Category: REIT
REITs – CNA
Opportunities for investors in Asian REITs amid rebound
Asian real estate investment trusts (REITs) have bounced back strongly in the first half of 2009, according to a recent analyst report by property consultancy CBRE. Their total market capitalisation rose 14.3 per cent for the period.
Analysts said on Thursday this performance was driven by improving credit conditions, government support for re-financing – especially for Japan REITs (J-REITs) – and successful rights issues as recently seen for Singapore REITs (S-REITs).
Other positive signs include the fact that many large-cap Asian REITs have managed to grow their rental income recently. In Singapore, the latest financial results of several REITs have performed up to or beyond analysts’ expectations.
Frankie Lee, head of property equities, Asia, Henderson Global Investors, said: “REITs have definitely rebounded very strongly, coming out of the issues of refinancing and also the cyclical downturn in the fiscal market. I think going into the second half, there’s still potential upside because some of the REITs are actually quite financially strong now, given some of the recapitalisation that they have done.
“REITs in Japan and also in Australia… can actually outperform further ahead because right now, the valuation is still very favourable. On the other hand, the asset markets have not really recovered as strongly as in other parts of Asia.”
Experts believe that one of the main challenges that will persist for most REITs will be to reduce their financial leverage. CBRE said this is especially so for those which have seen sharp drops in value for their assets, which may lead to potential breach in loan-to-value ratio covenants.
Another challenge is in growing distributions amid the current trend of falling rents. CBRE noted, for instance, that more than three quarters of J-REITs expect to see a drop in distribution dividends for the upcoming reporting period.
While the downturn has hurt many REITs in the region, market watchers said it has also helped investors to filter out the better buys.
Roger Tan, vice president, SIAS Research, said: “In good times, all REITs can raise debts, but it’s the bad time that determines whether the REITs are good or bad. In bad times, only the good REITs are able to repay or refinance their debts.”
Other criteria to consider include the potential of the REIT’s underlying assets and the track record of the REIT manager.
Most experts expect to see further recovery of the Asian REIT market next year, in line with a wider global economic recovery.
But they expect it to be a slow journey, with acquisitions and initial public offering activities unlikely to recover to pre-downturn levels in the near term.
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.
REITs – BT
Trusts’ resilience boosts Reit index
Better than expected results from Reits for Q2, revised GDP forecasts lead investors to turn positive on outlook
INVESTORS are heaving a sigh of relief – and putting some money back into the stock market – following better-than-expected results from some real estate investment trusts (Reits).
The FTSE ST Real Estate Investment Trusts Index has risen by almost 4 per cent on heavier trading volume since Reits started posting results a week ago. It closed at 494.82 yesterday.
Generally, results released so far ‘are either in line, if not slightly above’ expectations, said DBS Vickers analyst Lock Mun Yee.
Despite concerns about falling rents and occupancies in the office sector for instance, CapitaCommercial Trust (CCT) and K-Reit Asia have managed to post year-on-year increases in distributable income and distribution per unit (DPU) for their latest financial quarter.
CCT’s operating results exceeded the expectations of OCBC Investment Research analysts Meenal Kumar and Foo Sze Ming. It was ‘able to achieve new rents 45 per cent higher than previously signed rents, despite the 17.5 per cent quarter-on-quarter decline in Grade A office rent in 2Q 2009’.
Some retail Reits also displayed resilience amid the recession. Frasers Centrepoint Trust, which manages a portfolio of suburban malls, achieved a slightly higher DPU for the last financial quarter compared with a year ago.
And considering how the hospitality industry has been hit by the downturn and the spread of H1N1 flu, the year-on-year fall in Ascott Residence Trust’s DPU in the latest quarter did not surprise many. In fact, the market could have been comforted by the trust manager’s observations – that the sector is showing signs of stabilisation.
Ascott Reit’s unit price has gained more than 9 per cent since results were released last Thursday morning.
Of course, investors’ outlook could have improved even before they got a glimpse of the Reits’ results. The government recently revised its GDP forecast upwards and stock markets have been enjoying a long rally.
Ms Kumar and Mr Foo believe that ‘the price performance is more a function of outlook rather than Q2 performance’. Looking back further, the FTSE ST Real Estate Investment Trusts Index breached the 400-point mark in as early as May, and has risen by more than 16 per cent since.
While market forecasts have become rosier, a robust recovery has yet to take shape and investors could remain jumpy.
Ms Kumar and Mr Foo advise investors to continue paying attention to Reits’ balance sheets – the risk of falling asset values still exists and that could increase gearing levels.
DBS Vickers’ Ms Lock also said that Reits’ operational strength will come into focus, as they try to maintain earnings under ‘moderated economic conditions’.
REITs – CIMB
Investment summary
• Recapitalised; refinancing concerns largely averted. REITs have gone beyond the successful refinancing of debt to recapitalisations in a bid to strengthen their balance sheets for the recession ahead. Sponsor-backed REITs including Ascendas REIT, CapitaMall Trust, CapitaCommercial Trust, Starhill Global, and Frasers Commercial Trust went to the market and raised a combined S$3bn of equity. Average asset leverage for REITs under our coverage has retreated to 32% from 35%. Interest cover also appears healthy at 4.5x vs. the typical lenders’ requirement of 2x. We consider balance sheets to be relatively healthy.
• Positioned for a recovery. The larger environment looks positive for investing in REITs, underpinned by: 1) expected high liquidity and low interest rates; and 2)the Singapore government’s continued support for the REIT industry.
• We are most optimistic on hospitality and retail sub-sectors, which we believe will be major beneficiaries of the following in 2010: 1) the completion of the two integrated resorts (IRs); 2) a change in the marketing of Singapore as a standalone destination for tourists; 3) an expanded transport infrastructure with more rail lines; and 4) the anticipated return of corporates and expatriates as Singapore grows more cost-competitive against its regional peers.
• Overweight on S-REITs; top picks are Suntec REIT and CDLH-HT. We retain our Overweight position on REITs. Our top picks are CDL-HT and Suntec REIT on the back of their lower valuations and near-term catalysts. Dividend yields are also attractive at 9% and 10% respectively. CDL-HT’s Singapore concentration makes it the best proxy for a tourism revival in Singapore. Suntec REIT’s Suntec City Developments (87% of gross revenue) is the closest sizeable retail cluster to the Marina Bay Sands IR and one of the major beneficiaries of two MRT stations opening next to it. We also have Outperform ratings for FCT, ART, PLife, and CREIT.