PCCW Trust – BT
Downside of a PCCW trust listing here
PLANS by Hong Kong's PCCW to spin off and list its telecoms assets there have been effectively stonewalled. Last Wednesday, Hong Kong regulators firmly said 'no' to the fixed-line and broadband service operator's plan to list a telecoms business trust on the world's most bustling bourse and PCCW's home market.
Hong Kong's decision more or less pushes PCCW into the arms of a player patiently waiting in the wings: Singapore, which is the only Asian listing site to allow business trusts on board.
Neither the Hong Kong authorities nor PCCW gave clear reasons why the lobby failed. PCCW is appealing the decision.
Erring on the side of being a killjoy, the question is this: is it necessarily a boon for Singapore to take on PCCW's business?
Singapore had earlier this year scored a coup over Hong Kong with Hutchison Port Holdings Trust's US$5.5 billion IPO.
But HPH Trust's high profile listing also revived arguments about corporate governance issues attached to business trusts, arguments which are also relevant to PCCW.
Some allege that because trust sponsors usually hold at least 25 per cent of the units, it makes the trusts 'acquisition bid-proof'.
In other words, the sponsors' interests may be entrenched within the trust structure. In Asia, where it is common to find families controlling a bloc of more than 50 per cent of a company, a trust may be yet another mode for families or a majority shareholder to fend off any attempts to acquire the trust's assets.
That a trust's business is managed by the trustee-manager is also another problem. Shareholders are further removed from having a say, and removing a trustee-manager requires at least 75 per cent of unitholders' votes.
Those are the self-same arguments against business trusts.
But in PCCW's case, a new issue surfaces: disclosure.
That is, SGX and the trust should disclose why PCCW's trust application was rejected by Hong Kong in the first place, and not sweep it under the carpet.
It may not have been the corporate governance issues that made Hong Kong turn PCCW away.
Some are saying the Hong Kong stock exchange was concerned that the remaining bits of PCCW would not have made for viable business, after it put 90 per cent of its operations in a trust.
Add to this the fact that chairman Richard Li has tried many times to dispose of PCCW's fixed-line and broadband assets – the cash cow of the group, but also with worryingly high debt ratios.
Moody's had put this core business on its downgrade watch list, because of PCCW's 'failure to reduce leverage year on year'.
PCCW's annual report shows that the group has a high gross debt to total assets ratio of 73 per cent, although it's unclear how much of it is borne by the assets targeted for the trust.
Arguably, business trusts were designed for such capital-intensive businesses as they aren't subject to caps on gearing ratios.
However, most keep this modest and attempt to deleverage – rather than keep it persistently high. High financing levels may mean slashing distributions to conserve cash.
Having business trusts viewed as a convenient dumping ground for a company's highly geared assets might not add good value to Singapore's trust listings niche.
If it does comes to pass that PCCW's trust structure heads here, both the trust and SGX should try to reassure investors that PCCW's debt ratios are not at runaway levels and would not compromise future cash flow or distributions. If not, SGX might increasingly be known as the destination for 'regulation arbitrage' – where a company could benefit from laxer rules and standards in one jurisdiction over another. 
PLife – BT
PLife Reit’s distributable income up 14.4% in Q1
PARKWAY Life Reit (PLife Reit) has reported a 14.4 per cent rise year on year in distributable income to $14.3 million for the first quarter ended March 31, 2011.
Gross revenue for 1Q11 came in at $21.5 million, up 15.2 per cent, on the back of revenue contributions from new nursing homes in Japan acquired over the last 12 months as well as higher rent from its Singapore properties.
Distribution per unit (DPU) for the quarter is 2.36 cents per unit, versus 2.07 cents in 1Q10, while annualised DPU is 9.44 cents per unit for 1Q11 compared to 8.28 cents for 1Q10.
Earnings per unit for the quarter were 2.45 cents, up from 2.01 cents previously.
During the quarter, property expenses for 1Q11 rose 22.8 per cent to $1.77 million, in line with the bigger portfolio, while net property income was 14.6 per cent higher at $19.72 million.
