, but cost of equity raised in the short run. Average yield on cost for the entire 20-year period is slightly over 10% according to management, but we estimate that the initial passing yield on cost would be lower at about 6.5%. Although gearing for A-REIT would increase by only 1% as a result of this transaction and the trust has a ready revolving credit facility to draw down, the incremental cost of debt and its implication on cost of equity would be higher than it appears under current credit environment in our view; and we see some short-term share price vulnerability as a result.
• We retain our Overweight rating on AREIT, with a reduced Dec-09 price target of S$1.65/unit (S$1.70/unit previously), based on our DDM valuation using 8.5% discount rate (8.2% previously). Key risks to our rating and price target include a worse than expected deterioration in operating fundamentals and a prolonged capital markets downturn leading to elevated costs of capital for A-REIT.
AREIT – DB
AREIT announces S$175m devt project for Singtel
AREIT will be undertaking the build-to-suit development of a hi-tech industrial blg for Singtel. The est. invt cost is S$99.6m with a further S$75.8m for the installation of additional equipment. This brings AREIT’s devt pipeline to 4 projects amounting to ~S$334m. The blg is expected to have GFA of ~353,723sf upon completion in 1Q10. Singtel will enter into an agreement to lease the devt for an initial tenure of 20 years with annual rental escalation and option to renew for a further 10 years on expiry.
This devt is DPU accretive, with pro-forma DPU accretion of 0.28cts (no comments on the yield; we estimate ~8-8.2%) and 2% net profit contribution, assuming fully debt funded and held for the whole of FY09E. The stability of the long lease, high credit quality of Singtel and absence of leasing risk could justify a tighter yield. It has commented that it may fund the devt by debt and/or equity. AREIT currently has 51% of unutilized bilateral banking credit facilities of S$1,120m and may issue notes from its recently established S$$1bn MTN prog Gearing could potentially rise to around 37.4% (fr 35.5%) assuming full debt funding.
AREITs development activities provides a competitive advantage in delivering DPU growth even in the absence of open market acquisitions. It has historically achieved avg 35% value accretion upon completion (although this is unlikely to be achieved for this transaction), and this may offset book value erosion from potential revaluation deficits. We maintain our Buy with TP of S$1.80. AREIT is currently yielding 9.5% for FY10E.