Fortune – BT
Fortune Reit Q2 distribution income dips
FORTUNE Real Estate Investment Trust (Reit) yesterday posted a net property income of HK$115.3 million (S$21.4 million) for the second quarter ended June 30. This is 0.3 per cent more than a year ago.
However, income available for distribution dipped 0.7 per cent to HK$78.9 million. Distribution per unit was 9.54 HK cents, slightly below the 9.72 HK cents for the same period last year.
The occupancy rate across Fortune Reit’s portfolio of 11 retail malls in Hong Kong slipped from 95.5 per cent as at March 31 to 92.1 per cent as at June 30. Offsetting weaker occupancies was an increase in the average passing rent, which was HK$27.60 psf as at June 30.
Fortune Reit said that its suburban malls have stood ‘reasonably well’ in the downturn because they ‘serve a captive population’ and cater to non-discretionary spending on necessities and services.
The Reit also benefited from higher valuations of its malls and reaped a revaluation gain of HK$281.3 million. Its portfolio was valued at HK$8.9 billion as at June 30 – 3.5 per cent higher than at Dec 31, 2008.
Fortune Reit’s gearing at the end of Q2 was 25.7 per cent, and it has more than HK$2.37 billion worth of borrowings coming due in a year or less. It said that its manager ARA Asset Management (Singapore) is in discussion with various banks to refinance a term loan due in June 2010.
For the first half ended June 30, Fortune Reit saw a 4.1 per cent year-on-year rise in net property income to HK$238.4 million. Income available for distribution gained 7.1 per cent to HK$161.7 million. H1 DPU was 19.60 HK cents, exceeding the 18.51 HK cents a year ago.
Unitholders will receive a distribution of 19.60 HK cents per unit on August 28, for the period Jan 1 to June 30.
On future plans, ARA Asset Management (Singapore) chief operating officer Justina Chiu said that the manager will focus on ‘retaining quality tenants’ and step up on marketing activities ‘to assist tenants in keeping up their sales momentum’.
Fortune Reit lost five HK cents yesterday to close at HK$4.07.
Fortune – JPM
Steady operational performance, waiting for liquidity discount to narrow
• 1H09 results largely in line with expectations: Fortune REIT announced a 1H09 DPU of HK$0.196, up 5.9% Y/Y, and just 1.1% below our estimate. Gearing was a healthy 25.7%. Despite the tough environment, rental income remained fairly stable in Fortune REIT’s portfolio. Investment properties were revalued up by 3.5%, mainly on cap-rate compression of around 50bp (cap rates at 5.25-6%).
• We turn slightly optimistic about the retail rental market outlook: With early signs of stabilization in the retail market, and a slightly better economic outlook for 2010, we now only assume a 6% decline in FY09 spot rents and a 3% recovery in FY10 (compared to -10% in FY09 and 0% in FY10). As a result, we tweak our DPU forecast by -1% for FY09 to account for higher maintenance costs alongside some renovation projects, while we raise our FY10 DPU forecast by 6%. Our NPV also increases by 22.5% as a result of the higher DPU estimates, higher longterm growth rate (from 0.1% to 0.2%) assumption, and lower discount rate (from 7.72% to 6.95%) assumption.
• Valuation still looks appealing: The stock is still trading at a clean yield of 8.3% for FY09E-FY11E, which is still high relative to other Hong Kong REITs which are trading at an average clean yield of 5.6%. We believe there is room for further re-rating of the stock in the current low-interest-rate environment. The yield spread between Fortune REIT and 10-year HK Exchange Fund notes is wide at 680bp versus its longterm average of 384bp since its listing in 2003. We believe the liquidity discount on Fortune REIT should gradually narrow.
• Maintain OW, raise our Dec-09 PT to HK$4.9: We increase our Dec- 09 PT by 22.5% to HK$4.9, on par with our DDM-based NPV estimate. We used a discount rate of 6.95% and a long-term growth rate of 0.2%. Risks to our PT include sharper-than-expected rental declines, higherthan- expected vacancy rates, and a prolonged economic recession.
Cambridge – DBS
Building up its coffers
• 2Q09 results showed stable performance
• Private placement exercise leads to c10% dilution
• Impact on AEI activities only in the medium term
• Downgrade to HOLD, TP S$0.41 based on DCF.
Results in line. Cambridge Industrial Trust (CREIT) 2Q09 results were in line with expectations. Results were underpinned by a portfolio mainly secured on sale and leaseback leases. Distributable income came in 14% lower at S$10.7m (DPU of 1.345 Scts), largely a result of management fees paid in cash and higher borrowing costs.
Private placement- to National Australia Bank/ Oxley. In a recent announcement, Cambridge REIT announced a private placement exercise @ S$0.39 per unit to National Australia Bank & Oxley to raise cS$28m of proceeds. Total shares to be issued are estimated to be c.10% of share base.
