REITs – BT
Debt turns from foe to friend for many Reits
Debt has turned from foe to friend for many real estate investment trusts (Reits) as they pursue acquisitions again at a time of low interest rates.
This can be seen in the rising levels of borrowings among Reits against their assets. Out of a sample of 16 Reits in Singapore, as many as 10 had a higher aggregate leverage or gearing ratio at end-December 2010 compared with the previous year.
Several Reits had relied considerably on debt to fund growth until the global financial crisis hit in 2008, which forced them to cut borrowings as credit markets froze. Investors developed a phobia of highly-leveraged Reits, worried that they would collapse without sufficient financing.
But this is no longer the case. Ascendas Reit’s (A-Reit) shifting level of indebtedness, for instance, illustrates how tolerance for debt in the industry – and among Reit investors – has changed.
Between 2008 and 2009, A-Reit strove to lower its aggregate leverage from 42 per cent to 31 per cent through equity fund raisings and other capital management strategies. But as the economy grew last year and credit markets improved, so did its aggregate leverage, which crept up to 35 per cent by end-2010.
Take Suntec Reit as another example. Its aggregate leverage had dipped from 37 per cent at end-2008 to 35 per cent a year later, but jumped to 40 per cent at the close of 2010.
For a handful of Reits, the debt-to-asset increase is slight. CDL Hospitality Trusts is one which has maintained a relatively conservative debt profile over the last few years.
But many other Reits took on much more debt to feed their resurgent appetite for inorganic growth. ‘2010 was the most active year for new asset acquisitions that the market has seen in years,’ said Jason Kern, HSBC managing director and head of real estate investment banking for Asia Pacific.
K-Reit Asia was one which went on an acquisition spree last year. Its buys included a $1.4 billion one-third stake in the first phase of Marina Bay Financial Centre (MBFC). Consequently, its aggregate leverage rose to 37 per cent at end-December from 28 per cent in the previous year.
Suntec Reit also paid around $1.5 billion for a stake in properties at MBFC Phase One.
‘We are seeing more office Reits shoring up their aggregate leverage ratios,’ said OCBC Investment Research analyst Ong Kian Lin in a recent note. ‘We think that 40 per cent will be the new norm for FY2011.’
Reits outside the office sector, such as A-Reit, Mapletree Logistics Trust and Parkway Life Reit, also snapped up assets last year.
The low cost of debt, helped by sustained near-zero interest rates in the US, has facilitated borrowing.
Most Reits ‘are quite comfortable with the credit conditions’, said CIMB analyst Janice Ding. She believes that the average aggregate leverage among Reits could reach the high 30 per cent range.
While the credit environment is friendlier, market watchers do not expect Reits to ratchet up aggregate leverage to levels seen before the financial turmoil anytime soon.
Increasing gearing levels are a sign that property investors are gradually becoming more comfortable with leverage as they move further away from the financial crisis, said HSBC’s Mr Kern.
Nevertheless, he does not think investors are ready to see Reits revisiting the 40-50 per cent aggregate leverage that was common earlier. ‘Reits that are seen pushing the envelope on gearing too much will be punished with a lower equity valuation,’ he said.
The credit crunch had been a ‘very painful’ lesson for the Reit sector, Ms Ding said. As a result, Reits ‘will definitely be a lot more cautious’.
MIT – CIMB
Low-risk yields
• Initiate with Outperform and target price of S$1.24. Sponsored by Mapletree Investments, MIT is a REIT that invests in income-producing industrial assets in Singapore. With an 11.2% market share of Singapore’s flatted factory space, MIT’s S$2.1bn portfolio is a good proxy for Singapore’s SME space, we believe. We anticipate a 3-year DPU CAGR of 5.3% for the next two years as existing rental caps on its non-business park space are lifted by June. Using DDM valuation (discount rate 8.4%), we arrive at a target price of S$1.24. Trading at 1.24x P/BV and a 2010 yield of 6.6%, MIT is not cheaper than industrial leader AREIT (1.25x P/BV; 7% yield). However with a under-rented portfolio, pure Singapore exposure, and large tenant base point, rental downside is limited whilst upside is conversely strong. We expect catalysts from announcements of accretive acquisitions or development projects.
