Category: Suntec
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
Suntec – OCBC
Fairly valued – downgrade to HOLD
Office rents down 35% from peak. CB Richard Ellis data showed that both prime and Grade A monthly office rents have fallen about 35% from the highs of this cycle achieved in 2Q-3Q08. 1Q09 rents of S$12.30 psf per month for Grade A (versus S$18.80 psf pm in 3Q08) and S$10.50 psf pm for prime rents (versus S$16.10 psf pm in 3Q08) have taken the market back to 2Q07 levels. Meanwhile, the Business Times reported that a 16- storey freehold office block in the CBD has been sold by a UK fund. The Parakou Building was sold for about S$81.38m or S$1280 psf of net lettable area. The transaction is at a 36% discount to the S$128m the seller paid for the property two years ago. This is the first major office transaction after a fairly subdued 4Q08-1Q09.
We maintain our stance on office. The market data jibes with Suntec, which reported achieved rents of S$9.96 psf pm for Suntec City Office in 1Q09. In 2Q08, the manager had disclosed achieved rents in the range of S$12-15. At the results briefing, the manager had said that maintaining occupancy above the 90% level is a key priority. Negative drivers for office rents and capital values still persist, in our view: 1) excess capacity concerns; which are exacerbated by 2) a questionable demand outlook as companies rationalize their need for both existing space and planned expansions. As such, we maintain our forecast of continued rent declines for Suntec’s office portfolio over FY09.
Capital value decline may drive recapitalization. With the successful refinancing of S$825m in loans maturing this year, Suntec’s next refinancing requirement arises only in FY11. Our attention is on capital values – as independent valuations catch up with the market, we expect asset values to fall across the sector – increasing gearing levels. Lender and market appetite for leverage is low and we believe more S-REIT managers may launch equity issues to recapitalize REIT balance sheets.
Fairly valued. Our valuation for Suntec recognizes the need for correcting that implicit under-capitalization through additional equity – we price in an equity issue of S$500m at an issue price of S$0.70 (up from S$0.60 previously due to the recent price run up). This takes our fair value estimate for Suntec to S$0.84 (from S$0.80 previously) – or a 7% discount to our SOTP value of S$0.91. Suntec’s price has increased 32% since our last report just three weeks ago. Downgrade to HOLD on valuation grounds.
Suntec – BT
Suntec Reit secures $825m refinancing
Interest margin at below 3.75%; Q1 distributable income up 23% at $46.4m
SUNTEC Reit has secured an $825 million loan facility. And with this fresh loan, the office and retail trust has no further refinancing needs until 2011.
The new facility will be used to refinance Suntec Reit’s existing debt under its medium-term notes programme and $700 million of commercial mortgage backed securities maturing this year.
It comprises a $725 million three-year loan and a $100 million seven-year fixed-rate loan from a panel of seven banks. The blended all-in interest margin works out to less than 3.75 per cent, Suntec Reit said yesterday.
The loan facility will be secured by Suntec City Mall and parts of the trust’s portfolio in Suntec City Office Towers. The loans were granted by the three local banks – DBS Bank, OCBC Bank and United Overseas Bank – and four foreign banks.
The new facility means that Suntec Reit has refinanced $1.7 billion of borrowings in the past two years, said Yeo See Kiat, chief executive of the trust’s manager. Suntec Reit refinanced $870 million of loans in 2008.
‘Amid the tight liquidity in this global economic and financial crisis, this club loan of $825 million clearly demonstrates Suntec Reit’s strong credit standing,’ said Mr Yeo, adding that the trust is now in a good position to meet the challenges ahead.
Yesterday, Suntec Reit also reported that distributable income for Q1 2009 rose 23 per cent to $46.4 million, from $37.6 million a year ago, on higher office and retail rents from its properties.
On the back of this, distribution per unit (DPU) rose 15.9 per cent to 2.918 cents from 2.5185 cents in 2008.
Net property income for the quarter rose 15 per cent to $49.2 million, from $42.6 million a year ago.
Gross office revenue for the three months ended March 31 rose 32 per cent to $30.2 million. At end-March, committed overall occupancy for the office portfolio stood at 97.4 per cent, with renewal and replacement leases at Suntec City secured at an average of close to $10 per square foot per month (psf pm) for the quarter.
Likewise, committed retail passing rents remained strong. The committed retail passing rent at Suntec City Mall stood at $11.05 psf pm, while rents at Park Mall and Chijmes were $7.63 psf pm and $10.76 psf pm. The committed overall occupancy for the retail portfolio was 98.8 per cent.
Suntec Reit owns Suntec City Mall and office units in Suntec Towers One, Two and Three and the whole of Suntec Towers Four and Five. Its property portfolio also comprises Park Mall, Chijmes and a one-third interest in One Raffles Quay.
The trust’s units lost three cents, or 4.3 per cent, to close at 66 cents yesterday.
Suntec – Nomura
First look
After market close in Singapore today, Suntec REIT announced its 1Q09 results and that it has secured refinancing for all S$825mn of debts maturing this year. 1Q09 results beat our and consensus expectations, and we think management’s ability to achieve steady rentals in 1Q09 while keeping vacancy low is commendable in the current market. While the cost of refinancing appears to be above our expectation, we expect the share price to react positively to the news.
Strong 1Q; refinancing secured