Category: PLife
PLife – CIMB
Staying defensive
• In line. 4Q08 DPU of 1.84cts and FY08 DPU of 6.83cts were in line with Street and our expectations. Full-year gross revenue of S$53.9m was up 218.9% yoy (only four months of contribution in 2007 because of listing in August). Qoq growth was strong in 4Q08 at 21.2% on full contributions from portfolio assets and higher minimum rents from Singapore hospitals. This minimum had been fixed at 6.25% based on the CPI + 1%, effective from 23 Aug 08 to 22 Aug 09. Foreign-exchange loss from an appreciating yen (related to its Japanese assets) in 4Q08 was significant at almost S$8m, although this did not affect distribution. As at 31 Dec 08, portfolio value was S$1.048bn, down S$3.3m because of acquisition costs. Asset leverage remained low at 23.3%.
• New CEO and CFO appointed; capital management remains prudent. Acting CEO and CFO Mr Yong Yean Chau has been confirmed as the new CEO. Vice President of Corporate Finance, Mr Loo Hock Leong, will take over as CFO. Both appointments take immediate effect. With the ex-CFO at the helm, we expect PLife to take a more conservative stance. PLife’s current capital management is positive: 1) 100% of its debt is now long-term debt with a weighted average tenure of 2.8 years; 2) PLife has no refinancing risks until 2011; 3) interest cost has been fixed at 2.85% for 100% of its debt for three years; and 4) foreign-sourced income has been hedged for five years. Acquisitions in 2009, if any, are likely to be opportunistic and funded by debt. PLife has S$210m of unutilised revolving credit facilities and a S$500m medium-term note programme established last August.
• Maintain Outperform with lower target price of S$1.20 (from S$1.30). The outlook for organic growth is positive as the CPI-pegged base-case rents are set to grow by 6.25% in the first eight months of FY09. We refine our revenue projections based on actual FY08 income and lower our CPI assumption (for Sep 09 onwards) to 0% from 2%. Our DPU estimates for FY09-10 decrease by 6-8%. We also introduce FY11 forecasts. Our target price has been lowered to S$1.20 (from S$1.30). At 0.56x P/BV, PLife is cheaper and has less rental downside and refinancing risks than the other “premium” REITs, A-REIT (0.78x) and CMT (0.64x).
REITs – DBS
A tale of two Rs
Sector debt refinancing and recapitalising issues are likely to be the major drivers of the S-reit sector in 2009. As credit markets remain tight, access to credit takes priority over cost of funding. We see recapitalising prospects gathering momentum when asset writedowns begin. We see this as necessary to the sector but size and timing is uncertain under current market conditions. Valuationwise, these developments appear to have been largely anticipated in the share price, however, the uncertainty could hamper share price outperformance in the near
term. In terms of strategy, we prefer well-sponsored reits with good access to capital as well as those in the more resilient sectors such as retail, industrial and healthcare. Maintain buy on Parkway Life Reit and Areit and upgrade FCT on the back of attractive valuations.
Refinancing speed bumps linger: An estimated one third of the Sreit total indebtedness or $4.9b is due to be rolled over in 2009. The tight credit market environment would mean that access to funding would be crucial while increasing competition for funds would lead to an increase in cost of debt. Overall interest cost in the Sreit sector would rise above 4% from the present 3.2%. For every 50bps hike in average interest cost, DPU would be eroded by 10-15%.
Resetting the bar: We expect asset writedowns to begin as early as this year-end. Recapitalising issues are likely to gather momentum in the coming year, however, timing is uncertain as Sreits weigh the need to strengthen balance sheet against the commercial perspective of shareholder value dilution and investor appetite. Post funding, average DPU yield is estimated at 9% and P/adjusted book NAV of 0.75x, indicating that this possibility is reflected in the share price. Amongst Sreits, those with gearing closer to the 50% LTV mark and riskier sub-sectors such as office would have greater recapitalisation possibilities. This includes FCOT with a current loan to asset ratio of c49%. In the longer run, the higher geared reits such as CMT, Areit, CCT may look to strengthen balance sheet when equity markets recover.
Be selective: Given the headwinds from refinancing and recapitalisaton rises as asset writedowns, particular in the office segment, filter through, our strategy would be selective. In terms of large cap stock picks, we prefer Areit for its long lease tenure. In the mid cap sphere, we favour Parkway Life Reit and FCT with their resilient business model and attractive
valuations. Strong balance sheet and low gearing also reduces the need for recapitalising.
