Category: REIT
REITs – BT
Reits bank on placement, rights issues for now
BANKS may have loosened their purse strings but many real estate investment trusts (Reits) here are sticking to rights issues or private placements for funds – despite their dilutive effects.
Since June, another five Reits have conducted such exercises to raise more than $1.23 billion. Investors were not too pleased in some cases and sold out, driving unit prices down. Why would some Reits rather incur the wrath of unitholders than turn to banks?
For Reits looking to trim gearing, there are few other fund raising options. While credit conditions have certainly improved, ‘leverage’ remains a dirty word and many would prefer to repay debt than to refinance or borrow more. Frasers Commercial Trust was one which made a cash call in June for this.
‘Peer pressure’ keeps Reits particularly disciplined. With many paring down debt in the last few months, those with relatively higher leverage ratios would start drawing the wrong kind of attention from watchful analysts and investors. Just two out of 13 Reits have gearing levels exceeding 40 per cent, a CIMB report this week shows.
While refinancing may have become easier, there is no saying if credit might tighten again. Banks are still exposed to the recession – the default rate on commercial mortgages held by US banks, for instance, more than doubled in the second quarter from a year ago.
Rolling over debt in unstable times means that refinancing fears can haunt again and again. A DBS Vickers report last week found that Reits have just $1.89 billion of debt maturing next year. But this will surge to $3.28 billion and $4.28 billion in 2011 and 2012 respectively. So cutting debt still seems the prudent thing for many Reits to do.
Even Reits willing to borrow more from banks may not have much room to do so. Some analysts are expecting further asset value writedowns – particularly for commercial property. If this happens, gearing for affected Reits (determined by comparing debt with assets) will rise with or without an increase in borrowings.
In fact, CIMB believes that asset devaluation could trigger more equity raising by Reits. The cash would reduce debt, counter the effect of lower asset values and keep gearing stable.
Reits looking to buy assets but are not keen to raise debt will also value funds from rights issues and private placements. Starhill Reit raised $337.3 million recently not just to reduce debt, but also to capitalise on acquisition and asset enhancement opportunities.
CIMB further suggests in its report that Frasers Centrepoint Trust, CapitaMall Trust and Suntec Reit could also expand their portfolios and issue cash calls.
It helps that the stock market has surged, allowing Reits to issue new units at better prices. Fortune Reit, for example, announced a HK$1.9 billion (S$353.2 million) rights issue last week with new units going at HK$2.29 apiece – a large discount from the last traded price of HK$4.10 then. The rights issue price would have been much lower if the exercise had happened at the end of last year, when units traded at just HK$1.99.
Banks may be more willing to lend, but many Reits will want to keep their hands in unitholders’ pockets until economic skies are clear again.
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 – CIMB
Equity raising: Round 2 on the cards?
• Almost S$4bn of cash calls YTD. Since Jan 09, a number of SREITs have made cash calls amounting close to S$4bn, mostly to pare down maturing debt.
• Equity raising expected to continue, driven by acquisitions… Frasers Centrepoint Trust, PLife REIT, and CapitaMall Trust are most likely to make acquisitions in the next 12 months, in our estimation. We expect FCT and CMT to resort to equity raising as debt headroom is unlikely to be sufficient, in view of the sizeable potential pipeline. CMT could potentially raise more than S$1bn, assuming Sun Hung Kai also divests its 50% stake in Ion Orchard to CMT. In the medium term, we also expect Suntec REIT to acquire Suntec Convention Centre, potentially financed by a cash call.
• … and potential asset devaluation. The recent devaluation of Singapore Land Tower to about S$1,842psf is expected to put pressure on CCT to write down its two key office assets, 6 Battery Road and One George Street, with significantly higher valuations of above S$2,200psf. CCT would need to raise more than S$200m in equity to stay safely within the 40% asset leverage level if asset values fall by more than 20%.
• Mid-sized REITs preferred; PLife has lease risk of equity raising. We prefer mid-sized REITs with strong balance sheets such as FCT and PLife REIT. However, our top pick in the SREIT space for potential near-term acquisitions with the least risk of equity raising would be PLife REIT, as debt headroom of more than S$300m remains sizeable. Our target price of S$1.31 and forward yields of 7.2% have yet to account for potential acquisitions.
REITs – Phillip
Results Review
From the recently concluded financial results for the quarter ended 30th June 2009 (except Saizen REIT which is announcing on 27 August 2009), we observed that on a year-on-year basis, out of the 18 REITs that have announced their results, twelve reported revenue growth, one REIT reported flat revenue growth while five REITs reported negative revenue growth. Accordingly, nine REITs registered DPU growth while the other half have DPU erosion. A closer observation reveals that the hospitality sector fare the worst with both Ascott REIT and CDL Hospitality REIT recording decrease in gross revenue as well as lower DPU. For industrial sector, all four industrial REITs recorded lower DPU although only MacarthurCook Industrial REIT recorded lower gross revenue. The office and retail sectors prove to be more resilient with most of the REITs reporting higher gross revenue as well as DPU. The most stable sector continues to be healthcare.
On a quarter-on-quarter basis, eight REITs reported revenue growth, one REIT reported flat revenue growth while nine REITs reported negative revenue growth. Accordingly, eleven REITs have DPU growth while six have DPU erosion and one with constant DPU.
The sectoral performance came as no surprise to us as we have long espoused the same order of revenue stability. The hospitality sector shows the greatest revenue volatility because revenue is sourced from direct visitor stays and these are mainly short term in nature compared to the tenant leases of the other sectors which are longer term and have locked-in rates. The industrial sector REITs have stepped-up rent escalation while the office sector REITs are still enjoying positive rental reversion from expiring leases. However from the quarter-on-quarter performance, we can see that the gross revenue for the industrial, office and retail sectors have all declined compared to mostly increases for the year-on-year performance. This may indicate higher vacancies or lower reversionary rents. While the hospitality REITs scored the worst performance on year-on-year basis, the quarter-on-quarter results provide some degree of respite. Ascott REIT has turned in a revenue growth and CDLH Trust recorded a much lower percentage of revenue decline. This could indicate that the tourist arrivals are picking up and we believe the hospitality sector would be the first sector to show signs of a recovering economy.