Category: REIT
CCT – BT
CCT $580m refinancing boosts shares of S-Reits
MOST Singapore-listed real estate investment trusts (S-Reits) chalked up gains yesterday as news of CapitaCommercial Trust’s (CCT) $580 million loan allayed refinancing concerns facing the sector.
Fourteen out of 21 Reits closed higher. The FTSE ST Reit Index rose as much as 6.4 per cent in the day before ending at 407.09 for an 8.96-point or 2.3 per cent gain.
Among the Reits, CCT led the rally in percentage terms with a 7 per cent or 6.5-cent increase to close at $1.00.
Fortune Reit followed close behind, jumping 6.4 per cent or 14 HK cents to HK$2.34 (S$0.45).
CCT announced on Tuesday that it had obtained a three-year term loan of up to $580 million to refinance borrowings due in March.
The trust also said that it would drop the redevelopment of Market Street Car Park into a Grade A office and commercial building.
‘Including this club loan, CCT’s latest all-in cost of debt is estimated to fall well within 4.4 per cent, which is 80 basis points higher than its current 3.6 per cent,’ said DMG & Partners analyst Brandon Lee in a note yesterday.
Nevertheless, ‘the apparent availability of credit would serve to reinvigorate investors’ sagging belief in the credit-dependent Reit model’.
Supporting this view, another Reit analyst told BT: ‘Credit is available, especially to the better-sponsored Reits, but cost of funding is likely to go up.’
In a December report last year, DBS Vickers had estimated that the all-in cost of debt for Singapore Reits could rise from an average of 3.2 per cent to over 4 per cent.
CCT’s plan to abort the redevelopment of Market Street Car Park – estimated to cost $1 billion to $1.5 billion – also won Nomura Singapore’s support.
But the outlook for CCT is not entirely rosy yet. ‘We take a positive view of the refinancing… (but) this announcement is likely to be the last significant price catalyst for CCT this year as we expect more negative news flow on falling office rents and declining office space demand,’ said CIMB analyst Janice Ding.
Concerns over possible asset writedowns and the impact on gearing also continue to loom over the Reit sector.
As the property market falls, ‘a reduction of capital values would lead to a writedown in book values of S-Reits… This would translate to a higher gearing level for S-Reits,’ said DBS Vickers in its report.
REITs – BT
Reit model under pressure
SINGAPORE-listed real estate investment trusts (Reits) are now victims of their own success.
Over the past three years, most Reits here have taken an aggressive growth path, snapping up expensive properties and pushing up rentals in their properties as they took advantage of the property boom. This has allowed them to increase net property incomes and deliver good dividends to their unitholders.
But now, the good times have come to an end, and it is unclear how these Reits will deliver the kind of returns shareholders have gotten used to.
When reporting their Q3 results, the Reits admitted that growth through acquisitions will slow, what with the current credit squeeze making merger and acquisitions (M&As) more difficult and expensive across all sectors. The Reits said they will look to organic growth, such as enhancing their existing lettable space in search of higher rents.
But how much organic growth there can be under these conditions is debatable.
Retail Reits, for example, increase their property incomes in three ways – from acquisitions, through rental increases after they enhance their properties, and increased sales from their tenants, which they typically take a cut of.
But now, all three avenues for property income growth appear to be blocked. Acquisition growth, as mentioned, is no longer as viable. Retail sales are expected to take a beating this year as consumers cut back on spending as concerns over job and wage security take hold. Because of this, landlords, who typically take a percentage of turnover as part of the rent, will also see takings fall.
And rents will fall, as tenants try to bring landlords back to the negotiating table to ask for more manageable rates. ‘A prolonged depression in consumer spending could affect retailers’ ability to service their rents and we think it is possible that more retailers would renegotiate for lower rental rates, and retail mall managers may have to give in to avoid a high turnover in tenants,’ noted OCBC Investment Research in a recent report. As one market observer put it, ‘Reits can’t really squeeze the tenants anymore or they will just simply close shop.’
In 2009, CB Richard Ellis reckons that prime Orchard Road rents could contract 5-10 per cent in just the first half of the year. At prime suburban malls, a 2-3 per cent decline is likely, the property consultancy said. Prime Orchard Road rents fell 1.9 per cent quarter-on-quarter in Q4 2008, while prime suburban rents shed one per cent, the firm’s data showed.
The same trend holds true for the office and industrial sectors. CBRE’s data showed that average Grade A and prime office rental values in Singapore are estimated to have slipped about 20 per cent in Q4 2008. More falls are expected this year. Likewise, rents for industrial space could see double-digit percentage falls, analysts have said.
With retail, office, and – to a lesser extent – industrial Reits, having raised rentals quickly over the last few years, tenants are finding themselves in a tough spot during these trying times. Office rents, for example, nearly doubled in 2007, rising 96 per cent in the Grade A category and 92 per cent for prime space. That was on top of gains of 53 and 50 per cent respectively posted in 2006.
What this means is that tenants, who have been paying jacked-up rentals over the past two years, will in some cases lack the reserves to withstand the current crisis. They are also more likely to push for substantial rental decreases, which could affect the Reit model.
Jannie Tay, president of the Singapore Retailers Association, called for a drop in retail rents – in light of weaker sales – as early as September last year. Recently, she again asked retail landlords to cut rents by between 30 and 50 per cent. Reits are going to face pressure to give in.
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
REITs – OCBC
Perceived risk will drive performance
The growth story is unwinding. Since its establishment in 2002, the SREIT sector has flown on the back of a soaring property market. Portfolio sizes expanded on the back of acquisitions and revaluation gains. Unit prices had also followed suit. The REITs behaved like growth instruments – the focus was on capital appreciation, not yield. This golden era ended quite decidedly this year. The growth story, built on a bull market (rising asset prices) and a cheap market (easy credit), has seen a massive reversal. No thanks to a collapse in unit prices, the sector is now trading at an average 20% trailing yield and a 63% discount to book.
Perceived risk new driver. We believe the sector’s performance will be driven by perceived risk, as measured by the strength of their balance sheets and the quality of their underlying income. Based on reported data, some S$4.4b of debt is due for refinancing in the next nine months until September 2009. Refinancing poses a major challenge for the sector, especially with securitized financing no longer in play and lenders mindful of loan-to-value in a falling market. We feel revaluation losses have a high probability of breaching self-imposed and lender-preferred gearing targets. An equity recapitalization may be necessary. In the midst of such uncertainty, we believe sponsored REITs are likely to show outperformance. On the income side, earnings and distributions are threatened by a rising cost of capital and potential rental declines. Our view is that REITs may benefit from diversification, but will have to watch out for forex-driven revaluation risk.
Recommendations. We have a NEUTRAL rating on the sector. We generally think S-REITs are oversold. As capital appreciation-seekers abandon the sector en masse, we see a new ‘REIT as value’ story emerging. While we expect share price volatility to continue for these institutional favorites, value hunters have an opportunity to selectively pick up some good assets at what we think are really good valuations. We expect substantial declines in capital values and rentals in the office sector – but to a large extent unit prices already reflect these concerns. The impact of global events on the retail and industrial sectors has been slower to register in market consciousness. The industrial sector is quite leveraged as a whole and it may be too early to make the call that risks are fully priced in. Within our coverage universe, we have BUY ratings on Suntec REIT (fair value: S$0.90), CapitaMall Trust (fair value: S$1.94) and LMIR Trust (fair value: S$0.39).