Category: REIT
REITs – ML
Growth momentum limited; Maintain cautious stance
Bulk of equity issuance completed
YTD S-REITs have raised S$2.5bn in new equity (19% of end 2008 market cap). While we believe that the bulk of the sector funding has now been resolved, we maintain our cautious stance. YTD S-REITs are up 13%, underperforming both the STI (+27%) and developers (30%). We expect underperformance to continue as we are unable to identify significant catalysts that will re-rate the sector.
Appetite for acquisitions limited
Improvements in the debt and equity markets bode well for the outlook for REITs given the capital intensive nature of the business model. Despite this we struggle to see how REITs will be able to achieve significant growth momentum over the next 12 months. We believe REIT managers will continue to maintain a conservative stance with regards to gearing and that without an appetite for further acquisitions, earnings upside will be limited to organic growth.
Growth outlook still muted
Given the downturn in the property market, no sub-segment has been spared and both rentals and occupancies are under pressure. In particular, we expect operating metrics for the office and industrial sub-segments to weaken. Looking across the S-REITs, we expect an average of 4% negative DPU growth in 2009 and 2010 respectively. This is driven primarily by lower rentals, higher debt costs and the dilution from recent equity issuance.
CMT remains our preferred S-REIT pick
Our preferred exposure to the sector remains CapitaMall Trust given its weighting to the retail sector which we believe will fare relatively better verses other property sub segments. We remain negative on the industrial exposed A-REIT and expect its operating metrics to face further downward pressure. Given our expectation that the office market will not show signs of recovery until at least 2012, we would also avoid office-exposed CapitaCommercial Trust and Suntec.
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
REITs – UOBKH
Restarting The CMBS Market
In our sector report entitled A Rich-Yielding Harvest dated 1 Oct 08, we stated “catalysts for recovery include the following: a) normalisation in credit markets as systemic risks subside over time, and b) eventual reflation in Asian economies due to fiscal stimuli and growth in domestic consumption.” Our anticipated scenario for recovery in the REIT sector has started to unfold.
Extending TALF loans to commercial mortgage-backed securities (CMBS). The Federal Reserve announced on 1 May that CMBS would become eligible collaterals for Term Asset-Backed Securities Loan Facility (TALF) starting Jun 09. TALF loans with five-year maturities will also be made available for purchases of CMBS, asset-backed securities (ABS) backed by student loans and small business loans. Up to US$100b of TALF loans could have five-year maturities, which are more suited for investors in CMBS. The CMBS market has rallied with yield for AAA-rated CMBS falling from 15% to 10%.
OVERWEIGHT REITs. The US Federal Reserve’s decision to extend TALF loans for CMBS will restart the CMBS market, an important source of funding for REITs. Current yield spread for REITs is 4.7%, much higher than the historical average of 3.0%. We expect the yield spread to contract due to normalisation in the credit markets.
We like laggards such as Ascendas REIT (BUY/S$1.55/Target: S$1.93) and CDL Hospitality Trusts (BUY/S$0.755/Target: S$1.24). We also have BUY calls for Ascott Residence Trust (BUY/S$0.675/Target: S$0.90), Frasers Centrepoint Trust (BUY/S$0.80/Target: S$1.44) and K-REIT Asia (BUY/ S$0.89/Target: S$1.15). We have downgraded CapitaCommercial Trust (HOLD/S$1.12/Target: S$1.14) to HOLD as the stock has rallied 64.7% since our report on sensitivity analysis dated 18 Mar 09.
Link – Table
REITs – BT
Reits not sure-win investments
THE Saizen Real Estate Investment Trust (Reit) saga should dispel several widely held myths about the Singapore Reit sector – that the trusts are no-brainer investments; that they are duty-bound to pay out dividends; and that the most important thing to consider when assessing whether a Reit is worth putting your money into is the possible returns from the trust’s portfolio.
Saizen Reit, which in February said that it was not going to pay a distribution for Q2 2009 in order to conserve cash and pay off its loans, has more recently said that it aims to resume payments as soon as possible. But investors may have to wait as long as June 2010, which is when the Reit said it expects to resolve its funding issues.
Prior to those announcements, the trust, which gets its income from residential rental properties in Japan, put out a proposal that would allow it to pay dividends in the form of Reit units – rather than cash – but later said it would not proceed with the plan after deliberations with the Singapore Exchange.
For unitholders, this means that they may not get any income from their holdings in the Reit for more than a year. These investors, who probably bought into the Reit to be ensured of a stable source of income, could now have no such income until mid-2010.
The most important thing for a newcomer to the sector to note is that Reits are not required by law to pay out dividends. Singapore-listed Reits have to distribute to unitholders at least 90 per cent of their distributable income, in order to enjoy tax transparency – which means exemption from paying corporate tax at the Reit/vehicle level on the portion of income they distribute.