Meanwhile, finance costs fell by 11.1 per cent to $2.27 million despite the enlarged portfolio, mainly due to interest cost savings from refinancing and re-pricing exercises, though this was offset by higher financing costs incurred to finance the Japan properties acquired in the middle of last year and January this year.
Gearing stands at 34.3 per cent.
In an update on its Japan properties, business continues as usual at all its 30 Japan properties with none of them located within the evacuation zone of the Fukushima nuclear plants, PLife Reit said.
It owns 33 properties in the Asia Pacific, including three hospitals in Singapore and 30 healthcare and healthcare-related assets in Japan. Its portfolio size stood at $1.3 billion as at March 31, 2011.
Yong Yean Chau, chief executive officer of Reit manager Parkway Trust Management, said: ‘The regional healthcare industry remains robust due to the persistent rise in demand for better quality private healthcare, driven in no small part by growing affluence, fast-ageing populations and increasing social acceptance of nursing homes. PLife Reit’s enlarged portfolio of healthcare assets places us in a good position to capture the demand of the resilient and growing healthcare industry in the Asia Pacific.’
Shares in PLife Reit closed at $1.72 yesterday, unchanged.
PLife – CIMB
Removing covert dilution
• In line; maintain Outperform. 1Q11 DPU of 2.36cts meets consensus (24%) and our expectations (23% of FY11 estimate). Our above-consensus estimate assumes S$200m of acquisitions, to be realised in 2H11. 1Q11 DPU grew 14% yoy on the back of contributions from Japanese assets acquired in 2010-11 and higher rentals from Singapore assets boosted by inflation (CPI-pegged rental formula). We maintain our estimates and DDM-based target price of S$1.98 (discount rate 7.2%). PLife REIT trades at 1.22x P/BV and a forward yield of 6%. We expect stock catalysts from earlier-than-expected announcements of accretive acquisitions. In our view, PLife is the best inflation hedge in Singapore and is well positioned to acquire accretively. It also has a clear acquisition pipeline from sponsor Khazanah’s Pantai healthcare chain in Malaysia.
• Taking 100% of manager’s fees in cash. 1Q11 DPU dipped 0.7% qoq despite a flat topline as management had decided to take 100% of the manager’s fees in units from this quarter. Previously, it used to receive 80% in cash and 20% in units. Despite the dip, we are positive on the switch to full cash payment. We believe this removes covert dilution for unitholders, and presents clean DPUs which fully reflect portfolio performances.
• Asset leverage was 34%, unchanged from 4Q10. Debt headroom was about S$270m, assuming asset leverage of up to 45%. We believe any sizeable acquisitions in excess of this would likely be funded by debt and equity.
PLife – DBSV
Life’s resilient even after the earth shook
At a Glance
• 1Q11 DPU of 2.36 Scts (+14% yoy) within expectations
• Assets unaffected and operations continued in Japan; in fact, crisis may open up acquisition opportunities
• High CPI in Singapore bodes well for minimal rental growth rates in Year 5 of lease that will start in Aug’11
• Raised TP marginally to S$1.95 on higher CPI rates expected; Maintain Buy
Comment on Results
1Q11 DPU 2.36 Scts within expectations. 1Q11 DPU of 2.36 Scts (+14.4% yoy) was within our expectations, forming 24% of our full year estimates. Gross revenue grew 15.2% yoy to S$21.5 m, driven by contributions from the 12 new nursing homes acquired from Jun’10 till Jan’11, and higher rents from its Singapore properties due to minimal rent revision (+1.73%). NPI margin moderated slightly to 91.8% arising from expenses related to the 12 new nursing homes. Book closure for dividends is on 13 May, and will be paid on 8 Jun. The REIT manager has elected to receive 100% of its fees in cash, which will have minimal impact on DPU. In fact, we believe this could be positive in the longer term with payout matching the distributable income, and removing dilution, albeit minor.
No damage from earthquakes in Japan. None of its 30 properties in Japan is structurally affected, as all are located outside of the earthquake-affected areas. Operations are also unaffected by the nuclear situation as its nearest asset is 200km from the nuclear plant site. In our view, the uncertainties may present attractive opportunities for asset accumulation.
