CMT – DMG
No surprises in earnings; fully valued
1Q10 results moderately below expectations. CMT reported 1Q10 DPU of 2.23¢ (+13.2% YoY; -7.1% QoQ) on higher gross revenue from the full contribution of Sembawang Shopping Centre following its asset enhancement works. Annualised DPU came in at 9.04¢, which is 4% below ours and street’s estimates of 9.4¢. We, however, believe CMT will see sequential improvement in its DPU over the next few quarters in view of positive rental reversions for its other properties as well as the distribution of the S$9.5m retained earnings. CMT will trade ex-1Q10 distribution on 27 April 2010. CMT trades at an unexciting yield of 4.9%, justifying our NEUTRAL view on the counter with a DDM-derived TP of S$1.90.
Retained S$9.5m from its distributable income. Had that amount been distributed, CMT’s DPU would have been 0.29¢ higher. Management decided to err on the side of caution by retaining part of its distributable income, given that the bulk of the leases due to expire this year were locked-in at a high rate during the heydays of 2007. Management cautioned that achieving positive rental reversions for those expiring leases may be challenging in 2H10.
Portfolio occupancy stable; asset enhancement in the works. CMT’s portfolio occupancy remained relatively unchanged at 99.4%. Unitholders have approved the acquisition of the S$268m Clarke Quay mall, which we believe will be mildly yield accretive (adding 0.11¢ to FY10 DPU). Asset enhancement works for Raffles City and Jurong Entertainment Centre are on track for completion by end-2010 and early 2012, respectively. To date, 70% of Raffles City’s NLA that will be created on Basement 1 & 2, has been committed.
Maintain NEUTRAL rating. While we continue to recognize CMT’s impeccable mall management expertise, valuations for the counter appear rich compared against its historical heyday yield of 5.7%. We believe CMT is in good position to undertake acquisitions owing to its strong balance sheet and low cost of equity. We have, however, not factored any acquisitions into our assumptions. Without accretive acquisitions, we believe the stock is fully valued.
CMT – CIMB
Mixed signals
• DPU in line; maintain Neutral; target price raised to S$1.93 from S$1.91. 1Q10 results met Street and our expectations. DPU of 2.23cts forms 24% of our full-year estimate. We adjust our assumptions to include S$6.8m of capex for Junction 8 and Tampines Mall and S$700m of Euro-medium-term notes issued this month. Our DPU estimate falls by 2% for 2010 but increases by up to 3% for 2011-12 as contributions from asset enhancement flow in. Our DDM-based target price (discount rate 8.1%) rises to S$1.93 (from S$1.91) as a result. Improving retail sales and an anticipated jump in tourist arrivals this year augur well for CMT. However, in the course of recovery, there could be bouts of volatility particularly for malls in central areas where supply has increased. As a result, maintain Neutral on the stock.
• Opex could rise in 2H10. Available income for distribution was S$80.6m in 1Q10. Some S$9.5m has been retained on the side of caution in view of a record number of leases due for renewal in 2H10 (60% of the total due this year), and an anticipated rise in utility costs with rising oil prices. Nonetheless, management is committed to a 100% payout for the year. If the full S$80.6m were paid out, 1Q10 DPU would have been 2.53cts, or 28% of our full-year forecast.
• Mixed signs for retail sales. Net property income grew 5.7% yoy to S$97.7m, attributed mainly to full contributions from Sembawang Shopping Centre following asset enhancement work in Dec 09, lower interest cost after a repayment of borrowings in 2009 and higher rental rates for new and renewed leases. Average growth rate of lease renewals in 1Q10 was 2% per year, a stark improvement from the average 0.8% in FY09. There were also higher GTO contributions in more trade categories than a year ago. Nonetheless, the improvement was tainted by the closure of Barang Barang in Plaza Singapura due to liquidation. Separately, retention rates in Raffles City were exceptionally low at 20% (vs. a portfolio average of 73.4%) in the quarter due to an active change of tenants.