Proceeds for asset enhancement purposes. Proceeds from the placement will be utilized to embark on asset enhancement initiatives (50-70%) and general working purposes (50-30%). While we understand that several of their assets have yet to fully utilize their plot ratios, raising equity at c. 12 -13% yield does present a relatively high cost of capital hurdle to overcome in order to make any investments accretive. In addition, Cambridge REIT may have to seek respective tenants’ approval before embarking on any meaningful enhancement works, which could mean that the potential impact on earnings is likely to be delayed.
Downgrade to HOLD. DPU is expected to be diluted by c7-9% in FY09-10F to c. 4.8 – 4.7 Scts. Our DCF based TP will be reduced to S$0.41, which is close to its closing price. As such, we downgrade to HOLD. Cambridge REIT currently offers a FY09-10F yield of 12%.
REITs – BT
Trusts’ resilience boosts Reit index
Better than expected results from Reits for Q2, revised GDP forecasts lead investors to turn positive on outlook
INVESTORS are heaving a sigh of relief – and putting some money back into the stock market – following better-than-expected results from some real estate investment trusts (Reits).
The FTSE ST Real Estate Investment Trusts Index has risen by almost 4 per cent on heavier trading volume since Reits started posting results a week ago. It closed at 494.82 yesterday.
Generally, results released so far ‘are either in line, if not slightly above’ expectations, said DBS Vickers analyst Lock Mun Yee.
Despite concerns about falling rents and occupancies in the office sector for instance, CapitaCommercial Trust (CCT) and K-Reit Asia have managed to post year-on-year increases in distributable income and distribution per unit (DPU) for their latest financial quarter.
CCT’s operating results exceeded the expectations of OCBC Investment Research analysts Meenal Kumar and Foo Sze Ming. It was ‘able to achieve new rents 45 per cent higher than previously signed rents, despite the 17.5 per cent quarter-on-quarter decline in Grade A office rent in 2Q 2009’.
Some retail Reits also displayed resilience amid the recession. Frasers Centrepoint Trust, which manages a portfolio of suburban malls, achieved a slightly higher DPU for the last financial quarter compared with a year ago.
And considering how the hospitality industry has been hit by the downturn and the spread of H1N1 flu, the year-on-year fall in Ascott Residence Trust’s DPU in the latest quarter did not surprise many. In fact, the market could have been comforted by the trust manager’s observations – that the sector is showing signs of stabilisation.
Ascott Reit’s unit price has gained more than 9 per cent since results were released last Thursday morning.
Of course, investors’ outlook could have improved even before they got a glimpse of the Reits’ results. The government recently revised its GDP forecast upwards and stock markets have been enjoying a long rally.
Ms Kumar and Mr Foo believe that ‘the price performance is more a function of outlook rather than Q2 performance’. Looking back further, the FTSE ST Real Estate Investment Trusts Index breached the 400-point mark in as early as May, and has risen by more than 16 per cent since.
While market forecasts have become rosier, a robust recovery has yet to take shape and investors could remain jumpy.
Ms Kumar and Mr Foo advise investors to continue paying attention to Reits’ balance sheets – the risk of falling asset values still exists and that could increase gearing levels.
DBS Vickers’ Ms Lock also said that Reits’ operational strength will come into focus, as they try to maintain earnings under ‘moderated economic conditions’.
Cambridge – Phillip
Cambridge Industrial Trust reported results for 2Q09. CIT recorded gross revenue of $18.5 million (+2.8% yoy, flat qoq), net property income of $16.0 million (+0.9% yoy, flat qoq) and distributable income of $10.7 million (-13.8% yoy, +0.04% qoq). DPU for 2Q09 is 1.345 cents.
Gross revenue is stable with slight growth over the quarters. Occupancy rate improves slightly from 99.2% in 1Q09 to 99.5% in 2Q09. Distributable income has however decreased since 1Q08 to 1Q09 before improving slightly in 2Q09. The main reason for the decrease is the progressively higher interest cost CIT paid on its loans. CIT has maintained a gross margin of approximately 0.9x. Distributable income margin dropped from 0.7 in 1Q08 to the 0.6x level. We expect it to maintain at this level as interest payment should not varies much for the remaining term of loan.
Property portfolio was revalued downwards by 9%. Portfolio value fell from $967.7 million to $880.3 million. Correspondingly, gearing rises from 39.8% to 43.8%. CIT single loan maturity of $390 million is due in 2012. A point of concern is that further portfolio valuation drop may starts to breach bank covenants. CIT needs to maintain a LTV ratio below 0.55 and interest cover above 2.2x. Currently CIT has a LTV of 0.46 and interest cover of 3.2x. We estimate portfolio value will have to fall a further 17% before the LTV covenant is breached.
Our revenue forecasts have assumed a portfolio vacancy of 3%. Portfolio performance in the last two quarters was lower than our assumptions. We thus revise our vacancy assumption to 1%, still slightly conservative compared to CIT actual occupancy rate. We have also revised down the management fee following the downward revaluation of the portfolio. We raise our DPU forecast from 4.73 cents to 4.93 cents. Fair value is raised marginally from $0.44 to $0.45. In view of the recent run-up in price, we lower our rating from Buy to Hold.