A-REIT – OCBC
Limited impact from negative rental reversions in 2010
Expect a challenging year ahead for industrial landlords. Going into 2010, we continue to remain cautious on the industrial landlords due to supply-side concerns (for factory space) and weak demand recovery due to the still-uncertain global economic recovery pace. While a portion of the upcoming supply may have been pre-committed, take-up rate of the remaining uncommitted space could still be a concern. Nevertheless, rents of warehousing space are expected to fare better than factory space as the outlook for warehousing space supply is better in comparison to the factory space.
A-REIT’s diversified portfolio structure mitigates negative impact. Despite our negative outlook on the industrial space, we believe that the impact on A-REIT can be mitigated by its diversified asset portfolio with its balanced exposure to different groups of industrial properties, balanced mix of single and multi-tenanted properties and diversified base of quality tenants. Even though some of the assets could face negative rental reversions going forward, we believe that the impact on its portfolio as a whole would not be significant because the NLA of expiring leases is small compared to the total NLA of A-REIT’s portfolio and the average existing rents of these expiring leases are not significantly higher than current market rents.
Opportunity for growth via property development. We expect property development to be a key area of growth for A-REIT in 2010. Based on AREIT’s deposited property value of S$4,559.7m, it has the capacity to take on as much as S$456m worth of development projects in accordance to the maximum 10% exposure limit of the property fund’s deposited property to property development under the MAS guidelines for property funds. With just one ongoing development project at the moment – Built-to-Suit (BTS) for SingTel with an expected development cost of S$175.4m, this leaves A-REIT with significant headroom of S$280.6m for new development projects.
Maintain HOLD; fair value S$1.76. No changes have been made to our estimates and we maintain our RNAV estimate of S$1.76 per share. Pegging our valuation at par to our RNAV estimate, we derive a fair value estimate of S$1.76 for A-REIT. We expect A-REIT to pay out DPUs of 12.86 cents and 12.90 cents in FY09/10 and FY10/11 respectively, translating to DPU yields of 6.73% for FY09/10 and 6.75% for FY10/11. With an expected total return of -1.3%, we maintain our HOLD rating on A-REIT. We advise investors to accumulate A-REIT at more attractive price levels around the range of S$1.60 to S$1.70.
REITs – OCBC
The virtuous and the not-so-virtuous
Policy and leverage appetite shapes 2010. We believe the Singaporelisted REIT sector’s 2010 performance will be influenced by opposing systemic forces. A favorable policy climate is likely to sustain a high liquidity environment. While some S-REITs may book negative revaluations in 4Q09, the ‘Bernanke Put’ could potentially create a floor for asset values in 2010. On the flipside, the rules for leverage have changed and increased conservatism is the new normal. Over-leveraged players (by today’s standards) may need to reduce gearing through equity fund-raising or asset sales. This de-leveraging can potentially occur not only on the REIT level, but also on the sponsor, manager, and institutional investor level.
The virtuous and the not-so-virtuous. 2010 will not be an ‘easy’ market, in our view, as we expect greater variance in performance among the individual REITs. We believe the sector can be broadly divided into two camps differentiated by leverage, sponsor strength, and sub-sector specific differences in forward earnings performance. Investment opportunities are available in both camps but of different varieties: the stronger REITs may enjoy yield compression and price-to-book normalization, and can potentially tap into a virtuous cycle of accretive acquisitions. On the other hand, the weaker REITs could be trapped in a vicious cycle of declining asset value, refinancing difficulties, and a consequent need to de-leverage. For those REITs with outstanding challenges, we advise interested investors to wait until after a resolution is proposed and the extent of any dilution is clear.