• Demand to outpace supply. A healthy Singapore economy and manufacturing growth backed by the global electronics and semiconductor recovery are likely to boost take-up for flatted factories as firms expand to increase demand. Net new demand for flatted factories could surpass net new supply at least till 2013. The resultant rise in occupancy should lend support to rents and capital values.
• JTC’s trade sale could represent acquisition opportunity. JTC’s Phase 2 divestment of assets is likely to be finalised in 1H11. Its 3.5m sf portfolio will have no rental cap imposed, representing good opportunities for upward rental reversions at the onset, in our opinion. This represents a good acquisition opportunity for MIT to acquire a portfolio of similar asset quality and positioning as its existing one.
First REIT – OCBC
Stability in times of risk aversion
Providing stability amidst uncertain times. We believe that First REIT’s (FREIT) stability makes it an attractive investment thesis amidst such times of uncertainty. Growth is driven largely by Indonesia’s private healthcare sector, which is relatively inelastic in demand. Recall that FREIT performed decently in its recent FY10 results. Gross revenue increased 4.4% to S$31.49m (including deferred rental income); while distributable income rose 1.8% to S$21.35m. Looking ahead, we expect growth via both organic and inorganic means, since FREIT has a target to raise its asset base to S$1b in the next two to three years. Inorganic growth is likely to come from the acquisitions of hospitals from its sponsor Lippo Karawaci (Lippo).
Sponsor’s growth to spur FREIT’s earnings momentum. Lippo reported a good set of results last week. Revenue and net profit rose 21.8% and 35.4% to Rp3.13t and Rp525.3b respectively for FY10. We believe that the improving financial strength of Lippo will provide stronger support and stability for FREIT, given that Lippo contributed 86.7% of FREIT’s gross rental income as at 31 Dec 10. In particular, Lippo’s healthcare segment for FY10 experienced a healthy 15.8% growth to Rp1.04t (33.2% of total revenue), underpinned by rising demand for better quality healthcare services in Indonesia. FREIT is likely to be a key beneficiary of this trend, since the master leases for its Indonesian hospitals have a variable rental component to capture the upside in topline growth. Indonesia’s growing healthcare needs is likely to continue to lend support to Lippo, and hence FREIT’s growth momentum moving forward.
Higher emphasis on Singapore’s nursing homes. Singapore’s Ministry of Health has highlighted that there will be increasing emphasis placed on nursing homes in Singapore. The long waiting times and rising affluence of Singaporeans could entice more people to take up private nursing home services. While rental income from FREIT’s nursing homes is fixed at a 2% annual increase, the possible increase in profitability of the operators would help to boost their ability to fulfil their obligations to FREIT.
Reiterate BUY. We believe that FREIT has showcased its resilience and defensiveness during the current market downturn. Its share price has declined 2.6% (+5.0% YTD) since China announced its interest rate hikes on 8 Feb 11, which is milder than the broader market’s 3.4% decline (-3.4% YTD) and also the S-REIT universe’s 3.4% fall (-2.2% YTD). The prospective yield of 8.6% (our FY11F estimate) further enhances FREIT’s attractiveness, in our view. Reiterate BUY and fair value estimate of S$0.82.
LMIR – OCBC
FY10 results mostly in line; Maintain BUY
4Q DPU of 1.11 S-cents. LMIR Trust (LMIR) reported 4Q10 gross revenue of S$19.3m, up 41.6% YoY but down 4.7% QoQ. Distributable income however dropped 3.3% YoY but rose 2.5% QoQ to S$12.1m. For FY10, gross revenue jumped 50.9% to S$129.4m, which was in line with our projection of S$130m and market expectation of S$131m (based on consensus estimate from Bloomberg). Distributable income, however, slipped 11.4% to S$47.8m, partly due to higher operating expenses subsequent to the expiry of the Operating Costs Agreements with third party operators (Opcos) on 31 Dec 2009. Previously, Opcos were given rights to the service charges receipt and utilities cost recovery from tenants, whilst responsible for the costs directly related to the maintenance and operation of seven malls. The operating costs have since been passed on directly to the REIT in FY10. 4Q DPU is 1.11 S-cents (also in line with our forecast of 1.15 S-cents), representing an annualized yield of 8.16%, based on yesterday’s closing price of S$0.54. This was 4.1% lower than the 1.16 S-cents paid out in 4Q09.
