Category: REIT
REITs – JPM
More fund raisings to come?
• Starhill Global REIT (SGREIT SP; NR) to raise equity. SGREIT announced that it proposes to raise S$337million through 1-for-1 rights issue at S$0.35 per rights unit. The fund raising will be fully underwritten with YTL Corporation committing to up to 75% of the total number of rights unit. Proceeds from the rights issue, according to management, will be used to pare down some of its existing debt, and to capitalise on AEI and acquisition opportunities.
• S$5bn capital raised for the sector, how much more do we need? We estimate that S$5bn capital has been raised from the S-REIT sector with S$2.9bn from equity capital market and S$2.1bn from debt capital market (including debt extension) The sector is currently geared at 31% with interest coverage ratio comfortably at above 4.0x on our estimates, with no more debt refinancing for most of the S-REITs over the next 6 months. That said, we are still looking for about S$1bn equity capital to be raised in the space to convert some of the debt to permanent capital.
• Opportunistic capital raising to come? Despite the substantial amount of equities being raised YTD, J.P. Morgan S-REITs index has increased by 30% since its March low. Share prices for some of the S-MID cap REITs have more than doubled from the trough, which in our view could help to propel management’s decision on potential opportunistic equity capital raisings. In addition, the ever closing gap between the listed and public real estate could provide trust management with more reasons to further strengthen its balance sheet.
• Our top picks for large-cap S-REITs remain A-REIT and CMT, which we believe would generate more than 15% in total return at this level. Our picks amongst the SMID-cap S-REITs are FCT and AIT.
Link – Tables
REITs – MS
Still the Best Way Forward
Maintain In-Line view: S-REITs remain our preferred sector exposure within the Singapore property space at least for 2009. S-REITs have not disappointed in terms of refinancing their debt. Indeed, they recapitalized their balance sheets 6 months ahead of our expectations. At least for 2009 and to a certain extent 2010, there is less risk of S-REITs cutting their dividend payout due to pressure from rising leverage. We remain comfortable that the recent fall in commitment rents will be marginally negative for 2009 earnings given that the brunt of the decline will be felt only in 2010 and 2011. A near-term positive catalyst for S-REITs is if the benchmark interest rate remains low after its recent decline.
We have a new sector top pick – A-REIT: We initiate coverage on A-REIT with an EW rating and price target of S$1.70, suggesting 11% upside from current levels. We like its 8.5-8.7% FY2010-11E dividend yield, the highest amongst its larger-cap peers, and find its recent underperformance unjustified. See our note, Steady as She Goes, published June 9, for details.
What’s new: We have revised our earnings forecasts by -1% to 39% for F2009-10E and raised our price targets by 17-112%. Given the improvement in liquidity in the equity market, investors may be willing to pay a premium above intrinsic value. Hence, for stocks that have recently recapitalized, we assign a 30% probability to our bull-case NAV and a 70% probability to our base-case NAV to calculate our price targets. We are maintaining our EW ratings on CapitaCommercial Trust, CapitaMall Trust, and CDLHT, and are downgrading Suntec REIT to Underweight given its 23% downside risk from current levels. We maintain our UW on ART.
Our investment philosophy for the S-REIT sector remains intact. Given that all the property segments – office, retail, industrial, and hospitality – are seeing oversupply for 2009-2010, the playing field is level. Moreover, all the S-REITs within our coverage are backed by strong parents and quality assets within their respective segments.
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
REITs – BT
MAS seeks views on mandatory AGMs for Reits
It says compulsory AGM would improve corporate governance
THE Monetary Authority of Singapore (MAS) has proposed to make annual general meetings (AGMs) mandatory for real estate investment trusts (Reits).
Under the proposal, all Reits regulated as collective investment schemes (CIS) in Singapore will have to, with effect from Jan 1, 2010, hold AGMs once every calendar year and not more than 15 months from the last preceding AGM.
AGMs will also have to take place within four months from the end of the financial year, in line with Singapore Exchange’s rule on the timing of AGMs for other listed issuers.
Currently, all public companies and business trusts are required to hold AGMs and extending the practice to Reits would keep standards consistent, said MAS in a consultation paper yesterday.
Mandating AGMs for Reits would also improve corporate governance by creating an important communication channel between Reit managers and unitholders, it added.
Furthermore, Reit managers can use AGMs to obtain or renew general mandates from unitholders to issue new units in the coming year, said MAS. This would give Reits more flexibility in fundraising.
‘Reits would not face the problem of market speculation arising from convening an extraordinary general meeting (EGM) specifically for the purpose of obtaining such a mandate,’ MAS highlighted.
Several industry watchers had welcomed the mandating of AGMs for Reits when the plan was mentioned briefly in February. The New York Stock Exchange, for instance, already requires Reits to do so each fiscal year.
Suntec Reit manager’s CEO Yeo See Kiat also told BT yesterday that he supported the idea. ‘Reits are like all listed companies,’ he said. ‘AGMs would provide Reits with an additional communication platform with unitholders.’
Mak Yuen Teen, co-director of NUS’ Corporate Governance & Financial Reporting Centre, also agreed that the move will raise the accountability of Reit managers. However, he did not see the need for MAS to pass such a rule to increase flexibility for Reits in fundraising.
In June 2005, MAS had consulted the public on making AGMs mandatory for Reits but decided against the idea. Most people had felt that AGMs were not cost-effective as Reits were already holding EGMs regularly to seek approval for acquisitions.
MAS said that its Property Fund Guidelines today allow for general meetings ‘at the request in writing of not less than 50 participants or participants representing not less than 10 per cent of the issued units of the property fund’.
But MAS recognises that Reits are hardly holding EGMs nowadays because of the dearth of acquisitions. Also, Reit managers gave feedback that EGMs for certain matters, such as a general mandate to issue new units, may create market speculation and hit unit prices.
Interested parties can share their views on the proposal with MAS by June 26.