Category: ART
ART – BT
Ascott Reit’s $1b note programme
ASCOTT Residence Trust (ART) now has access to $1 billion by way of a multi-currency medium term note (MTN). Ascott Residence Trust Management Ltd (ARTML), the Reit manager, has appointed DBS Bank to act as the arranger and the dealer of the MTN programme.
In a statement released yesterday, ARTML said the MTN may be used to refinance existing borrowings, to finance/ refinance investments, to on-lend to any trust, fund or entity in which ART has an interest, to finance/refinance any asset enhancement works and for the general working capital of the group.
In July, it was reported that ART plans to renovate Somerset Grand Cairnhill and Somerset Liang Court in phases. It was also reported then that ART had posted year-on-year declines in distributable income of 17 per cent for the second quarter and 20 per cent for H1. On a quarter-on-quarter basis, the Q2 2009 figure was up 2 per cent from the preceding quarter.
Most Reits have been adversely affected by the economic downturn. Since June, five other Reits have conducted rights issues or private placements for funds to raise more than $1.23 billion.
REITs – OCBC
Opportunities for yield arbitrage
Yield divergence. S-REITs have re-rated strongly YTD on the risk rally but the gains haven’t been equally distributed. We are seeing some interesting pockets of yield divergence. Using consensus estimates, Suntec REIT is trading at a 300 points yield premium to CapitaCommercial Trust (CCT) despite support from its retail portfolio and fairly similar gearing. Similarly, consensus DPU estimates for Suntec and K-REIT are identical over FY09-10, but Suntec still trades at a significant yield premium. Part of the premium, in our view, is driven by expectations of an equity issue. Meanwhile, CDL Hospitality Trusts is trading at a 260 basis points premium to Ascott Residence Trust (ART). Gearing and geography may play a part here.
Outlook driven? There is also some notable yield divergence between sectors. Pure foreign plays (excluding Saizen and First REIT) are trading at an average consensus yield of 8.8% versus the office REITs at an average of 10.1%. This is an interesting discrepancy that is overriding the typical country risk premium that is awarded to some of those names. Industrial and office REIT yields are at par on average, but average price to book is 0.7x for the industrials versus 0.5x for the office owners.
Arbitrage opportunity. Economic data is still really sideways, in our view – there is some recovery and bottoming out thanks to stimulus efforts but private sector and consumer activity is still a question mark. As such, we don’t expect much capital appreciation for the sector ex major news flow. We do expect opportunities for yield arbitrage as the divergence corrects, especially as clarity increases on the office outlook.
Rights issues, repackaged. Recent activity in the sector includes equity issues (A-REIT, round two); acquisitions (Suntec and K-REIT); and a combination of both (Fortune REIT). Things don’t change as much as branding does: managers will toss around buzz words including “position of strength” and “acquisition opportunities” but the end result will be the same: further equity issues. This is not always a bad thing, in our opinion, as either avenues of growth open up or gearing is lowered (still desirable). We expect more activity as: 1) managers exploit significant re-rating; 2)laggard REITs start de-leveraging; and 3) managers resort to inorganic options to propel the next leg of DPU growth, or even to sustain DPU. We identify Suntec, Mapletree Logistics Trust and Frasers Centrepoint Trust as likely candidates for an equity/acquisition two-for-one in the next six months. Maintain NEUTRAL; top picks are CCT and ART.
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.
ART – CIMB
Holding firm
• In line. 2Q09 distributable income of S$11m (-17% yoy) and DPU of 1.79cts (-18% yoy) were in line with Street and our expectations, forming 25% of our full-year estimate. 1H09 DPU of 3.56cts forms 49% of our full-year forecast. Gross profit of S$20.8m fell 11% yoy but improved 5% qoq. Although demand for serviced residences slowed globally yoy, ART’s qoq performance was boosted by contributions from Somerset St Georges Terrace and Somerset Westlake which were acquired after 2Q08, and improved gross profit margins (+1.3% pts qoq).
• REVPAU of S$119 was down 17% yoy. With the exception of flat REVPAU in the Philippines (+1%), REVPAU in all other countries fell: Singapore (-39%), China (- 19%), Vietnam (-12%). Yoy, portfolio REVPAU of S$119 was down 17%.
• Asset value down S$60.6m to S$1.55bn; 100% cash distribution. As at 30 Jun 09, HVS International revalued ART’s portfolio at S$1.55bn (-1.8% from Dec 08 valuation). After revaluation, NAV is now S$1.36 and price/NAV is 0.62x. Management says cap rates had not changed from December levels, and the lower valuation was blamed on lower REVPAU assumptions for serviced residences in China and Japan. It expects valuations to remain flat in Dec 09, in line with an anticipated improved performance in 2H09. There has been more aggressive marketing of ART’s properties, particularly for longer stays of more than one month and it expects fruits by 2H09. REVPAU is expected to improve moderately by 5- 10%. ART says it will be maintaining its 100% cash distribution policy.
• Downgrade to Neutral from Outperform; no change in estimates and DDMbased target price of S$0.79 (discount rate 10.3%). We maintain our forecast of a 13% decline in full-year REVPAU, in keeping with guidance. Our capex assumptions for FY09-11 are also in line with guidance. ART has risen 22% since our upgrade on 10 Jul, to exceed our target price of S$0.79. As such, we downgrade it to Neutral.
ART – OCBC
Signs of stability; upgrade to BUY
QoQ improvement. Ascott Residence Trust posted a 2% QoQ increase in 2Q revenue to S$43m, and a 1.4% QoQ increase in distributable amount to S$11m. The 1H distributable amount made up 53% of our full year estimate. Portfolio RevPAU for the quarter was S$119 compared to S$120 in 1Q09. ART will pay out 3.55 S cents for 1H09.
Performance encouraging. Market concern was that performance would continue to slide in 2Q09 on top of the steep falls in the last two quarters. Instead performance in major markets levelled off or recovered slightly. ART noted that corporate travel is showing signs of life: for instance, project group demand – which had largely dropped off as companies froze spending – is back, albeit on shorter commitments. Going forward, the manager sees “signs of stability with a slight bias towards an uptrend” as aggressive marketing efforts and steep rate cuts pay off. Singapore and China guidance was positive. We do note that our channel checks show continued rate
weakness and aggressive free-nights promotions in the Shanghai and Beijing markets. Generally the extended-stay market seems to have bottomed out but the size and shape of the recovery is still uncertain, in our view.
Balance sheet concerns easing. ART recorded a revaluation deficit of S$61m, with 2Q NAV down 10% QoQ to S$1.36. The manager maintains it is comfortable within 45% leverage (40.7% now) and 3x interest cover (3.4x now), and does not need to recapitalize its balance sheet. The credit markets have unclogged and we don’t expect the S$105.7m loan maturing this year to present any significant refinancing challenges. We also believe that the need for, and impact from, any recapitalization-focused cash call has diminished in view of the recent price rally and improved operating outlook. Any equity-raising attempt would likely be paired to an acquisition,
in which case ART can afford to wait for even better equity pricing.
More benign expectations. Our FY09F and FY10F distributable amount estimates are up 9% and 17% over previous estimates, reflecting our expectation of stabilization at current levels. Our new SOTP value for ART is S$1.14 (prev: S$0.82). This excludes our previous cash call assumption, as its current valuation impact is minimal. Market conditions have eased dramatically and we feel the risk of further stress on ART’s portfolios and balance sheet has abated. Consequently, we are lowering our “uncertainty discount” to SOTP from 25% to 15%. Our new fair value estimate is S$0.97 (prev: S$0.61). Upgrade to BUY.