Portfolio Performance. Overall portfolio occupancy increases 1.4 pp YoY to 98.3%; this compares well against Jakarta’s average occupancy rate of 86.3%. LMIR also benefited from positive rental reversion with renewed leases contracted at 10% higher on average than the ones that have expired during the year. LMIR continues to have a well-diversified portfolio, with no particular trade sector accounting for more than 17% of total net leasable area (NLA), and no single property accounting for more than 18% of total net property income (NPI). We also noted that LMIR’s gearing ratio of 10.3% is relatively low, compared to other retail REITs. This places it in a favorable position to use debt financing to embark on inorganic growth in FY2011. On the organic-growth front, we also understand that LMIR is exploring asset enhancement opportunities at some of its existing malls.
Positive Outlook. Management guided that the Indonesian economy is projected to remain buoyant1 , which will benefit the retail industry. Retail leasing has started to pick up in 3Q10, with a large number of leases recorded and several notable deals witnessed in newly completed projects. Foreign major retailers were also increasingly active in the market, with expansion plans in response to market opportunities. Furthermore, as new supply is expected to grow moderately in 2011, nationwide vacancy is anticipated to stabilize at around 13.3% by end of 2011. Such a trend helps the market to maintain stable occupancy and record good rental reversions going forward. Our investment thesis for LMIR remains intact, supported by Indonesia’s growth story and LMIR’s quality assets. Maintain BUY with an unchanged fair value of S$0.592.
1 The World Bank has forecasted Indonesia’s GDP to grow at 6.2% and 6.3% in 2011 and 2012 respectively. IMF has also projected Indonesia’s GDP growth at 6.2% and 6.5% in 2011 and 2012 respectively.
2 Key risks to our rating include reversal of recovery trends for the Indonesian economy, forex risk and deterioration in credit and capital markets.
CMT – BT
CapitaMall Trust offers $200m of retail bonds
Interest payment of 2% per annum for 2-year bonds
CAPITAMALL Trust (CMT) is offering up to $200 million in retail bonds, as part of a $2.5 billion retail bond programme announced yesterday.
The $200 million bond issue will consist of a $50 million public tranche, which will be made available by way of electronic application, and a $150 million placement tranche for institutional and other investors.
Both tranches open for applications at 9am today and will be closed at noon on Feb 23. The public can apply through the ATMs of DBS Bank, POSB, OCBC Bank and UOB Bank and its subsidiary Far Eastern Bank, and through DBS Bank’s Internet banking website.
The minimum investment amount is $2,000 for subscriptions under the public offer, with incremental multiples of $1,000.
The issue price of the 2 per cent bonds, due 2013, will be $1 per $1 in principal amount, ie. 100 per cent of the principal amount of the bonds.
CMT, whose portfolio includes Tampines Mall, Funan DigitaLife Mall, Bugis Junction, Rivervale Mall and Plaza Singapura, estimates the net proceeds of the bond issue at $197.9 million, which it says it will use to partially refinance its existing borrowings, fund its investments, on-lend to any trust, fund or entity in which it has an interest, finance asset-enhancement works and for general corporate and working capital purposes.
CMT said its manager has the right to cancel the offer if it receives less than $50 million in applications. In the event that the offer is oversubscribed, CapitaMall Trust Management (CMTM) has the option of increasing the issue size up to a maximum of $300 million – in which case, there will be $75 million for the public tranche and $225 million for the placement.
The bonds are expected to be listed on the Singapore Exchange (SGX) on or about Feb 28. Each board lot will be made up of $1,000 in principal amount of bonds.
CMT said it received in-principle approval from SGX for the listing and quotation of the bonds on Feb 10.
DBS Bank is the sole bookrunner and lead manager for the offer.
As for its $2.5 billion retail bond programme, CMT said the bonds under the programme will be issued from time to time by HSBC Institutional Trust Services (Singapore) Limited, in its capacity as trustee of CMT. DBS Bank is the arranger and dealer of the programme.
The bonds may be issued in series or tranches in Singapore dollars, US dollars, Australian dollars, Canadian dollars, euros, Hong Kong dollars, Japanese yen or in other currencies agreed between CMTM and the relevant dealer of the bonds. The bonds may be fixed-rate, floating-rate, hybrid or zero coupon bonds.
CMT units closed trading unchanged at $1.83 yesterday.