Poised to benefit as Singapore’s CPI stays up. With Singapore’s CPI rate averaging at c.4.17% since Jul’10, this bodes well for PREIT’s rental reversion in its Year 5 of lease commencing in Aug’11, and will provide a boost to revenues from 4Q11. Our economist forecasts Singapore’s 2011 CPI at 4.2%.
Recommendation
Maintain Buy, TP raised marginally to S$1.95 on higher CPI. Due to the election to receive fees in cash, our FY11F DPU is lowered marginally by c.2%. We raised our DCF-backed TP marginally to S$1.95 to reflect higher CPI rate of 4.2%/3% (prev. 3.2%/ 1%) for 2011/ 12 in our assumptions. Gearing remains healthy at 34.3%. We believe the REIT will continue to provide organic growth, while exploring portfolio expansion opportunities going forward. We have assumed S$200m worth of acquisitions in 2011, funded 70%/30% by equity/debt to maintain its existing gearing ratio of c.35%, empowering PREIT to undertake opportunistic acquisitions.
Sabana – BT
Sabana kindles Gulf interest in Islamic Reits
Dubai aims for first Reit listing within a year, two UAE firms plan offers in M’sia
Persian Gulf companies are planning their first syariah-compliant real-estate investment trusts, after shares in Singapore’s debut offering recovered from the lowest level since it was started in November.
The city-state’s Sabana Shari’ah Compliant Industrial Reit has advanced 2.2 per cent to 94 Singapore cents since the shares reached a low of 92 cents on March 31. The initial offering price was S$1.05. The company said on April 27 it would distribute more income to shareholders than originally planned.
Dubai is aiming to list its Reit on the local exchange within a year, while two United Arab Emirates companies plan offerings in Malaysia, which pioneered the industry in 2006.
Asia may see at least one new Islamic property trust listing this year as funds seek assets that comply with Islam’s ban on receiving interest or investing in casinos and bars, said HSBC Amanah, the syariah-compliant unit of Europe’s largest bank.
‘We can expect investments in trusts generally to see more activity over the coming months,’ Kuala Lumpur-based Oz Ahmed, associate director of wholesale banking at HSBC Amanah, said in an interview on Tuesday. ‘The market should expect another syariah-compliant trust in real estate, and quite a lot of pipeline, discussions and increased interest across this industry.’
Singapore’s Sabana, the world’s biggest publicly traded Islamic Reit, is the republic’s sole trust complying with religious principles. Malaysia has three listed syariah-compliant vehicles. Malaysia’s 14 Reits, which include Islamic and non-Islamic, have a combined market worth of US$3.4 billion, or 12 per cent of Singapore’s US$29.3 billion, according to a March 17 report by property consultant CB Richard Ellis.
The city-state’s ‘developed’ Reit market may encourage more Islamic issuance, Pratik Burman Ray, a senior property analyst at HSBC Securities Singapore Pte, said on April 15. Industrial property prices in Singapore will probably increase 5 per cent to 8 per cent this year, he said.
‘Singapore has a far more sophisticated regulatory framework for Reits and that naturally puts the market ahead of the rest,’ said Mr Ray. ‘If you want to attract Middle East investors, you have to offer size and Singapore has that.’
Sabana, which invests in properties such as warehouses and high-technology office space, raised S$664.4 million from the November initial offering. It had S$19.3 million in income that can be distributed to shareholders in the period Nov 26 to March 31, 2 per cent more than planned, the company said on April 27.
Emirates Reit, Dubai’s first Islamic real-estate investment trust, was established in November and may be publicly traded on Nasdaq Dubai, Marwan Ahmad Lutfi, deputy chief executive officer at the Dubai International Financial Centre Authority, said on April 10.
Two developers from the UAE are planning to list Islamic Reits worth RM2 billion (S$826 million) in Malaysia this year, Raja Teh Maimunah, global head of Islamic markets at Bursa Malaysia Bhd, said on Feb 23.