Limited upside, risks to the downside. We use 2006 valuations as a sanity check on the current recovery. The sector trades on average at 0.78x book, still below the 0.89x average in 2006. The potential 13.4% increase from current levels is offset, however, by book value risk from 4Q09 revaluations. A 6.9% potential upside from a distribution yield perspective is also offset by a mixed earnings outlook. With an unexciting risk-reward ratio for 2010, we maintain our NEUTRAL rating on S-REITs. Within our coverage universe, we have BUY ratings on Mapletree Logistics Trust [MLT, FV: S$0.78], Ascott Residence Trust [ART, FV: S$1.25], and Suntec REIT [FV: S$1.40]. Our top picks for the sector are ART and MLT, for ART’s positive earning outlook and MLT’s earnings stability, and for the possibility of yield-accretive acquisitions at both REITs. Key risks to our thesis include an increase in interest rates (which we believe would impact the blue chips the most), a double-dip recession and the threat of a new asset bubble.
FSL – BT
FSL Trust holding back US$200m notes issue
It says Dubai World fallout impacted fixed-income investor sentiment
FIRST Ship Lease Trust (FSLT) has put plans to issue up to US$200 million senior notes on hold amid poor investor sentiment in the wake of the Dubai World credit crisis.
FSLT had said, when it announced the notes issue last month, that the proceeds would be used to repay existing indebtedness, fund future vessel acquisitions and for its general corporate purposes.
However CEO of trustee-manager FSL Trust Management, Philip Clausius, yesterday said: ‘The start of the investor roadshow coincided with the outbreak of the Dubai World credit crisis. This impacted fixed-income investor sentiment, particularly in Asia and Europe.’
‘We could most likely have concluded this offering, but only on terms that would not have been in the best interests of FSLT unitholders. Since we have no external pressure, including that from our bank lenders, to conclude this offering, we have decided to suspend it for now. We will revisit it when market circumstances change,’ he added.
In its SGX statement, FSLT said that it has stable and predictable cashflow from its portfolio of long-term lease contracts, which has remaining contracted revenue of US$782 million as at Sept 30 this year. It does not have any outstanding capital expenditure that requires additional funding and it has no loan maturing before April 2, 2012.
A share placement in September raised some US$28.3 million for FSLT and the shipping trust at its third quarter results had said that it was evaluating a number of attractive acquisition-and-leaseback proposals which would enable the trust to further diversify its portfolio by investing in modern vessels with good quality counterparties.
The extra US$200 million would have come in handy to pre-pay loans and improve its cash position as well as take advantage of buying opportunities. However, these are not absolutely critical to FSLT’s business as it does not have newbuilds on order.
Another shipping trust, Rickmers Maritime Trust, however may be concerned over this development as it does have serious fund raising needs in the near future. With this being the first fallout in the local shipping finance sector directly blamed on the Dubai woes, some will wonder whether there are more lurking in the shadows.
Cambridge – Phillip
Business As Usual
The recent MIREIT saga came to an end as all the resolutions were passed during the EGM. According to the latest regulatory fillings, Cambridge Industrial Trust (CIT) has sold down its stakes in MIREIT from 26 million units to 13.31 million units. We believe that CIT has no intention of maintaining an interest in MIREIT. A recent update with management indicates that it is business as usual and it will focus on its original plan that was outline before the saga took place.
De-leverage. CIT current gearing is 42% and has total debt of $390.1 million. Management expects year-end valuation of the portfolio assets to remain constant and therefore should not affect gearing substantially. De-leverage strategy involves divesting non-core assets as well as the implementation of Dividend Reinvestment Plan (DPR) to retain cash and pay down debt. CIT has a target gearing in the range of 30-35%. No firm implementation date has been set yet, but the DRP program is slated to commence from 1QFY10.
Asset enhancement and acquisitions. Management is in talks with tenants on possible asset enhancement initiatives, however tenants are still cautious about the recovery at this stage and nothing has been carried out yet. On the acquisition front, management has not rule out making acquisitions in the next year.
Valuation and recommendation. In our opinion, the MIREIT episode has caused slight hiccups to the initial plan of CIT, but no real derailment. The underlying portfolio is still sound with high occupancy rate and tenants are paying their rents on time. The impact on CIT besides some bad presses is the financial impact to the bottom line. According to our calculations, we estimate that CIT would have incurred a loss
of approximately $2.3 million if it completely off-loads its holdings, which has a minimal impact on NAV. We make no change to our forecasts for now and maintain a Hold recommendation.