FirstREIT – OCBC
2Q11 results within expectations
2Q11 results within expectations. First REIT (FREIT) reported its 2Q11 results which were within expectations. Gross revenue surged 75.3% YoY and 0.3% QoQ (deferred rental from the Adam Road property of S$1.4m recognised in 1Q11 as revenue has been reclassified to ‘gain on divestment of investment property’) to S$13.2m, forming 24.0% of our full year projection. The YoY increase was due to contributions from its two Indonesian hospitals acquired in Dec 2010. Income available for distribution jumped 86.5% YoY but was flat QoQ at S$9.9m. However, DPU of 1.58 S cents represented a 17.7% YoY decline (flat sequentially) due to an enlarged unit base from the effects of the 5-for-4 rights issue in Dec 2010 and constituted 25.5% of our FY11 estimate. This equates to an annualised yield of 7.6%. For 1H11, gross revenue increased 76.1% to S$26.4m while DPU fell 17.3% to 3.16 S cents due to the larger unit base highlighted earlier.
Sufficient debt headroom for new acquisitions. As at 30 Jun 2011, FREIT’s gearing ratio stands at a healthy 12.7%. Hence we expect any future acquisitions in the near term to be funded by debt as FREIT still has sufficient debt headroom of S$103.3-155.5m before reaching its long-term target gearing ratio range of 25-30%. While FREIT is keeping a lookout for accretive targets in the region, we opine that future acquisitions are likely to come from its sponsor Lippo Karawaci (Lippo). This is because FREIT has the first right of refusal to the pipeline of hospitals in Lippo’s portfolio.
Downgrade to HOLD on valuation grounds. We fine-tune our assumptions in accordance with FREIT’s 2Q11 results, and our RNAV-derived fair value estimate inches up to S$0.84 (previously S$0.835). FREIT’s share price has surged 12.8% since we initiated coverage with a BUY rating on 7 Jan 2011, outperforming the STI and FTSE ST Real Estate Investment Trusts Index substantially by 15.8 ppt and 14.2 ppt respectively. We opine that current valuations appear fair, with FREIT now trading at a PBR of 1.07x, versus its historical PBR of 0.80x. We note that companies with assets in overseas countries which are economically and politically more risky than Singapore typically trade at a discount to NAV. While we continue to like FREIT for its resilient business model, strong management and proxy to Indonesia’s growing private healthcare sector, we believe that these positives have already been factored in. Hence we downgrade FREIT to HOLD, purely on valuation grounds. Downside risk should be limited by its healthy FY11F distribution yield of 7.6%; while re-rating catalysts include yield-accretive acquisitions.
ART – OCBC
Results above expectations; Maintain BUY
2Q11 results above expectations. Ascott Residence Trust (ART) announced a 2Q11 distribution of S$26.3m, up 127% YoY. This came in above our expectations as 2Q11 distribution income made up 30% of our FY11 forecast. As a result, we increase our FY11 revenue and distribution income forecasts by 5.0% and 11.3% respectively. 2Q11 revenue improved 65% YoY mainly due to the contributions from 28 properties acquired in Oct10. Gross margin expansion to 56% in 2Q11 further boosted the YoY gross profit growth to 98%, fueled by higher margins on master leases, higher rental rates and better cost management. Revaluation gains of S$82.8m were also recognized.
Steady performance across portfolio. Master leases on 20 properties constituted about 25% of ART’s 2Q11 gross profit, boosting performance YoY given the higher margins from these leases. These leases have an average weighted remaining tenure of seven years and are expected to underpin performance going forward. We saw improved YoY performance across countries, except for China, Indonesia and Japan. In China, this was due to the divestment of Ascott Beijing in Oct10 and poorer performance at Tianjin and Shanghai, offset by Beijing. In Indonesia, this was due to the divestment of Country Woods in Oct 10 and the strengthening of the SGD versus USD. The poorer performance in Japan was mainly due to the effects of the earthquake. 2Q11 REVPAR across the portfolio increased 17% YoY to $147, mostly due to Singapore and UK. Occupancy remained stable at 81%.
