FCT – OCBC
3Q NPI boosted by Northpoint
Pays out 1.94 S cents. Frasers Centrepoint Trust (FCT) posted S$21.2m in gross revenue, up 1.8% YoY and 0.5% QoQ. The REIT will distribute S$12.1m to unitholders, up 4.1% YoY and 4.4% QoQ. The YoY and QoQ improvements in distributions are due to a 100% payout this quarter versus a 95% payout in 2Q09 and 3Q08. Excluding the payout difference, distributions would have slipped. Results beat our expectations.
3Q NPI boosted by Northpoint. Causeway Point (CP) and Anchorpoint (AP) registered a 7% and 7.7% QoQ drop in net property income (NPI)respectively in 3Q09. Margins fell as revenue recorded smaller QoQ changes of -3% and 0.2% at the two properties. AP also saw occupancy fall from 99.5% three months ago to 93% though the manager did say committed occupancy stands at 97.2% there as at June. The erosion in NPI at these two properties was offset by gains at Northpoint, where asset enhancement (AEI) work is finally drawing to a close. The combination of rising occupancy and higher post-AEI rents led to a 35% QoQ increase in NPI at the mall. Consequently, NPI was up 0.1% for the overall portfolio.
What next? 97% of NP’s NLA has already been leased or is in advanced stages of negotiations with tenants. The manager is projecting a 20% increase in average rents at the mall from S$11 per square foot per month to S$13.20 psf pm. This should flow through to 4Q09 results. Meanwhile, FCT issued S$75m 3-year fixed rate notes in June, which it will use to repay short-term debts. Gearing is expected to consequently fall to below 30%. AEI plans at CP, which were postponed, could potentially be resurrected now that the macro picture and credit market look to be stabilizing. But CP is the portfolio’s key revenue driver and investor appetite for DPU stability may be a constraint. Meanwhile, the manager said two malls in the pipeline were “ready for acquisition”. Financing and pricing of any acquisition is still a question mark, however, in our opinion.
Valuation. We have increased our earnings estimates to reflect the positive rental reversions achieved in 9M09 as well as the post-AEI support from NP. We still expect declines in achieved rent in FY10, however. We are also lowering our cap rate assumptions by 40 basis points. Our new fair value estimate is S$0.95 (prev: S$0.75), at par to our SOTP value for FCT. We are estimating yields of 7.2% and 7.7% in FY09 and FY10. Maintain HOLD.
PST – DBS
DPU cut will add little value
• Plans to cut payout from current 90% to potentially 70% from 3Q09
• FY10 DPU forecast reduced by 20%
• Gearing, distribution policy already conservative
• We see limited strategic potential of this move, downgrade to FULLY VALUED, TP US$0.22
2Q09 results, payout in line. Pacific Shipping Trust’s 2Q09 results were in line with expectations and consistent with 1Q09 performance – with revenue of US$15.5m and net distributable cash of US$5.8m. The Trust paid out 90% of total cash generated (after debt repayment)- as per its practice in previous quarters – and DPU amounted to 0.99UScts per unit, compared to 0.98UScts in 1Q09 and 1.09UScts in 2Q08.
Rationale behind DPU cut is not clear. The Trustee Manager will be reviewing its distribution policy, with a view to reduce payout and conserve more cash from 3Q09. Management anticipates that payout for 3Q09 would not be lower than 70%. Given that PST is already the most conservative among the three shipping trusts in terms of distribution policy and gearing – distributable cash is only arrived at after accounting for debt repayment every quarter – we are not sure how the proposed DPU cut will add value. While management remains on the lookout for opportunistic acquisitions, the US$1.5-2m additional cash that can be saved per quarter does not look to be realistically significant for any transaction.
Looks expensive on FY10 basis. On other fronts, the discussions with troubled customer CSAV are still ongoing and we look for a ~30% charter rate cut at worst. Adding the impact of the cut in payout, we reduce our FY09 and FY10 DPU forecasts by 8% and 20%, respectively, and downgrade the stock to Fully Valued at a TP of US$0.22 (target yield of 12% on FY10 DPU). Having gained 72% YTD, the stock – trading at 10.7% FY10 yield – looks expensive compared to its peers.
CMT – DBS
Slowly but steadily
• 2Q09 results within expectation
• Occupancy remains high, slight positive rental reversion
• Maintain Buy with TP $1.68
Still holding ground. CMT reported a 10.4% rise in Q2 revenue to $138.6m while NPI improved 12.2% to $93.8m. Distributable income of $67.9m (DPU 2.13cts) was 15.8% higher than previous period. On a qoq basis, all operating metrics continued to show positive growth of 3%, 1.5% and 8.5% respectively. The group took a $276.2m deficit in the value of its assets, lowering book NAV to $1.56.
