Category: FCOT
SREITs – OCBC
Impact of Japan’s earthquake & tsunami
Residential REITs. Saizen REIT (Not Rated), with 146 properties all over Japan, will be the most affected S-REIT, in our opinion. The impacted region includes the cities of Sendai with 22 properties, Koriyama and Morioka with three properties each, making up 15.5% of its portfolio value (PV). Most notably, Sendai (nearest quake epicenter) constitutes 11.2% of Saizen’s total portfolio value and 10.6% of rental income. The full extent of the damage is still unknown as access to these areas has been cordoned off due to safety concerns.
Industrial REITs. MLT has 14 properties in Japan (26.4% of PV) of which 13 escaped with either no damage or minimal damage. Sendai Centre (2-storey chilled and frozen facility, contributing 0.75% of PV & 0.7% of MLT’s gross revenue), is located along the coastal area of Sendai, and appears to be most affected. However, the full extent of damage can only be ascertained when access into the property is allowed. The total cost of reinstating the building is ~S$9m (0.37 S-cents per unit), but MLT does not expect the cost of repairs will come to this amount. We place our BUY rating and fair value of S$1.03 under review pending more updates and clarity from management. AAREIT (Not Rated) also has a warehouse at Saitama (4% of PV) to be sold pending sale completion in Mar 2011. AAREIT has announced that there appears to be no structural damage to the property.
Office REITs. FCOT has three commercial properties in Tokyo and Osaka (6.9% of PV). We understand from the manager that all properties are away from the affected areas and thus did not suffer any damages. With FCOT’s limited exposure in Japan, we maintain our BUY rating and fair value of S$0.92.
Retail REITs. Starhill Global REIT has seven malls in Tokyo (6.6% of PV, 4.6% of total gross revenue). The manager has stated that there is no known damage to the malls. In addition, the properties were also partially covered by earthquake insurance (unlike properties in other REIT subsector), providing some form of assurance for unitholders. We expect retail sales in Japan to be impacted somewhat but maintain our BUY rating and target price of S$0.74.
Taking a cautious stance. Nevertheless, we remain cautious as events in Japan are still unfolding and at this stage, it is hard to predict the extent to which the quake and the nuclear fallout will hurt the economy. There is also the possibility of more quakes (likely 7.0 or higher magnitude), aftershocks and even tsunamis taking place in the coming days.
Office REITs – OCBC
Common Themes of FY10 results; Maintain OVERWEIGHT
Negative rental reversion bottoming out. After FY10 results, we found a few common themes in the guidance given by Office REITs managers. Firstly, most Office REITs with Grade-A office assets expect negative rental reversions to bottom out by end 2011. In FY10, negative rental reversions were still prevalent in some Grade-A properties such as Six Battery Road and One George Street. One Raffles Quay and Suntec City1 also saw YoY declines in gross revenue contribution, but this is expected to turn around in 2011-2012. According to CBRE, Grade-A rents averaged S$9.90 psf/month in 4Q10, reflecting an increase of 10% QoQ and 22.2% YoY. Grade-A rents bottomed at S$8 psf/month in 1Q10 and have since risen some 23.8%. We see room for more rental upside ahead and forecast Grade-A rents to hit S$10.50 psf./month in 2011, more than S$11 psf/month in 2012 and above S$12 psf/month in 2013. However, non-Grade-A properties will see more gradual recovery, where they will bottom out possibly only after 2012-2013.
Hollowing-out concerns a passé. Most Office REITs hold the view that earlier concerns of the “hollowing-out effect”, as the vacated space is readily being taken up by existing tenants wanting to expand or occupiers from other buildings. This is corroborated by CRBE findings which reported that that Grade-A vacancy dipped to 2.7% in 4Q10 from 2.8% in 3Q10 and a notable turnaround from 6.2% in 4Q09, despite the new supply including MBFC Tower 1 in 1Q10 and MBFC Tower 2 in 3Q10.
