Limited near term catalysts; Maintain NEUTRAL

Mixed retail sales data. Singapore Retail sales in Mar 2011, excluding motor vehicles, were up 7% YoY but down 1.3% MoM. The yearly sales increase was partly the result of escalating inflation. At constant price, retail sales were, nonetheless, up 4.6% YoY but down 2.4% MoM. Compared to Mar 2010 and adjusted for inflation, only the food & beverages, wearing apparel & footwear and furniture & household equipment segments recorded growth of more than 7%. The largest drop, however, came from supermarkets and optical goods & books which declined approx. 2%.

Rental rates mixed as well. According to CBRE, the retail leasing market also gave mixed signals in 1Q11, with major leasing deals concluded (Abercrombie & Fitch at Knightbridge, Cold Stone Creamery at Orchard Building) as well as the exit of some anchor tenants (such as ALT at Heeren) along Orchard Road. Monthly rents for prime Orchard Road averaged $30.10 psf/month in 1Q11, dropping 0.5% QoQ. Suburban rents remained at $29.10 psf/month, unchanged from the previous quarter. On average, the gap between prime Orchard and suburban rents continues to narrow, amounting to S$1.00 this quarter compared to S$4.10 a year ago. It is likely that prime retail rents along Orchard Road will continue to slide in the near term as recent completions along Orchard Road have not been digested and rental re-negotiations at some of these malls are impending. For example, more than 20 retailers at shopping mall 313@Somerset have banded together recently to petition for lower rents after struggling to attract customers. We also heard on the street that business for tenants in older malls such as Orchard Plaza, Far East Plaza, Heeren and Midpoint Orchard continue to deteriorate, dropping by some 30%-50% ever since the newer malls opened.

Supply Issues. According to our estimates, there is approximately 1.9m sq ft of mall space in the 2011-2012 pipeline. The retail sector continues to grapple with supplyside issues, brought on by the massive injection of new retail space in 2009-10. Some of the tourism expenditure is also diverted to the casinos and more consumers are shopping online, particularly among the younger group. The appreciating SGD will also affect tourist spending and motivate more Singaporeans to shop overseas. In fact, Knight Frank has forecasted that prime Orchards rents are likely to remain flat while suburban rents are likely to see only upside of about 2% – 3% this year. Landlords face an increasingly uphill task ahead to maintain attractive rentals, not only to retain but also to enhance the tenant mix. With limited near term catalysts, we think Singapore-based Retail REITs are likely to trade range bound. Maintain NEUTRAL on the overall sector.

SHOW ME THE MONEY
In Reits we trust?

A report card on the performance of various types of trusts listed in Singapore shows that Reits remain the best bets

By TEH HOOI LING
SENIOR CORRESPONDENT

A FEW weeks back, I was having dinner with some colleagues, one of whom is from The Straits Times when a colleague from Lianhe Zaobao walked past. We started chatting, and the topic naturally veered towards the stock market, given that we are all business writers.

The Straits Times colleague asked the Zaobao colleague what she thought of Hutchison Port Holdings (HPH), whose initial public offering was about to close then. Instead of directly answering the question, the Zaobao colleague said: ‘CitySpring is now trading at half its IPO price!’

The Straits Times colleague interpreted the comment as negative for HPH. ‘She’s saying don’t buy, that the new IPO may suffer a similar fate as that of CitySpring,’ he said. Then, our marketing colleague sheepishly admitted that he has CitySpring in his portfolio. I didn’t own up at the time, but I too had CitySpring languishing somewhere in my portfolio.

The conversation set me thinking. Has CitySpring done that badly if we take into consideration all the dividends paid out since its IPO?

How about the other investment trusts? We’ve had a number of property investment trusts, shipping trusts and business trusts listed on the Singapore Exchange. In general, how have they done since IPO, in absolute terms, and relative to the broad market movement?

So I decided to find out. Basically, I obtained from Bloomberg the total return for each of the trust relative to their IPO price. Bloomberg assumes that all dividends received are reinvested back into the security.

Also, the Bloomberg program can only calculate total return up to a certain number of days. So, for Reits that were listed before 2005, I had to switch to the weekly return numbers. Hence, the returns for Reits such as Ascendas, CapitaMall, CapitaCommercial, Suntec and Fortune are calculated based on the closing price on the first Friday after they started trading, and not the IPO price.