Occupancy levels sustained. The better sequential performance was due organic growth with 223728sf of NLA being renewed at rents 1.5% higher than previous levels. Portfolio occupancy remained at a high 99.7%. The growth in bottomline was also aided by lower interest cost at the group repaid loans with the rights proceeds. Outlook is ‘cautiously optimistic’ with a slight 2.2% recovery in pedestrian footfalls. However, tenant sales psf growth remained anemic at this point. Trade sectors that continue to do well were basically necessity shopping. CMT has a remaining 13.9% of GRI to be renewed this year with another 36.5% and 25.7% in FY10 and FY11 and we expect them to be able to recontract these at modest but positive improvement over previous levels.
Maintain Buy. Management’s ability to grow rents despite the challenging conditions while maintaining a high occupancy level underlines its good track record as retail property managers. We have lifted FY09 and FY10 DPU to 8.6cts and 9.1cts on higher portfolio occupancy assumption of 99% vs an earlier 95%. The stock is currently trading at 5.5-5.8% DPU yield and offers a 12% total return.
CMT – CIMB
Meeting expectations
• DPU in line despite S$1.5m retained. 2Q09 results were in line with Street and our expectations. Total income available for distribution was S$67.1m (+17% yoy). However, actual distributed amount was S$67.9m, including S$1.5m of distributable income retained from 2Q09 in view of economic uncertainties; and S$2.3m of net capital distribution income and net tax-exempt income from CRCT retained in 1Q09. Including the S$3.3m retained in 1Q09, management has retained S$4.8m of distributable income for 1H09. It is committed to distributing 100% of its distributable income for the full year. Hence, the S$4.8m retained will represent an additional 0.15cts for distribution in 2H09. 2Q09 DPU of 2.13 cts fell 40% yoy due to an increase in the unit base, forming 25% of our forecast for FY09. 1H09 DPU of 4.25cts, including retained income, represents 49% of our full-year forecast. Net property income of S$93.8m was up 12% yoy on new contributions from Atrium@Orchard and the completion of asset enhancement work in various malls. Qoq, the income was up 1.5% as positive rental reversions were diluted by higher property tax, marketing and maintenance expenses.
• Occupancy stable at 99.7%; reversion rates flat. Portfolio occupancy stayed at 99.7%, the same as 1Q09. Average rentals grew 1.5% over preceding rates (typically committed three years ago), representing annual growth of 0.5%. Although shopper traffic was 2.2% higher than in 2Q08, gross turnover sales of tenants was only 0.2% higher, indicating more care in consumer spending.
• New-to-market brands in Orchard could be prospective tenants. Management says competition in Orchard Road could be viewed positively as new-to-market brands who would first establish themselves in the prime shopping belt could also be persuaded to take root in suburban malls.
• Maintain Underperform and DDM-based target price of S$1.30. For the rest of 2009, we expect CMT’s portfolio occupancy to be nearly full, anchored by its welllocated suburban malls. However, reversions may turn negative as improvements in retail sales still lag behind. Maintain target price S$1.30, still based on DDM valuation (discount rate 9.5%).
FCT – CIMB
Steady performer
• Met expectations. 3Q09 results are in line with Street and our expectations. DPU grew 3.2% yoy to 1.94cts, to make up 27% of our full-year forecast. Distribution income (+4.1% yoy) and net property income (+4.4%) grew despite disruptions from enhancement work at Northpoint, boosted by higher contributions from Causeway Point and Anchorpoint.
• Occupancy stable; reversions positive. Portfolio occupancy was stable at 93.2% (-0.2% qoq) even though Northpoint’s occupancy was affected by enhancement work. Renewals were on track and reversions were 14% above preceding rates. This translates to an annual increment of 4.5%, assuming typical 3-year leases.
• Northpoint and other leasing updates. Enhancement work on Northpoint is expected to end shortly. Physical occupancy was 75% as at end-Jun 09. However, 97% of the net lettable area has been leased, including space being negotiated with tenants (talks in advanced stage). Management estimates that enhancement will increase Northpoint’s average rents by 20% (to S$13.20 psf) and full-year net property income by 30% (to S$18m). Additionally, 98% of gross rental income for FY09 has been locked in.
• Northpoint 2 and Yew Tee Point ready for injection. Northpoint 2 and Yew Tee Point, currently held by sponsor FCL, appear ready for injection in the short term with committed occupancy rates of 100% and 94% respectively. In our view, Northpoint 2 is more likely to be injected first as it is already fully occupied and seamlessly integrated with Northpoint. The put and call option announced last year estimates an acquisition price of S$139.5m-170.5m (S$1,632-1,994 psf).
• Maintain Outperform and target price of S$1.12. FCT’s progress in pre-leasing renewals, positive reversions and stable occupancy reaffirm our belief that suburban retail is stable despite the downturn. Our estimates and DDM-derived target price of S$1.12 (discount rate 9.2%) are unchanged. Maintain Outperform.