Healthy balance sheet. ART continued to show a healthy balance sheet with gearing at 40.1% and cash at S$112.7m. 59% of debt have fixed-rate terms, with the remaining 22% and 19% under floating with interest rate caps and floating rates, respectively. 11% or S$119.4m of total outstanding borrowings fall due in 2011, of which S$110.0m has been refinanced in Jul 11. The remaining S$9.4m is expected to be paid down according to scheduled terms.
Maintain BUY. We see further upside to ART’s unit price due to continued good execution from management. Its diversified portfolio across geographical regions would also buffer earnings somewhat against region-specific weaknesses. (28.3% Europe ex. UK, 45.1% Asia ex. Japan, 16.6% UK, 10% Japan, by asset values end 2Q11) Moreover, we expect a significant portion of profits (44% of gross profit 2011 YTD) to be underpinned by master leases and guaranteed income management contracts going forward. Maintain BUY with a revised fair value estimate of S$1.35 ($1.30 previously).
Starhill Global – BT
Starhill Global Reit’s Q2 DPU increases 14.3%
STARHILL Global Real Estate Investment Trust said yesterday that its second-quarter distribution per unit climbed 14.3 per cent, buoyed by its Malaysian and Australian purchases. The DPU of 1.04 cents compares with 0.91 cents a year ago.
Q2 income available for distribution rose 26.8 per cent year on year to $22.8 million, while net property income was up 23.4 per cent year on year at $35.6 million.
Gross revenue was up 18.9 per cent at $44.24 million.
‘Our acquisitions of Starhill Gallery and Lot 10 in Kuala Lumpur, Malaysia and David Jones Building in Perth, Australia last year have been key contributors to the growth,’ said Francis Yeoh, executive chairman of YTL Starhill Global, which manages the Reit.
Starhill Global Reit’s Singapore portfolio, comprising interests in Wisma Atria and Ngee Ann City on Orchard Road, contributed 62 per cent, or $27.5 million of total revenue.
Starhill Global Reit said that while the take-up rate for office space in Singapore has been healthy, overall rental rates have declined as new and renewed office leases were secured at rental rates which are below the peak levels achieved in 2007.
However, its Malaysia portfolio contributed 17.3 per cent, or $7.7 million, of Q2 revenue. The David Jones Building in Perth contributed 8.3 per cent or $3.7 million to total revenue.
Starhill Global Reit said that the global economic growth will continue to be led by Asia for the rest of this year. As the ongoing debt crisis in Europe and the United States continue to weigh down the economic growth of these advanced economies, IMF projects that Asia’s gross domestic product will expand by 8.4 per cent this year.
Against this backdrop, it is proceeding with the redevelopment of the Wisma Atria property, which is expected to be completed in the third quarter next year.
Its retail properties in Malaysia and Australia have master leases or long-term leases with built-in step-up rents.
‘These will contribute to the stability and sustainability of the income while ensuring organic growth for Starhill Global Reit,’ it said.
Starhill Global Reit closed trading yesterday at 65.5 cents, up half a cent.
Rickmers – BT
Rickmers’ Q2 DPU up 5%; net profit soars
RICKMERS Maritime declared a distribution per unit (DPU) of 0.6 US cent for its second quarter ended June 30, 2011 yesterday, up 5 per cent from its DPU of 0.57 US cent in Q2 2010.
Cash flow available for distribution before payment to debt capital providers stood at US$26.5 million for the quarter, 4 per cent lower year on year. For the first six months of the year, the figure stood at US$51.4 million, a dip of 6 per cent from the corresponding period a year before.
After accounting for payment to the trust’s debt capital providers, US$3.7 million was available for distribution, 70 per cent lower than US$12.2 million in Q2 last year.
For H1 2011, cash available for distribution after paying off the trust’s debt capital providers was US$5.6 million, 80 per cent lower from US$27.5 million the year before.
Revenue for the quarter grew 3 per cent to US$37.6 million, driven by a better net charter rate of US$23,888 per day which the trust had secured for the Kaethe C Rickmers in late March, up from US$8,288 a day in Q2 last year.