Here’s what I found. Of all the various types of trusts, the real estate investment trust (Reit) has been the most successful. The performance of shipping trusts and other forms of business trusts have generally been rather dismal.

And among the Reits, those with Singapore-based properties have on the whole performed better than those with overseas properties.

So which has been the most successful Reit to date? Excluding those with trading records of less than one year, CDL Hospitality Trust appears to be the star. Since July 18, 2006, it has returned 225 per cent to its unitholders. That’s an equivalent of 28.5 per cent a year, and it outperformed the FTSE Straits Times All Shares Index by a whopping 198 percentage points during that period.

First Reit, which owns hospitals and hotels in Indonesia and Singapore, is the second-best performer with a return of 20 per cent a year. Both were listed in 2006.

The first batch of Reits to hit the market also fared well. Ascendas Reit rewarded investors with return in excess of 17 per cent a year since 2002 – that’s a near 10-year record. CapitaMall Trust, meanwhile, returned 16 per cent a year, outpacing the general market by more than 170 percentage points.

Earning the dubious honour as the worst Reit to have listed on the Singapore Exchange is Saizen, which owns residential properties in Japan. It is now 78 per cent below its IPO price, and after taking into consideration its distribution, investors have seen their capital getting shaved by 33 per cent a year since November 2007. It underperformed the general market by 66 percentage points.

AIMS AMP Capital Industrial Reit, formerly known as MacarthurCook Industrial Reit, is the second-worst Reit. It has lost 72 per cent of its share price, or the equivalent of 17 per cent a year after dividend since 2007. It trailed the general market by 37 percentage points.

The median return of all the Reits listed on SGX since their IPOs up till end-March 2011 is 8.9 per cent a year. That’s a return not to be sniffed at. Reits which bombed tended to have high gearing, so that’s a good metric to start one’s screening process.

As at this week, the average yield for all the Reits listed in Singapore is 7 per cent. There’s a website – http://reitdata.com/ – which provides a comprehensive and updated listing of all the reits and business trusts in Singapore.

Meanwhile, the performance of the other two types of trusts – shipping and business or infrastructure trusts – leaves very much to be desired. On average, the three shipping trusts – Pacific Shipping Trust, FSL Trust and Rickmers – have seen their unit price slumped by 56 per cent since their IPO. Only the distributions from Pacific Shipping Trust has more than made up for the capital loss.

Investors who bought into Pacific Shipping Trust are still better off than leaving their money in the bank, or buying into the general Singapore market. The trust returned 7.43 per cent a year since May 2006. It outperformed the FTSE All Shares Index by 17.5 percentage points.

No such luck for holders of FSL and Rickmers. Investors in the two suffered a loss of 14 per cent and 20 per cent a year respectively since 2007 when they were listed.

As for the other business trusts, the performance in general has also been lacklustre. The average annual return is -18.9 per cent a year. The average is dragged down by Indiabulls Properties Investment Trust which has seen its unit price slump 70 per cent since its listing in July 2008. The best performer in this category is Ascendas India Trust – with an annual return of 2.3 per cent a year since 2007.

What about CitySpring? Well, what do you know – after taking in all its distributions, investors are actually up by 1.4 per cent a year. That’s an outperformance of 14.5 per cent over the FTSE All Shares Index between February 2007 and end-March 2011.

From the report card above, on the whole, it appears that of the various types of trusts, Reits remain the best bets. There seems to be a lot more uncertainties associated with the other forms of trusts.


The writer is a CFA charterholder

Leveraging trend continues in 2011

Leveraging trend. In our year-end S-REITs strategy report in 2010, we highlighted that the trend of leveraging up among S-REITs is likely to continue into 2011, buoyed by the still-low interest rates environment. So far, this has proven to be true, with many S-REITs taking on more debt to fund new acquisitions. Recently, we have seen K-REIT entering into a S$125.1m sale and purchase agreement for Prudential Tower, which will increase its aggregate leverage from 37% to 39.3%. AAREIT has also leveraged up from 32.7% to 33.6% following its S$72m NorthTech acquisition. CACHE is also expected to bump up its gearing from 23.7% to 27.6% on the back of its maiden acquisition of two local logistics properties. CDLHT is also leveraging up from 20.4% to 26.5% with the purchase of Studio M Hotel for S$154m. We noted that most of these transactions to-date (except CDLHT) have been third-party acquisitions – we have yet to witness more sponsor-backed assets being injected into the REIT.

