Category: REIT
REITs – DBS
Examining trough valuations
Going for high risk aversion. We re-iterate our view that the S-reit sector has been de-rated sufficiently for the prospects of slowing earnings growth momentum and possibility of capital value write-downs as well as refinancing concerns. The sector is trading at 7.6% FY08 yield or a 450bps above the current Singapore 10-year bond yield and a hefty 3.7% pt ahead of our projected peak bond yield of 3.9%. The 0.94x P/RNAV already reflects an average 20% cut in capital values across all property sub-segments. S-reits are also trading between 3.5-12% implied cap rates, as investors priced in a bear case scenario.
Office and hospitality sectors may lag: Granted that at this period of higher investor risk aversion, volatile capital value outlook and tight credit conditions, valuations are unlikely to approach previous highs in the short term, we believe that at the current level, much of the anticipated risks are factored in the S-reits lowered valuations. In terms of the various segments, the office and hospitality space poses the most downside risk given the former’s strong correlation to GDP growth and skewed supply/demand dynamics as well as limited earnings visibility in the short-stay accommodation segment.
Go for defensive: While we believe DCF-based measurements are still valid to give investors a longer term total return picture, we are ascribing a discount to these values to derive our price targets given current uncertain environment. Our strategy would be to prefer the more defensive S-reits, particularly those in the healthcare, industrial and retail space. Our top picks are Parkway Life Reit, which offers a highly defensive earnings model with minimal earnings downside risks and exposure into the growing aging population. While stock liquidity may be an issue, we believe this can likely be addressed progressively in the long term. Amongst the larger cap names, we maintain our buy rating on A-reit for its long lease expiry profile and CMT, Suntec and FCT as a suburban retail players with a diversified tenant base. Share prices of ART had been bashed down significantly and at the present level, we see value emerging given its steep discount to RNAVs.
Parkway Life Reit (PREIT SP, TP $1.35)
ParkwayLife REIT (PREIT) offers an exposure to the region’s growing need for healthcare facilities due to an aging population. It is currently trading at 0.8x of book NAV and offers a net dividend yield of 6.4% for FY08F and 6.8% for FY09F. Earnings downside risk is negligible thanks to its revenue model that is based on the higher of i) base rental of S$30m plus 3.8% of the adjusted hospital revenue; or, (ii) preceding year’s rental multiplied by [1+(1%+CPI of preceding year)]. Our DCF-derived target price of S$1.35 (6.3% WACC, 1% terminal growth) offers potential upside of 29%. In addition, refinancing risk is minimal with a low gearing of
10.2%. Maintain Buy.
CapitaMall Trust (CT SP, TP $2.96)
CMT remains one of our key picks due to its strong operational history with a proven expertise in optimizing asset yields through their various AEI activities. Moving forward, catalyst for growth will derive from I) rental reversion from the expiry of 69% of its portfolio income over FY09-10, ii) planned AEI activities amounting to $288m, largely from SSC and JEC, should boost bottomline in the medium term and iii) The Atrium purchase, which is pending completion, should grow NPI further when plans to re-position the asset is completed in 2010.
Ascendas REIT (AREIT SP, TP $2.33)
We like AREIT for its i) quality portfolio of industrial assets, which are enjoying occupancies in excess of 98%, ii) business and science parks exposure that is expected to remain robust on the back of over-spilling demand from office space crunch in the CBD. This segment makes up 25% of its total portfolio. iii) proven development capability which will are higher yielding compared to asset purchases. In this aspect, AREIT has S$309m worth of development assets in the pipeline. Iii) financial flexibility, AREIT management has adopted a prudent capital management strategy which is reflected in its gearing of 38.2%.