40% leverage is the new norm. On the back of the low interest rate environment and mega acquisitions completed in 2010 (MBFC Phase 1), we are seeing more Office REITs shoring up their aggregate leverage ratios, with Suntec leading the pack with 40.4% on end-Dec 2010 from 33% on end-Sep 2010. K-REIT’s gearing also increased from 15.1% to 37%, while FCOT’s leverage remains flat at 39.8%. With the exception of CCT2 which had pared down its debt in 4Q10, most of the Office REITs seem comfortable reverting back to the pre-crisis target gearing levels of 40-45%. We think the 40% will be the new norm for FY2011. Debt headroom of S$1.18b in for the local Office REITs subsector indicates that sizeable debt-funded acquisitions are still possible.
Valuations. The four local Office-REITs, namely CCT [BUY, FV: S$1.61], Suntec [HOLD, FV: S$1.60], K-REIT [NOT RATED] and FCOT [BUY, FV: S$0.90] trade at an averageprice-to-book of 0.81x, which compares favourably to the broader S-REIT sector of 0.93x. We remain upbeat on the office sector recovery; and maintain OVERWEIGHT for the local Office REITs subsector.
FCOT – Phillip
1QFY11 Results
•1Q11 revenue of $29.0 million, NPI of $22.9 million, distributable income of $7.9 million
•1Q11 DPU of 0.25 cents
•Divestment of Cosmo Plaza a positive
•Maintain Hold, target price $0.18
1Q11 results came in without much fanfare. Revenue was $29.0 million (-1.1% q-q, -2.3% yy), net property income was $22.9 million (-1.2% q-q, -2.4% y-y) and distributable income of $7.9 million (-16.9% q-q, +6.7% y-y). DPU for the quarter was 0.25 cents (+4.2% y-y). Cosmo Plaza continued to be the drag in the quarter, contributing an operating loss to net property income. Distributable income and DPU improved y-y due to an absence of realized loss on derivative instruments a year ago. Operationally, the rest of the portfolio performed in-line with expectations. Portfolio occupancy showed slight improvement from the last quarter from 90.8% to 91.8%, but dropped 1.1% from the same period a year ago. Singapore portfolio experienced improvement in occupancy rate, however negative reversion was seen at 55 Market street, this corroborates with our view that the office sector might still be experiencing negative reversion from renewal of leases signed in pre crisis days. At the other Singapore property, Keypoint, management effort in asset enhancement and repositioning is seeing results. Occupancy rate has risen almost 10ppt from a year ago. The Australia and Japan portfolio delivered stable results, excluding Cosmo Plaza.
Painful but necessary decision
Subsequent to the 1QFY2011 quarter, FCOT finally sold Cosmo Plaza in Jan 2011. This is an almost cashless transaction whereby the sale consideration is simply JPY4 (S$0.06). In return, FCOT lightens its balance sheet with the transfer of JPY3.8 billion in loans to the buyer. In retrospect, the building was acquired in 2007 for JPY6.5 billion. Current valuation is JPY3.1 billion. Over the years, Cosmo Plaza contributed $7.7 million in net property income. We may be off in our numbers, but Cosmo Plaza represents substantial value destruction. We think the building is a bad piece of legacy which the present management inherited from its predecessor. With the divestment, gearing is lowered to 38% with total debt of $775.2 million.
One down, one to go
With Cosmo gone, there is just one white elephant left on the balance sheet. FCOT has not received dividends from AWPF since 3Q08. Latest valuation is AUD24.9 million (S$32.5 million). In the event of a successful recycling of this capital to reduce debt, gearing could be lowered further to 37%. Again we feel that management has delivered on its strategy. We are slowly witnessing results of the transformation. Core portfolio is delivering stable performance. FCOT has secured higher committed occupancy commencing in the coming quarters which should helped to bolster the forthcoming results. FCOT currently trades at 0.6x book value. We are maintaining our Hold recommendation and target price of $0.18.
