Category: FCT
FrasersCT – OCBC
Is the pipeline ready for resuscitation? Not just yet.
FCT up sharply YTD. Frasers Centrepoint Trust (FCT) is up 51% YTD and is now trading at 0.74x book. A buy rationale at this price level implies, in our view, expectations of growth either through 1) the re-rating of existing assets, which we don’t see much economic evidence for, or 2) through value-accretive acquisitions.
Opportunity in pipeline. FCT is comfortably geared at 29.7%. It also does not have to look far for potential deals: recall that FCT has a pipeline of four retail malls from sponsor Fraser & Neave [FNN, NOT RATED] under a right of first refusal (ROFR). We believe the ROFR, which expires in 2011, has been a key investment driver for FCT. FCT’s acquisition plan is currently suspended due to difficult market conditions. At the 2Q briefing, the manager commented on the divide between the physical market and S-REIT valuations. FCT’s price has increased 30% since then, and it is now trading at a FY09F yield of 7.5%.
NP2 most compelling. Among the ROFR assets, we find Northpoint 2 most compelling because of the small deal size and its synergy with an existing asset – Northpoint. The asset is close to 100% leased. A put and call option agreement with a price range of S$139.5m-S$170.5m is in place. The agreement expires in December 2009. If 100% debt funded, buying NP2 would increase FCT’s gearing to about 42-45%.
But stumbling blocks, still. Note this pricing range is roughly equivalent to a 12% discount to 8% premium on Northpoint’s Sept 2008 valuation. This is not a very attractive deal, in today’s context. We think the market may be more receptive to a “cheaper” deal; a desire FNN may have no interest in accommodating. The deal structure itself also promises to be complex – if the buy is not 100% debt-funded, FNN may need to do its part as a 51% stakeholder. This holds even if FCT goes for potentially lower priced third-party assets. A potential solution is a cash-and-shares deal on a pipeline asset, sidestepping the need for a large cash call. But financing acquisitions may not be a top priority for FNN, especially when sibling Frasers Commercial Trust [FCOT, NR] presents a more pressing case for sponsor support. As such, we believe a buy call is yet to be justified on FCT. Our fair value estimate rises to S$0.75 (previously: S$0.62) as we relax our discount rate to reflect a lower cost of equity. Maintain HOLD on valuation grounds.
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
FCT – UOBKH
Highly Focused On Non-discretionary Consumer Spending
Suburban malls are more resilient. We conducted a site visit on 19 May 09 to Northpoint Shopping Centre located in Yishun, which was a lot more crowded compared to our last visit in Jan 09 (see our last update Anchor tenants have reopened at Northpoint dated 29 Jan 09). This reaffirms our view that suburban malls in the Housing and Development Board (HDB) heartlands are less affected by the economic turmoil. According to Frasers Centrepoint Trust (FCT), shopper traffic increased 7.9% yoy at Causeway Point, 7.2% at Northpoint and 8.6% at Anchorpoint in 2QFY09.
Retail sales index rebounded in Mar 09. Retail sales index for departmental stores and supermarkets recovered to +3.8% and +6.8% yoy respectively in Mar 09 after briefly entering negative territory in Feb 09. Anecdotal evidence suggests domestic consumption will continue to improve, going into 2Q09. A more buoyant retail scene will ensure renewal rates for leases expiring stay firm.
Earnings recovery driven by Northpoint. Net property income from Northpoint rebounded 31.3% qoq to S$4.2m in 2QFY09 with 80% of the enhancement works already completed. Occupancy rate at Northpoint recovered from 52.2% as at Dec 08 to 72.1% as at Mar 09. Management estimated that the asset enhancement initiative, which will be fully completed by Jun 09, will increase Northpoint’s average rent by 20% and net property income by 30%.
FCT focuses on suburban malls located next to the Mass Rapid Transit (MRT) stations, which cater to non-discretionary spending by captive populations in HDB heartlands. Our target price of S$1.44 is based on the Dividend Discount Model (required rate of return: 7.7%, terminal growth: 2.5%). FCT provides 2009 distribution yield of 8.8% and trades at 30.9% discount to NAV/share of S$1.23.
SREITs – DBS
Catching up
• Results in line with expectations
• Bulk of 2009 refinancing needs addressed, cashflow is still key
• Lagged developers in recent performance, room to catch up
• Preference for suburban retail over office segment
Results generally in line. Slower pace of topline growth, +14% yoy and –0.3% qoq, was affected by the weaker hospitality reits performance. NPI improved a better 14% yoy and 4% qoq due to cost containment measures by the Sreits. Distribution income was up a smaller 9% yoy and 0.1% qoq as higher interest cost and more prudent payout policy eroded bottomline growth.
Refinancing concerns abating, cashflow preservation still key. With 75% of the Sreit debt due in 2009 already locked in 1Q09, concerns over credit availability is abating. Nevertheless, cashflow preservation is still key given that higher average cost of funding and downward pressure on rents from weaker economic prospects are likely to result in negative DPU growth over the next 2 years. In this regard, Sreits are exploring other avenues of cashflow retention, including lowering dividend payout and dividend reinvestment scheme.
Be selective. Sreits have lagged developers in the recent price run up and we see room for catching up. In terms of valuation, Sreits are trading on an average 0.5x P/bk NAV and offer average FY09 yield of 10%. We continue to like the Sreits for its attractive valuations, however, in view of the recent run-up we would be more selective at this point. Our top buys remain FCT, Suntec, Parkway Life and Starhill Global. FCT offers dividend yield of 8.2-8.6%, higher than its comparable peers and its pure suburban retail exposure appears more resilient. Suntec is yielding 11.8-10.3% over FY09-10. Recent debt renewal exercise has removed refinancing needs till 2011. We continue to like Parkway Life for its ‘base plus’ revenue model, low gearing and minimal refinancing risk. We have upgraded Starhill Global to Buy with TP of $0.70. Starhill is yielding c12% FY09-10. Newsflow of increased competition from soon-to-open malls have been factored into current share price. The upside risk at this point is the potential of spillover effect of increased pedestrian traffic once these malls open. We have downgraded AiT to Hold purely on valuation grounds after the recent surge in share price. The risk for the Sreit sector at this point remains the possibility of further fund raising if share prices continue to power up.
Link – Tables