Frasers Centerpoint Trust (FCT SP, TP S$1.26)
Frasers Centerpoint Trust (FCT) offers exposure to Singapore’s suburban retail sector through its 3 sub-urban retail malls located in major population catchment areas in Singapore. Earnings should remain resilient given that it derives mainly from non-discretionary spending. In terms of portfolio growth, acquisition of Northpoint II scheduled to TOP by by 08/early 09 kickstarts its portfolio growth plans with other properties such as Yew Tee Mall and Bedok Mall to follow suit in 1H09 and 2010/11 respectively. FCT is expected to tap debt and capital markets for these purchases.
Suntec Reit (SUN SP, TP $1.55)
Suntec Reit offers investors exposure to a more defensive business model of office and retail assets through its portfolio of 1.9msf NLA. DPU growth over the next 2 years is derived from office lease reversions and higher retail rents. Plans to enhance Park Mall and add 67000sf of GFA could provide further upside to our projections in the medium term. Refinancing concerns have been largely allayed by putting in place a $420m club loan. Our price target offers total return of 15%.
Ascott Residence Trust (ART SP, TP S$0.94)
Ascott Residence Trust (ART), as the first Serviced Residence REIT, offers exposure to the Asean booming serviced residence industry. We believe ART presents the least earnings risks amongst the hospitality peers with a regional portfolio exposure that reduces country specific risks. In addition, its average portfolio lease of 8 months should delay an impact of a downside in spot rates. In addition, potential acquisition
Link – Table
REITs – Kim Eng
S-REITs update
Prices of S-REITs have declined over the past one month since the release of the quarter ended June results, with CDL Hospitality (CDLHT) and Ascott Residence declining as much as 18-22%. While recent valuations reflect expectations of slower acquisitions and rental growth, we observed two positive developments: 1) refinancing issues have been cleared up and 2) yields spread have widened. But despite reduced gearing, managers will focus on organic growth in the foreseeable future and de-emphasizing acquisitions.
Hospitality and office/retail REIT had a good quarter but the going will get tough
High hotel occupancy rates over the past year and sustained retail/office rental growth benefitted CDLHT and Suntec Reit (SUN) in the period ended Jun 08, evident from their strong YoY DPU growth of 44% and 30%, respectively. SUN and FCT delivered good QoQ growth of 8.4% and 7.4%. Annualized DPUs of S-REITs were generally in line with consensus FY08 estimates. Unfortunately, most sounded rather cautious on the outlook which spooked the market.
Organic growth seems to be the only saving grace
Management teams have generally highlighted the lack of yield accretive acquisitions. Even if there are, REITs face difficulty tapping the capital market in this environment. We focus on REITs with organic growth potential. The organic growth of CCT (Rating: Buy) will be driven by rental reversions with about 41% of the office leases expiring between 2009 and 2010. The weighted average rental of leases expiring in 2009 and 2010 for 6 Battery Road is approximately 45% below the current micro-market rentals. Office rentals are likely to remain resilient until a substantial supply of prime office space come onstream in 2010, allowing CCT’s rentals to catch up with the market.
Refinancing woes resolved
The debt profile of S-REITs has generally improved, with no immediate need to tap the capital market for fund raising. It is notable that SUN has refinanced its remaining bridge loans with S$400m unsecured club loan extended by several banks at highly competitive spreads, a sign of a hopeful credit situation for REITs with strong credit standing. K-Reit has also seen an improvement in gearing ratio from over 54% down to 28% after its rights issue. REITs with lowest gearing include CDREIT, FCT and Plife Reit.
Fear of potential write-down of capital values overplayed
While fears of a potential write-down of capital values are valid given the steep discounts to NAV, a write-down will not affect cash distribution as least in the medium term as rentals have been locked in leases. We do not see a write-down coming for the retail REITs CMT and FCT due to the AEIs. In the office space, recent transactions done at average prices of $2400 psf in 1H08 reflect still tight office supply. REITs with low gearing are also preferred as they would be far from hitting the maximum allowable gearing limit in the event of a write-down. Some commendable names are CDLHT, PLife Reit and FCT.