Link – Tables
SREIT – CIMB
Feedback from investors
We held meetings with 58 investors during an 8-day roadshow to the UK, Europe, Singapore and Kuala Lumpur in November. Themes discussed included REITs’ refinancing issues, the implications of breaching the 60% gearing limit as well as the degree of occupancy and rental declines that could be expected in a downturn.
While most REITs seem able to maintain general debt covenants with their bankers with safe gearing levels of under 45% (vs. the regulatory 60% limit) and interest cover exceeding 3x, short-term refinancing looks daunting for a number of them. From the refinancing deals announced over October-November, we conclude that REITs with strong sponsors, particularly government-linked sponsors, low leverage and quality portfolios are more likely to secure bank loans, which are the preferred refinancing option.
While some sceptical investors felt that there was more room for rents and occupancy to fall, most agreed that REITs have been oversold and even if yields deteriorate moderately from here, the REITs remain highly attractive, by any measure.
Our top pick #1: CCT
Will it get cheaper? Most clients agreed that at 0.2x P/BV, falling rents and occupancy levels have been priced in and yields of 18% certainly look attractive. We contend that CCT’s low average rent base (under S$8psf/month), long leases, rental caps for some of its leases, rental support from CapitaLand for One George Street and a master lease structure with the hotel operator RC Hotels within Raffles City would provide buffers despite falling office spot rents and occupancy levels. Investors’ apprehensions about a falling topline were somewhat assuaged. However, refinancing issues remain the main worry and three possibilities were discussed:
(1) Bank loans secured but at a high cost. Refinancing via bank loans is the most preferred solution for CCT at this point. On 28 Nov, Reuters reported that CCT verbally mandated four banks (Bank of Tokyo-Mitsubishi UFJ, DBS Bank, Standard Chartered Bank and UOB) to handle a S$580m 3-year bullet refinancing deal, which is equivalent to its short-term debt coming due in Mar 09. Interest cost, which was reported at 250bp above LIBOR, is in line with the 3-year cost of debt in Singapore (we earlier estimated at 200-300bp above SIBOR or SOR). However some investors are concerned that the indicative rate is significantly higher than CCT’s portfolio property yield, which is below 4%. Even though the cost of debt has yet to be finalised, we have assumed a cost of debt of 5% for CCT in 2009. Most investors conceded that an increase in cost of debt would still be preferable to a dilutive rights issue. We are of the view that banks remain willing to extend credit to CCT, given its quality portfolio and strong sponsor CapitaLand (CAPL SP, S$2.49, Underperform, target price S$2.30). A direct bank loan remains the most possible and positive outcome for CCT.
(2) Bank loans not secured; rights issue forced. More sceptical clients were worried that CCT may resort to a rights issue if bank loans cannot be secured, causing dilution for existing unitholders. Additionally, if take-up is poor, sponsor CapitaLand could end up absorbing the bulk of the issue, resulting in a highly illiquid REIT. This would be negative for both CCT and the REIT sector. We are of the view that this option would be given low priority, and that bank financing would eventually be made available to CCT. Before deciding on a rights issue, a loan from the parent might be an alternative, and would be received more positively than rights.
(3) Convertible bonds redeemed at put date. Short-term financing woes aside, Singapore-based investors were particularly concerned that CCT’s S$370m convertible bond due to mature in 2013 would be redeemed earlier at its put date in May 2011. This would cause a spike in CCT’s debt profile in 2011 and increase its allin cost of debt.
Our top pick #2: PLife
Positive on existing model, negative on Novena. While investors like the downside protection of PLife with a CPI-pegged revenue base and interest locked in for three years, they are apprehensive about the Novena hospital site, which is currently under development by the sponsor Parkway Holdings (PWAY SP, S$1.11, Outperform, target price S$2.45). It is widely anticipated that the completed development would be injected into PLife upon completion. The 17,266 sq m site was acquired by PWAY in Feb 08 for S$1.25bn or S$1,600/sf/gross plot ratio under the Government Land Sales programme. The acquisition price of the land was more than double the secondhighest bid of S$695/psf/gross plot ratio. We assured investors that while PLife has the first right of refusal to the sponsor’s assets put up for sale, it is not obliged to acquire assets that are not accretive. Additionally, any related party transaction that crosses 5% of the NAV threshold will require unitholders’ approval, and the related party (PWAY in this case) will have to abstain from voting. Completion of the hospital is expected in 2011.
Where’s the growth? Investors also queried about PLife’s growth avenues. Management earlier indicated that the company still has capacity to grow via acquisitions given a low leverage of under 20% and access to more than S$350m of funds. While investors remained open to further acquisitions, they also hoped that management will be cautious and secure truly accretive deals.