The charter lease on the Kaethe C Rickmers expires in March next year.
For the first half of the year, revenue was flat, at US$73.4 million.
The trust’s quarterly net profit surged to US$8.6 million from US$610,000 the year before, driven by a writeback of US$2.9 million on vessel impairment because of the Kaethe C Rickmers.
The trust’s bottom line also fared better relative to 2010 because it had incurred a one-time loan restructuring of US$5.4 million in the second quarter of last year.
On a half-year basis, net profit for H1 2011 was US$17.9 million – almost triple that of H1 2010’s net profit of US$6 million.
Currently, the trust has a fleet of 16 container ships with an average daily time charter rate of US$25,750 per vessel.
Thomas Preben Hansen, chief executive of Rickmers Trust Management Pte Ltd (RTM) – the trust’s trustee manager – said that there are no current plans to add vessels to the fleet.
‘We are always on the lookout, but we’ve really been focused on deleveraging the business,’ he said.
In response to a question about whether the trust was currently able to meet its value-to-loan covenants for which it has a waiver of another one-and-a-half years, Gerard Low, RTM’s chief financial officer, said that there is still uncertainty about the outlook for ship values.
‘The value of the ships had stabilised in the early part of this year but as we approach this period, there has been a big increase in orders for new ships,’ he said.
‘The one (variable) that we can control is the loan value. As we accelerate the repayments, we know that we are bringing down the loan value.’
Last year, as part of a move to solve its funding issues, Rickmers signed a term sheet with its lending banks for a five-year extension of its US$130 million top-up loan facility. Under the terms, the criteria of the value-to-loan ratio had been waived. As a condition of the waiver, the trust’s DPU is capped at 0.6 US cent per quarter.
‘We are also watching this closely. When world trade is increasing and stable, the shipping capacity in under control and we have the resources, only then can we confidently say when we are ready to negotiate directly with the banks to get out of this waiver period,’ said Mr Low.
The trust’s counter closed half a cent higher to 41 cents in trading yesterday, before its results were released.
PST – DBSV
Another stable quarter
At a Glance
• 2Q11 DPU remains steady at 0.809 UScts per unit, payout amounts to ~71% of distributable cash flow
• Expect DPU growth from 4Q11 onwards
• Dividend yield remains attractive at >9%; maintain BUY with higher TP of US$0.44 as we roll over valuations to blended FY11/12 numbers
Comment on Results
Good start to the year. 2Q11 revenue of US$15.4m and operating profit of US$9.3m remained steady on a y-o-y and q-o-q basis, as the existing fleet of 12 container ships continued to generate predictable income levels. Net profit was up 2.3% to US$6.8m, as interest expenses decreased 6.3% on the back of PST’s regular debt repayment schedule. Thus, net distributable cash (after loan amortisation) for 2Q11 came in slightly higher at US$6.7m vs. US$6.5m in 2Q10. The Trust paid out 71% of distributable cash, which amounted to US$4.8m or 0.809 UScts per unit in 2Q11, a 2% increase y-o-y and flat q-o-q.
Outlook & Recommendation
DPU growth expected from 4Q11. To recap, PST has announced 3 separate acquisition deals in FY10 to drive growth and diversification of the fleet – two new Capesize bulk carriers for delivery in Sep 2011, 2 Multi Purpose vessels for delivery in Sep/Dec 2012 and 5 Supramax bulk carriers for delivery in Nov 2012 – Apr 2013. With the delivery of the bulk carriers in 4Q11, we expect DPU to be stronger, and project overall 5% DPU growth in FY11, followed by 19% DPU growth in FY12.
PST remains our top pick in the shipping trust sector. The Trust has secured a total of US$282m in bilateral financing commitments from six banks to finance the above deals, which implies a high debt-to-value ratio of close to 85% and signals the faith of lenders in PST’s ability to sustain cash flows. We remain positive on PST’s growth and capital management strategies and maintain our BUY call with a higher TP of US$0.44 as we roll over our valuations to blended FY11/12 numbers.