40% watermark increasingly tested. According to our estimates, the top three highest-geared S-REITs are Suntec (40.4%), K-REIT (39.3%) and FCOT (38%). Departing from the previous conservatism seen during the financial crisis, it seems that more S-REITs are now comfortable reverting back to the pre-crisis target gearing levels of 40-45%. We think the next likely candidates to gear up and possibly test the 40% watermark will be MIT, which has yet to make its maiden acquisition to-date; and FCT which is be looking at acquiring Bedok Point from its sponsor.

Sponsor Injections. Going into the remaining three quarters of 2011, we are awaiting more sponsor injections into the REITs, which will likely bring up gearing levels. Apart from Bedok Point, other FY11/FY12 targets on our radar screen include: ION Orchard (CMT), Ocean Financial Centre (K-REIT), Pandan Logistics Hub & CWT Logistics Hub 3 (CACHE), Pandai Hospitals in Malaysia (PLife REIT), 30 Tuas Ave 10 (Sabana), Changi City Point & Centrepoint (FCT), CMA’s China malls (CRCT) and Lippo-Karawaci’s Indonesian malls (LMIRT).

Interest rate hike likely in 2012. The MAS manages the Sing dollar’s strength by buying or selling currencies to keep its exchange rate against major currencies within a policy band. This FX-centred monetary policy regime means that Singapore has effectively imported US’s interest rate policy, despite obvious domestic inflationary pressures. Many economists are expecting the Fed to start normalising rates towards the latter part of 2012 – which, if correct, would imply the Sibor will stay at current low levels through 2011. We thus anticipate the leveraging trend among S-REITs to persist for the remaining of 2011 and possibly the early part of 2012.

Industrial S-Reits’ expansion into China poses risk: Moody’s

AS industrial Singapore real estate investment trusts (S-Reits) look at spreading their wings to China, Moody’s Investors Service (MIS) has cautioned about the legal and regulatory risks they face.

In a report on the business risks which industrial S-Reits will face in China, associate analyst Alvin Tan of MIS, a wholly owned credit rating agency subsidiary of Moody’s Corporation, said: ‘Moving into China would have negative credit implications, given the uncertainties associated with entering an unfamiliar market and the associated regulatory risk, which could nullify the potential gains of geographical diversification.’

Mr Tan said that China’s financial, tax, and legal frameworks are still in their infancy, which could have a number of negative ramifications, such as the regulatory risk related to tax policies on profits, the enforcement of lease contracts, and land ownership issues, as well as foreign-exchange risk for the repatriation of capital.

On why industrial S-Reits are seeking expansion into new regions, the MIS report said the competition for industrial properties in Singapore is intensifying. S-Reits’ growing risk appetite and the low interest rate environment have exacerbated the competitive pressure.

Another push factor is that the large supply of new industrial properties opening up over the next two years may limit rental growth in the medium term.

‘In their search for higher yields, the industrial S-Reits are now looking at expanding into new regions,’ said Mr Tan, ‘with several of the S-Reits identifying China, the world’s fifth most active real-estate investment market, as a possibility.’

There are of course ‘positive factors’, said Mr Tan, but they ‘could mitigate, but not fully offset, the impact of these negatives’.

The merits of overseas diversification include lessening the S-Reits’ geographic exposure to Singapore. And those with sponsors that have already established a presence abroad could tap into their sponsors’ China-related experience to reduce the risk associated with operations in a complex regulatory environment.

Also, the acquisition of overseas properties with long-term leases and rental guarantees would provide additional income and stability to medium-term operating results.

Can Reits weather the turbulence?

REAL estate investment trusts (Reits) have grown increasingly popular over the years due to their attractive tax-exempt dividend income and greater liquidity as compared to physical property assets.

With more people starting to plan for their retirement earlier, many look to Reits as a form of ‘annuity’ that will see them through their golden years.

Even global fund managers have now set up dividend funds to tap the rise of the dividend culture, with Asia taking centrestage.

Notably, recent times have brought about an increased trend among Reits to acquire yield-accretive overseas assets to diversify their earnings base. This acquisition trail tends to be focused more on developed countries, such as Japan, where yields are perceived to be more ‘stable’. But is this really a wise move or a lack of foresight, from a risk management angle? More importantly, are Reits really that resilient to capital downside in times of turmoil while staying capable of sustaining dividend payouts indefinitely into the future?

Let us evaluate this in the context of the latest natural disaster that has hit Japan.