Lower bond yield widens spread
Weekly average 10-yr SGS bond yield decreased from a high of 3.9% mid-Jun to 3.2% end-Aug. 12-mth SIBOR decreased from a high of 2% to 1.75% over the same period. 5-yr SGD swap also declined 100bp to 2.9%. The projected yield of 6.3% for CCT (Buy) offers an attractive 310bp spread over the 10-yr bond yield, while CDLHT (unrated) also offers an attractive yield spread with 9.7% projected yield.
Link – Table
Reits – BT
Yields are attractive but they are subject to movements in cyclical property market
By EMILYN YAP
(SINGAPORE) High yields and strong results are making real estate investment trusts (Reits) stand out in a volatile market. But there is debate over their potential as defensive plays, with some market watchers cautioning that Reits are not necessarily safer bets because of their link to the cyclical property sector.
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Most Reits turned in impressive results for the quarter ended June 30, 2008. The 18 which reported their performance before last Friday all achieved higher distributable income and distribution per unit (DPU) over the same period last year.
Distribution yields reported by the Reits, based on annualised DPUs and last Friday’s closing prices, ranged from 4.8 per cent to 11 per cent. Reits which offered yields above 10 per cent included MapleTree Logistics Trust, healthcare-related First Reit and Lippo- MapleTree Indonesia Retail Trust.
Overall, the Reits had an average distribution yield of around 7.8 per cent, offering a spread of over 4.6 percentage points above the 10-year Singapore government bond yield of 3.14 per cent on Friday. Compared with one-year fixed deposit rates which start from around 0.8 per cent, the Reits offered an even wider spread.
Analysts say Reits have largely performed in line with expectations. Their good performances have won them fans – with many trading at discounts to net asset values and thus offering relatively high yields, OCBC Investment Research said in a recent report that investors could ‘take a fresh look at S-Reits as defensive vehicles offering stable cash flows and high yields’.
However, others pointed out that Reits still may not match up to traditional defensive plays, including high-yielding blue chips like telcos and banks. While Reits do offer high distribution yields, the sector is influenced by movements in the property market, which tends to be more cyclical compared with, for instance, the telecommunications industry, or even banking, they say.
Distribution yields are also a function of Reits’ unit prices, so yields may look high simply because unit prices have dropped, explained one analyst. Considering both capital gains and distributions to investors, Reits have not done as well compared to around a year ago, he added. The FTSE ST Reit Index has fallen by more than 10 per cent since it was launched on Jan 10 this year.
Reit fans, on the other hand, argue that few sectors are completely resistant to economic slowdowns. Also, some Reits may be more resilient because they can lock in leases over several years, which helps stabilise earnings.
Where there is agreement among most of the market watchers BT spoke to is that Reits will continue to generate steady operating results. For those which have locked in leases or are able to gain from higher rental reversions on lease renewal, ‘there is a lot of predictability in terms of their earnings and distributions,’ said Daiwa Institute of Research analyst David Lum.
With credit conditions staying tough, however, much of the earnings growth will have to come organically. Reits may still acquire properties but they will have to be more selective, analysts say.
Analysts’ top Reit picks include Suntec Reit. ‘With 32.6 per cent of total office net lettable area up for renewal in FY09, we believe Suntec is well-positioned for rental reversion with current $14 psf signing rents versus passing rent of around $6.30 psf,’ said a Citi Investment Research report last week.
CapitaCommercial Trust was another popular choice. Goldman Sachs reiterated its ‘buy’ call on the Reit, favouring its strong organic growth and ‘leadership among office Reits’.
SREIT – DBS
Facing headwinds
Sector outlook and valuation: The S-reit sector is currently trading at average FY08 yield of 7%, a 360bps spread over the 10-year bond yield and at 0.79x P/book NAV. We believe that much of the rising interest rate expectation and slower economic outlook is likely factored in the current share price. While the sector is likely to continue seeing headwinds from the negative newsflow from the tight credit and sluggish capital markets, valuations are not excessive by historical standards, as yield spreads are trading above their longterm average levels.