A-REIT – DMG
Earnings below expectations due to one-off fees
4QFY10 results below with expectations. A-REIT reported 4QFY10 DPU of 2.73¢ (-15.5% YoY; -16.5x% QoQ), representing 20% of our FY10 DPU forecast of 13.62¢. A-REIT registered an FY10 DPU of 13.1¢. Earnings were below ours and street’s forecasts due mainly to the one-off upfront fees for certain loans that were amortised. Had these fees been amortised over the tenure of the loan, A-REIT’s 4QFY10 DPU would have been 0.35¢ higher, at 3.08¢ instead. This would have brought its FY10 DPU in-line with ours and street’s forecasts. A-REIT will trade ex-4Q10 distribution on 23 Apr 2010. At our TP, A-REIT offers a yield of 6.2%, a reasonable peg in our view. Maintain NEUTRAL.
Occupancy fell marginally; redevelopment of 1 Senoko Avenue. Reflecting the stabilisation in global demand, A-REIT’s portfolio occupancy declined marginally to 95.7% from 96.5% in 3QFY10. For its multi-tenanted properties, occupancy moderated to 91.2% from 93.1%. Following the repossession of 1 Senoko Avenue, this property will be redeveloped in two phases to fully utilize its permitted plot ratio (from the current 0.6x to 2.5x) and will target potential tenants in the food processing industry.
Focus on built-to-suit and other acquisition opportunities. With a gearing of about 32%, A-REIT has significant dry powder to undertake acquisition and development projects. Management has indicated that they will continue to scout for opportunistic acquisitions and/or built-to-suit development projects for high-credit quality tenants.
Stock almost fully valued; trading near peak valuations. A marginal revaluation deficit of S$53.7m (-1.1%) was booked. This has no impact on the distribution. Management has guided for a flat year in FY11. We maintain our FY11 DPU forecast of 13.7¢ as dividends are well supported by the long-term leases. A-REIT trades at an FY11 yield of 6.9%. Should we factor a more bullish yield peg of 6%, A-REIT’s recursive fair value would be S$2.28, an upside of 15%. Maintain NEUTRAL. Buy on dips.
FSL – DBSV
Buy for yield and underlying recovery
At a Glance
• Predictable results again; declares DPU of 1.50UScts for 1Q10, maintains similar guidance for 2Q10
• Provides “charter-free” vessel valuation of US$623m – 24% discount to NBV but well within covenant limits
• Share price re-rating still lagging those of ship operators
• Maintain BUY with TP S$0.78
Comment on Results
There was again no surprise in 1Q10 as far as operational results were concerned. Revenue came in at US$24.4m, stable q-o-q, and the Trust generated net cash of US$16.3m from operations, in line with our estimates. As guided previously, the Trust paid out 1.50UScts as distribution for 1Q10, though they had to depend slightly on cash retained in previous periods to meet the guidance. As in previous quarters, US$8m was earmarked to prepay loans, which should bring outstanding loans to US$477m in April 2010.
Outlook and Recommendation
The Trust also took the opportunity to announce the independent charter-free valuations of its 23 vessel-fleet, which stood at US$623m as of March 2010. This is about 6% higher than a similar valuation of US$590m obtained in October 2009, pointing to a gradual recovery in asset values in line with demand recovery. The “charter-free” valuation, while not fully relevant to FSLT’s business model, represents a 24% discount to the vessels’ NBV of US$821m.
The valuation also represents 129% of current indebtedness of US$484m, well within the revised LTV limit of 100%, which is applicable until 2Q11. Based on the expected indebtedness of US$440m at end-2Q11, the charter-free value required to fulfil the original 145% LTV covenant would be US$638m, or only about 2.5% higher than current valuations. Thus we would not be unduly worried at this stage about the chances of future technical defaults.
Hence, we are maintaining our BUY call on FSLT at a TP of S$0.78 (10% target yield), given the visibility in payouts, possibility of acquisitions in 2H10 and our perception of it being a laggard stock
SREITs – BT
S-Reit sector bounces back from global crisis
With the completion of recapitalisation exercises and major refinancing S-Reits are poised for acquisitive growth
IN LATE 2008, the effects of the global financial crisis had come to a head.
What started as a spike in real estate prices in the United States gradually spread to other jurisdictions and when the bubble eventually burst, the fallout brought global credit markets to their collective knees. Real estate companies, having witnessed their stock prices plummet, were forced to watch as credit liquidity dried up.