In an Islamic Reit, payments to investors are based on rental income or dividends. Syariah-compliant trusts prohibit income from properties involved in gambling, financial services based on interest payments, hotels and bars.
‘Reits resonate well with Islamic finance because they’re backed by underlying assets,’ said HSBC Amanah’s Oz. ‘There’s an element of risk sharing because investors are taking a risk on the portfolio of assets.’
Malaysia’s Islamic Reits had a market value of RM2.3 billion at the end of 2010, according to an e-mailed reply to questions from Bursa Malaysia, the stock exchange regulator.
‘Bursa Malaysia has received interest from foreign issuers to list their Reits, including Islamic Reits here,’ the regulator said. ‘Any foreign assets seeking listing on Bursa Malaysia will have to go through a due diligence process and assessment by the regulators prior to approval.’
Malaysia is the world’s biggest market for Islamic bonds, which pay returns on assets to comply with the religion’s ban on interest. Sales of Malaysian-currency sukuk rose to RM11.4 billion this year, compared with RM6.7 billion in the same period last year, according to data compiled by Bloomberg.
Global issuance increased to US$5.2 billion, from US$4.4 billion in the same period last year.
‘Malaysia is a more regulated and mature market, and from an investor perspective, it’s one of the fully Islamic integrated markets in the world,’ Riad Saad, Islamic product manager at the Treasury and Investment Department of Abu Dhabi Commercial Bank PJSC, said in an interview on April 19. ‘There is government support and liquidity, and it has all the capabilities of making Reit launches successful.’
Syariah-compliant bonds returned 4.4 per cent this year, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index. Debt in developing markets gained 2.5 per cent, JPMorgan Chase & Co’s EMBI Global Diversified Index shows.
The difference between the average yield for sukuk and the London interbank offered was little changed at 242 basis points on Tuesday, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index.
Average yields fell to 4.14 per cent, the lowest since June 2005. The spread between Malaysia’s dollar sukuk and the Dubai Department of Finance’s 6.396 per cent note due November 2014 narrowed three basis points to 235, Bloomberg data show.
Malaysia can play catch up with Singapore by ‘playing its syariah card,’ said Kuala Lumpur-based Stewart Labrooy, chief executive officer at Axis Real Estate Investment Trust. Axis-Reit, which sold 98.4 million shares at RM1.25 when it listed on the Malaysian stock exchange in August 2005, converted to an Islamic property trust in 2008.
The price of Axis-Reit rose 0.4 per cent to RM2.38 this year as of 4:17 pm in Singapore, according to Bloomberg data. The company will list a syariah-compliant property trust valued at more than RM3 billion, Reuters reported on its website on March 11, citing three unidentified people familiar with the matter. Mr Labrooy declined to comment on the report when contacted by Bloomberg.
‘People wanting to invest in syariah products in Malaysia will have a very high degree of comfort in investing in Islamic Reits here as there is a high degree of transparency, syariah governance and compliance,’ Mr Labrooy said. He forecasts growth in industrial property prices in Malaysia of 5 per cent to 10 per cent this year.
The Al-‘Aqar KPJ Reit, listed on Malaysia’s bourse since August 2006, was the first publicly traded Islamic property trust in Asia. Al-‘Aqar, managed by hospital operator KPJ Healthcare Bhd, raised RM179.3 million from the share sale. The price climbed 2.7 per cent to RM1.15 this year, according to data compiled by Bloomberg.
Al-Hadharah Boustead Reit, listed on the local stock exchange on Feb 8, 2007, raised RM229.7 million through an initial offering. The shares dropped 1.4 per cent in 2011 to RM1.42. The trust owns and invests mainly in plantation assets in Malaysia including palm oil.
Malaysia’s ‘focused’ approach to its Islamic finance industry will offer the nation an advantage in luring more listings from foreign companies, including those from the Persian Gulf, Bernard Ching, the head of research at Kuala Lumpur-based brokerage services company ECM Libra Capital Sdn Bhd, said in an interview on April 19.
‘Malaysia has the infrastructure in place, whether it is financing, the investor base or expertise, including syariah advisory,’ he said. — Bloomberg