But this tax break only applies to those Reits with assets based in Singapore. Reits such as Saizen, which have all of their properties in Japan, do not qualify for the above-mentioned tax transparency treatment. This means that they do not have the same incentive to pay out 90 per cent of their distributable income that Reits with all their assets based in Singapore do.
The Reit sector here has been drawing investors by advertising high yields (which have gotten even higher as Reit stock prices have fallen by quite a bit over the past year). But these yields – as Saizen Reit has proven – are not always guaranteed.
The other thing that this whole saga has highlighted is that when evaluating whether a Reit is worth putting your money into, it is not enough to just consider the viability of the Reit’s business. One must also look at how the trust initially financed its property portfolio.
By all accounts, Saizen Reit’s income stream seems to be stable. The trust, which has a portfolio of 166 buildings with 6,000 rental homes in Japan, said rents and occupancies across its largely mass-market properties have remained stable since the current crisis began.
Rather, the problem is with the way those properties were financed when they were acquired. When building up its portfolio in the years leading up to its 2007 listing, Saizen relied solely on commercial mortgage backed securities (CMBS) loans to finance its buying. But the CMBS market all but shut down at the beginning of 2008.
The trust had already changed some of its loans to traditional bank loans by then, but the crisis meant that bank loans dried up, leaving it with six CMBS loans worth some 20.15 billion yen (S$303.8 million) in all – which Saizen couldn’t refinance.
Now, the trust has to draw on cash reserves, proceeds from a $41 million rights issue, operating cash flow and a short-term bridging loan to pay off five of these CMBS loans worth some 12.2 billion yen in all.
For the sixth CMBS loan, worth 7.95 billion yen, Saizen is looking for refinancing through a possible syndicated loan. In the worst-case scenario, if no refinancing can be found for the sixth loan, the trust may have to forfeit properties worth 10.3 billion Japanese yen, which were used as collateral for that CMBS loan tranche.
High yields and capital gains in the initial years of the sector’s growth have spoilt Singapore Reit investors, or worse still, lulled some into thinking Reits are sure-win investments. What happened at Saizen, hopefully, will serve as a wake-up call.
REITs – BT
Singapore to lead Asia Reit recovery on bank funding
Real estate investment trusts in Singapore and Australia will be the first in Asia-Pacific to recover from the economic slowdown on their ability to secure funding from banks, according to a new survey.
Singapore has the region’s best environment for Reits in terms of property market growth and regulatory support, while South Korea, Vietnam and Indonesia have the worst conditions, Sydney-based Trust Company Ltd said in the annual Reit survey it published last Friday.
‘In Singapore, every Reit has so far been able to successfully refinance debt as it’s fallen due,’ Trust chief executive officer John Atkin said in an interview here. ‘They’ve been forced to take a conservative approach by the Monetary Authority of Singapore, and have been more careful with their gearing levels.’ Asia-Pacific syndicated loans excluding Japan plunged 65 per cent to US$26.9 billion in the first quarter as banks reined in lending amid the global credit crisis, according to data compiled by Bloomberg. When Singapore Telecommunications Ltd agreed to a $1.08 billion three-year loan last month to refinance maturing debt, it paid more than 10 times the interest of similar-maturity loans it signed three years ago, the data showed.
Singaporean property trusts and developers need to refinance as much as US$13 billion of debt maturing this year, the city’s The Business Times newspaper reported on April 1, citing Asian Public Real Estate Association head Peter Mitchell.
‘It’s a credit crunch, not a property crunch and by that I mean the fundamentals of the real estate market are quite good,’ UBS AG senior property analyst John Freedman said in a phone interview from Sydney. ‘The question mark is over the financing of it, and clearly more transparent markets will have a stronger chance of recovery.’ Reits across Asia-Pacific declined in the past 18 months as rents fell and the mortgage-backed securities market they use for funding dried up.
The Tokyo Stock Exchange Reit Index has plunged 68 per cent from a high of 2612.98 in May 2007, while Bloomberg’s Reit Index is down 30 per cent this year.
Australian Reits including Valad Property Group and Goodman Group have written down the value of investments and cut back spending as they repair balance sheets.
Sydney-based Goodman, whose shares slumped from a high of A$7.44 on Feb 13, 2007 to 40 Australian cents, last Friday said that it secured new leases in France at prices which matched past European rental transactions.
Standard & Poor’s yesterday cut the group’s rating to BBB from BBB+, citing the economic downturn’s impact on its biggest tenants and the company’s ‘reduced access to capital’. ‘Our market is off 73 per cent from its March 2007 peak,’ – Bloomberg