When news of the recent 9.0-magnitude earthquake and tsunami hit newswires last Friday, investors scurried to sell off positions in a broad range of equities, including the once-believed safe-haven Reits.

This led Reits with income and asset exposure to Japan such as Saizen Reit, Parkway Life Reit (P-Life), Mapletree Logistics Trust (MLT), Frasers Commercial Trust and Starhill Global Reit to shed 16.1 per cent, 5.3 per cent, 4.4 per cent, 6.2 per cent and 2.4 per cent respectively since last Friday.

Some feared fluctuations in the Japanese yen may trigger translation losses for Reits. But, in the first place, the more pertinent question to ask is: is the yen more likely to appreciate or depreciate in such a scenario?

Our guess is the yen may appreciate against the greenback in the short term as Japanese investors repatriate funds back to Japan. With hefty insurance payouts also looming on the horizon, the yen could be further boosted as insurance companies quickly liquidate foreign assets to raise cash.

We borrow confidence that this trend will persist in the short term as the yen’s advance last Friday was similar to that experienced after the 1995 Kobe earthquake. As such, income impact – if any – will be more positive than negative for now.

On the asset front, overall damage was also in check as verified by most of the affected Reits. Besides, most Japanese assets tend to be insured against natural disasters. This being so, any fears arising from the need for excessive capital expenditure are probably unwarranted although insurance premiums are likely to increase going forward – an item that is unlikely to materially dent a Reit’s bottom line.

All in all, most of the Reits walked away relatively unscathed, except one: Saizen Reit. It took a hard knock as the trust’s entire asset portfolio consisting of 146 properties is located in Japan, of which 22 properties are situated in worst-hit Sendai. The lack of diversification of its earnings base sent the Reit reeling, with its units plunging a sharp 16.1 per cent or 2-1/2 cents to 13 cents since tragedy struck last Friday.

Fortunately, most of the other Reits with exposure to Japan have diversified portfolios where income streams come from a mix of geographical locations. Analysts reckon income streams for most Reits are not likely to be materially impacted going forward.

Interest rates-wise, the recent disaster that destroyed much of north-east Japan’s infrastructure is more likely to deflate interest rates than inflate them in the short to medium term as the government attempts to keep interest rates near zero while rebuilding the nation.

Our view is further supported by the Japanese central bank’s recent move to inject 15 trillion yen (S$232.4 billion) into the nation’s money markets to promote financial stability and boost overall liquidity.

Reits with debt arising from Japanese assets are therefore likely to continue operating in an ‘idyllic’ low-interest-rate environment, at least in the short to medium term.

Interest rates could, of course, become firmer in the longer term. After all, they are ruled by a function of demand and supply for funds. For instance, if infrastructural demand increases, increased competition for funds may drive up interest rates.

That said, interest rates are unlikely to be able to escalate very much before triggering government intervention as the Japanese government tends to favour less stringent monetary policies that promote liquidity in the nation’s money markets.

To highlight a couple of Reits that could potentially be affected by interest rate movements in Japan, let’s examine P-Life and MLT – the two Singapore-listed Reits with the greatest amount of Japanese borrowings within the Singapore Reit universe.

Both Reits currently still draw bullish ratings from analysts despite their debt exposure to the stricken nation. In particular, P-Life has held up exceptionally well despite a meltdown in regional markets. So far, P-Life has eased 2.4 per cent year-to-date as opposed to the benchmark Straits Times Index (STI), which has declined 7.6 per cent since the beginning of the year.

Analysts such as Janice Ding from CIMB also remain positive on both Reits’ outlook in the times ahead as reiterated by her ‘outperform’ calls on both stocks and target prices of $1.98 and $1.05 for P-Life and MLT respectively – this translates to 23 per cent and 20.7 per cent upside potential for P-Life and MLT respectively, based on yesterday’s closing prices.

So what are our key takeaways from this?

Diversification of earning streams is perhaps one of the key imperatives from a Reit’s risk perspective as reflected in the case of Saizen Reit. Even though Japan is seen as a developed nation that could provide stable yields from its assets and mature economy, too much of a good thing may be bad after all.

Reits that had other sources of income – such as P-Life and MLT – weathered this round of ‘turbulence’ much better than counterparts that did not.

In fact, sharply discounted prices make such Reits look increasingly attractive from a yield perspective. Not only are they resilient in trying times like these, they ‘fill our wallets’ on a regular basis too.