Tenant concentration risk. Some investors pointed out that PLife is highly dependent on its sponsor, PWAY, as its major tenant/operator, contributing about 80% of its gross revenue. We draw comfort that PWAY, the leading integrated healthcare provider in Asia, had remained profitable throughout the last two recessions, in 1998 and 2002. Furthermore, PWAY was among the earliest to recover, boosted by pent-up demand during the recessions. We also expect PWAY’s enlarged regional network to cushion its revenue in the coming recession. In PWAY’s
Singapore hospitals, higher-paying patients from new venues such as Russia and the Middle East have increased, resulting in an overall improvement in revenue.
Wish list for the sector
Securing refinancing that is not detrimental to unitholders. Top of the wish list is the ability to secure refinancing that would be non-detrimental to unitholders. Several investors were concerned that REITs would have to resort to: 1) dilutive rights issues; 2) distressed sales of assets to repay debt; or 3) the declaration of bankruptcy / liquidation, should banks be unwilling to extend credit at reasonable costs.
Truly accretive acquisitions. Also top of the list are truly DPU-accretive future acquisitions, untainted by financial engineering. While a number of acquisitions had “proven” accretive due to the spread between property yields and low borrowing costs, the credit crunch throws up the possibility that spreads may not be sustainable if refinancing is not available or obtained at much higher costs.
REITs in favour. Long funds remain fundamentally focused on asset quality, prudent REIT managers and more resilient property segments. REITs with a core Singaporebased portfolio are also preferred. FCT, A-REIT and PLife are three of the more preferred stocks. Strong interest was also expressed in CCT which remains the cheapest stock under our coverage at 0.2x P/BV, although doubts about refinancing were equally strong. Despite the hostile macro environment for the hospitality industry, some investors were beginning to show interest in CDLHT, citing its low asset leverage and prudent management.
Link – Table
PLife – CIMB
Limited downside risks
• Maintain Outperform. PLife’s exposure to the resilient healthcare sector, long lease structures of up to 15 years and built-in rent increases pegged to the CPI give greater clarity to its income streams than for the other REITs under our coverage. With refinancing secured and a surplus war chest, PLife is positioned for stable growth even in a difficult financial climate.
• Outlook for healthcare remains positive. We expect demand for healthcare to grow strongly on the back of a greying Asian population, blooming medical tourism in the region and the Singapore government’s initiatives to establish a biomedical industry.
• Unchanged DDM-derived target price of S$1.30 (discount rate 8.1%). Management had been able to secure very favourable financing terms despite the credit crunch. We continue to like PLife for its attractive forward yields of more than 10% with the least earnings risk among the S-REITs. P/BV of 0.57x is also in line with the average S-REITs’ 0.51x. Maintain Outperform.
REITs – CIMB
Ripe for the picking
• Looking cheaper than ever. YTD, the Singapore REIT index has fallen 56% (vs. the STI’s 48% decline), driven by fears of REITs’ inability to secure refinancing, and falling rents and occupancy in an economic downturn. Average P/BV for the S-REIT sector has fallen to 0.51 while average yields have doubled to 14% in the last two months.
• REITs with strong credit and risk metrics get gold. Despite the credit crunch, there are still REITs that exhibit strong credit and diversified risk metrics. The presence of strong sponsors and government-linked sponsors is advantageous at this juncture. To these, banks are not only willing to lend but lend on more favourable terms. Some REITs have even managed to move away from borrowings that require pledges on their assets or rental income, thereby retaining financial flexibility.
• Asset devaluation risks small, financing ability not impaired yet. Most of the REITS are still within safe gearing levels. This implies a low risk of breaching impairment levels and could mean debt funding would still be available to them.
• Look for efficiency. In the midst of the credit crunch, acquisitions and asset enhancements requiring significant outlay would be difficult, particularly in 2009. More attention should be focused on the operational efficiency of the REIT manager in pushing every dollar of rent from the top down to the distribution level. CDLHT stands out as an efficient REIT manager with a remarkably close match between its revenue growth (222%) and DPU growth (211%), in our comparison.
• Overweight on S-REITs; top picks are PLife and CCT. With the strong selldown of REITs, we see an opportune time to accumulate positions. We maintain our Outperform ratings on A-REIT, CIT, FCT and PLIfe. We upgrade CCT and MLT to Outperform from Underperform and Neutral respectively. We maintain our Underperform on ART but downgrade CDLHT to Underperform from Neutral. While PLife remains our top pick for its limited earnings downside and strong financial flexibility, CCT emerges as a deep-value pick with the lowest P/BV of 0.28x among REITs under our coverage, and below the S-REIT average of 0.5x. We believe that all negatives have been priced in and forward yields at 12.2% (CY09) look attractive.
Link – Table