The negative investor sentiment did not spare Singapore real estate investment trusts (S-Reits). The market capitalisation of S-Reits declined by more than 50 per cent in the second half of 2008, and continued their slide into the first quarter of 2009. The impact was widespread, with little distinction being made for the individual qualities of particular Reits.
Credit/refinancing risk (in view of the requirement to distribute in excess of 90 per cent of taxable income in order to enjoy tax transparency) was cited as one of the primary reasons for the unit price declines and S-Reits sought to address this concern. However, this was no easy task for Reit managers, as banks, constrained by their own credit considerations and with no clear idea of the extent and duration of market uncertainties, were less than eager to put their balance sheets in jeopardy.
With the completion of recapitalisation exercises and major refinancing, the S-Reit sector has re-rated and prices have rebounded strongly. By the end of 2009, S-Reit prices were up approximately 60 per cent from the start of the year.
Over the last eight years, S-Reits have grown not only in scale, but also in complexity and depth. S-Reits now own assets in retail, commercial, industrial, healthcare, hospitality and residential sectors, located in numerous jurisdictions around the region.
Structures have changed too, with the constraints posed by the traditional Reit regulatory regime being overcome by the use of alternative structures. For example, selected property trusts have utilised the business trust structure to overcome development constraints, whilst incorporating a majority of traditional Reit structure elements to leverage on the relatively wider Reit investor base. Investors too have matured, with many now largely able to differentiate the quality of individual property trusts.
2010 began on a positive note, with the $182 million placement exercise undertaken by Frasers Centrepoint Trust executed at a tight discount of 3.7 per cent to adjusted volume weighted average price. This was followed by the IPO of Cache Logistics Trust (CLT), the first property trust IPO in almost two years. Cache’s IPO attracted a subscription rate of approximately 7.8 times, demonstrating the market’s strong appetite for new Reit products.
It would be safe to assume that issuers will aim to repeat the success of CLT’s; seeking to raise capital and kick-start growth plans which may have been largely set aside in the preceding years. Listed Reits, free from refinancing concerns (only approximately 17 per cent of S-Reit debt matures in 2010) retain the option to revisit the capital markets this year, and to undertake equity fund raising to fund acquisitive growth.
Reit managers, with the events of 2009 still fresh in their minds, are unlikely to be keen to gear up too excessively to fund acquisitions, despite liquidity having largely returned to the credit markets. In this regard, listed Reits that are trading at premiums to net asset value, are well positioned to deliver accretive acquisitive growth to unitholders.
As the S-Reit market continues to mature, investors should not lose sight of the fundamentals that led to the sector’s success in the first place. Investors seeking to invest in a particular Reit should begin by analysing its property portfolio.
Areas for consideration include property type, geographical location, occupancy rates, demographics, lease terms, tenant quality and diversity. These, in turn, would impact the portfolio’s aggregate rental income and ultimately, the sustainability and stability of the Reit’s distributable income.
Investors should also consider the Reit manager, a critical component of a high quality Reit. The principal responsibilities of the Reit manager include the development and implementation of the Reit’s investment strategy as well as the management of its portfolio and capital structure to ensure the long term success of the Reit. A strong Reit manager is made up of a team of experienced individuals, with expertise specific to the asset portfolio and the Reit structure.
Besides the Reit manager, investors should also look to the quality and commitment of the Reit sponsor. A Reit sponsor would typically hold a meaningful stake in the Reit, hold a stake (part or whole) in the Reit manager, provide an acquisition pipeline by means of a right of first refusal and make available a business network to facilitate the Reit’s growth plans. On occasion, the sponsor shares its name with the Reit to provide familiarity to investors based on its own track record of performance.
As global equity and credit markets continue to recover, potential Reit sponsors from around the region will continue to look to Singapore as a premier listing destination.
This is given the critical mass of listed Reits trading on the Singapore Exchange, its vibrancy and strong track record of market performance, conducive regulatory and tax framework as well as investor familiarity and confidence in standards of governance. The manner in which regulators and market participants have worked together, to enable the Reit sector to weather and emerge stronger after an unprecedented financial crisis, has not gone unnoticed.
At the end of the day, in a world of increasing complexity, the simplicity of the Reit model, its strong underlying fundamentals, and relatively risk averse nature, make it an attractive option for investors to consider.