Raising cost of capital assumptions. Using higher debt and equity costs have eroded S-reit returns. Even then, Sreits are trading at steep 24% discounts to DCF-backed price projections, which are based on these greater cost of capital assumptions. Essentially, we have lowered our price targets by 19% by increasing our equity discount rates by 107bps. Another issue surrounding the S-reit sector is the relatively short debt expiry profile, estimated at 2.9 years. S-reits have an estimated $5.1b (43% of total) debt to be renewed in the next 12-18 months. However, with more than 75% of total debt on fixed rates or are hedged, the impact of the hike would likely be moderated.
Stock selection is key. Under the present dampened acquisition growth environment, we would be selective in our S-reit picks and would prefer those with strong organic growth potential to drive DPU expansion, such as retail reits as well as those with long lease expiry profiles such as industrial reits. Amongst our top picks are CMT and A-reit. CMT has a multi-pronged growth strategy through organic and asset enhancement activities. A-reit has a relatively long weighted lease expiry profile of 5.5 years that would enable them to have earnings certainty and visibility. There is potential for more rental hikes given that industrial rents have not appreciated significantly from the low. Share price of A-reit had declined 23% since May 08 and is currently offering 7.4- 7.5% FY09 and FY10 yields.
REITs – OCBC
Staying defensive in times of uncertainty
What a difference a year makes for the REIT market! Last year, the “REIT as growth” story was birthed by benevolent circumstances. Markets were strong, credit was easy, and the Singapore economy was flying. The property market was booming and REITs became the surrogate for riding the wave.
Circumstances are no longer so accommodating. Share prices of retail/ office S-REITs (Singapore listed REITs) have fallen some 20 to 30% since July 2007, reflecting the breakdown in the credit markets and uncertainty about future growth prospects. Higher long term interest rates have steepened yield curves. We expect interest rate volatility to persist as inflation concerns shape central bank policy and prospects for a US rate hike.
Attractive from a defensive prism. The majority of the S-REITs are trading at steep discounts to net asset values (NAVs). REITs are trading at an average yield of about 7.7%, about 400 bps over the 10-year Singapore government bond rate. This de-rating has given investors an opportunity to take a fresh look at S-REITs as defensive vehicles offering stable cash flows and high yields.
Under-rented office portfolios could drive near-term DPU growth. We are quite positive on the office sector – the prospects of an economic downturn are hedged by limited supply. We expect office rentals to peak by year end and then hold or decline only marginally. This nevertheless implies significant upside for REITs with leases locked in two or three years ago, boosting rental revenues in the coming 1-2 years. For instance, a large portion of Suntec REIT’s office portfolio coming up for renewal is significantly under-rented at S$5-6 psf per month. We have a BUY rating on Suntec with a S$1.71 fair value estimate.
Outlook for retail segment is more uncertain. The outlook for the retail sector is more uncertain, with high economic uncertainty and increasing supply – about 1.2m sq ft of new retail space is coming on-stream over 2008-09 on Orchard Road alone. CB Richard Ellis expects a total 6.9m sq ft of new retail space between 2H08 and 2012, with the bulk (48.0%) coming on-stream in 2009. Marina Bay Shoppes by developer Marina Bay Sands is a major contributor – adding 800,000 sq ft; while ION Orchard adds about 663,000 sq ft. Notable suburban additions include the Big Box development at Jurong Regional Centre and CapitaLand’s Civic, Cultural
and Retail Complex at Vista Xchange.
Conclusion – Overall, we are positive on the office and industrial segments, but neutral on the retail segment. For the residential sector, we see pockets of weakness especially for high-end residential units, but fortunately the bigger listed developers have secured earnings for the next 1-2 years due to strong pre-sold units’ revenues, which will be recognised in 2008-2010. On the REIT space, present good yields for commercial space will continue to support rental income for REITs with exposure to good-class commercial assets.
Link – Performance Table