FCOT – OCBC
Heading the right direction with divestment of Cosmo Plaza
1Q11 DPU of 0.25 S-cents. Frasers Commercial Trust (FCOT) announced 1Q11 gross revenue of S$29m, which declined 2.3% YoY and 1.1% QoQ. This was mainly attributed to the lower contribution from Cosmo Plaza as a result of the expiry of a significant tenancy in Aug 2010. Subsequently, FCOT successfully completed the divestment of Cosmo Plaza on 18 Jan 2011, Amount available for distribution to unitholders is S$7.9m, an increase of 6.7% from a year earlier, amounting to a 1Q11 DPU of 0.25 S-cents.
Successful Divestment of Cosmo Plaza. As part of capital recycling, FCOT has been trying to divest Cosmo Plaza since 3Q09, but found no suitable buyer. Cosmo Plaza has been affected by the economic slowdown in Japan, which saw its occupancy rate dipped from a peak of 100% in 2008 to a trough of 26% in 2010. FCOT made a gain on disposal of approximately S$7.28m from the transaction. We have assumed the sale proceeds will be used to pare down FCOT's debt, which matured mostly in 2012. We view this divestment favorably, as it will improve the overall quality of the portfolio and lower FCOT's gearing from 39.8% to slightly below 38%. Overall portfolio occupancy will also improve from 91.8% to above 96%.
Portfolio Performance. Both 55 Market Street (55MS) and KeyPoint saw a rise in occupancy rate in 1Q11, but gross revenue fell 13% QoQ for 55MS. We think that 55MS is possibly still experiencing negative rental reversions. According to our estimates, 55MS is likely to bottom-out of negative territory only in 2012-2013 (factoring in its lease expiry profile), while China Square Central (CSC) and Keypoint should turn positive much earlier. For the Australian properties, average occupancy rate remains healthy at 95.3%. Excluding Cosmo Plaza, the average occupancy rate for the Japan properties is 93.0%.
Maintain BUY. FCOT is currently trading at a PBR of 0.44x, which is lower than its historical PBR of 0.54x since listing. We believe that one reason could be a legacy issue; this being FCOT was formerly known as Allco Commercial REIT before it was bought over by FCL in 2008. Given the strong sponsor, capable manager and stable income, we feel that the high discount is unwarranted. As a first step, the manager is heading the right direction by divesting low income-producing assets. We anticipate further scope for the manager to grow income through asset enhancement initiatives and acquisitions. Maintain BUY with an unchanged fair value of S$0.18.
FCOT – BT
FCOT Q1 net property income slips 2.4%
Lower contribution from Cosmo Plaza cited for fall
FRASERS Commercial Trust’s (FCOT) net property income slipped 2.4 per cent year-on-year to $22.95 million for the first quarter ended Dec 31, 2010.
Gross revenue fell 2.3 per cent to $28.98 million.
Trust manager Frasers Centrepoint Asset Management (Commercial) Ltd attributed this to ‘lower contribution from Cosmo Plaza as a result of the expiry of a significant tenancy in August 2010’.
It added: ‘If the financial results for Cosmo Plaza were to be excluded, the net property income for the financial quarter would be comparable to that of last year on the same basis.’
FCOT had successfully completed the divestment of Cosmo Plaza – located in Osaka, Japan – on Jan 18.
‘The divestment of Cosmo Plaza would improve the overall quality of the portfolio and create additional debt headroom for FCOT to enlarge its existing portfolio via future acquisitions,’ said Low Chee Wah, chief executive of the trust’s manager.
Despite the dent in net property income, total distributable income rose 4.1 per cent to $12.64 million.
This was due to ‘an absence of loss from realisation of forward contract incurred in the prior year’.
Distribution per unit (DPU) for the period rose 4.2 per cent to 0.25 cents.
There is no distribution payment this quarter as FCOT distributes semi-annually.
The counter gained 0.5 cents yesterday to close at 17.5 cents.