KREIT – UOBKH
Lower Gearing, Higher Upside
We visited K-REIT Asia (K-REIT) and key highlights from the meeting are as follows:
Credit crunch has abated. Availability of funding via bank loans has improved significantly. There is a slight improvement in the credit spread that banks charge, although the quantum is not obvious in management’s opinion. Management sees an advantage in the longer tenures of 5-7 years provided by commercial mortgage-backed securities (CMBS). Cost of borrowings for long-dated CMBS is not as prohibitive, compared with bank loans, as the yield curve is not as steep. K-REIT has a S$190m CMBS that matures in May 2011.
Conservative in valuing assets. K-REIT revalues its investment properties once a year and the next valuation will be conducted in Dec 09. The company has been conservative in valuing its assets and usually marks prices to the lower end of the market range. It values Prudential Tower at S$2,066psf, Keppel & GE Towers at S$1,347psf, Bugis Junction Towers at S$1,265psf and One Raffles Quay at S$2,213psf. The risk of severe markdowns in asset values is quite low, especially given the recent rebound in transaction prices for strata office space.
K-REIT has the lowest gearing of 27.6% among office REITs (CapitaCommercial Trust: 30.7% post-rights issue, Suntec REIT: 34.4%). Financial risk is low as the next refinancing is an unsecured floating rate loan of S$391m from Keppel Corporation due Mar 2011. Maintain BUY with target price at S$1.16, based on a dividend discount model (required rate of return: 7.7%, growth: 2.5%).
PLife – CIMB
On the road
• PLife non-deal roadshow. We brought PLife REIT on a non-deal roadshow to Singapore, Kuala Lumpur and Hong Kong recently. Management elaborated on its acquisition rationale and strategies, and clarified on tenant concentration risks from Parkway Holdings.
• Acquisition rationale and strategies. Whilst short term acquisitions are likely to remain opportunistic in nature, medium term targets will focus on low-risk countries with quality healthcare assets and transparency in government regulations. The management will also attempt to keep similar leasing arrangements for future acquisitions so as not to erode the defensiveness of the REIT. In the longer term, the management intends to cut down concentration risks from PWAY to 60%.
• Potential acquisitions to be a kicker. An acquisition within the year looks increasingly likely. PLife’s trading yields have been compressed to 7.9%. Offers from cash-strapped healthcare operators continue to grow and capital markets seem to be opening up again. We expect acquisitions to be a kicker for PLife. Maintain Outperform with unchanged target price of S$1.20 (discount rate 8.1%)
FSL – BT
31% opt for new units in place of cash: FSL Trust
FSL Trust Management Pte Ltd (FSLTM), the trustee-manager of First Ship Lease Trust (FSL Trust), yesterday said its distribution reinvestment scheme (DRS) has received stronger than expected support from unitholders. It also affirmed its distribution forecast for the current quarter.
Unitholders holding 155,540,770 units or 30.9 per cent of the total number of issued FSL Trust units elected to receive their distributions in the form of new units in lieu of 2.45 US cents per unit in cash. Accordingly, FSLTM has issued 15.6 million new units and the units have been credited into the CDP securities account of these unitholders on May 29, 2009.
FSL Trust’s sponsor FSLTM and the respective board directors also opted for new units in respect for all or part of their unitholdings.
FSLTM chief executive Philip Clausius said: ‘The participation level in the DRS was much stronger than we expected and we are certainly very pleased with the outcome. That so many unitholders chose to receive their distribution in new units is a testament of their confidence in the stability and long-term prospects of FSL Trust.’
With the scheme, a total of US$3.8 million has been retained and this will go mainly to voluntary debt repayment.
FSLTM reaffirmed its distribution per unit (DPU) guidance of 2.45 US cents for the quarter ending June 30, 2009. This represents about 75 per cent of the projected distributable cash flow. The residual cash from the distributable cash flow, together with the US$3.8 million retained under the DRS, will be applied towards a voluntary loan prepayment of US$8 million on the next interest reset date.
All of FSL Trust’s eight lessees have been making full and prompt advance payment of their monthly lease rentals, including those for June 2009. ‘FSL Trust has no committed capital expenditure and no immediate need for substantial capital raising to support its current lease portfolio,’ it said.
CMT – CIMB
On the road
CMT roadshow to KL
We brought CMT to Kuala Lumpur for a non-deal road show last week. Investors’ top concerns were the retail outlook in Singapore, the performance of CMT’s portfolio, and management’s acquisition and asset enhancement plans.
Defining “suburban mall” by location and positioning. Investors expressed concern over upcoming retail supply, particularly in central Singapore. Management pointed out that CMT’s portfolio resilience stems from its primarily suburban assets. The definition of “suburban” should not refer only to physical locations but malls’ positioning i.e. a suburban mall should offer a good selection of mass-appeal and necessity-based retail produces and services including cinemas, supermarkets, music schools and food courts. Plaza Singapura is a centrally located mall which management considers suburban in its positioning for residents in the districts of River Valley, Orchard Road and Mount Sophia. Repeat visits within the week are expected for CMT’s suburban malls due to their proximity to MRT stations and necessity-based offerings as opposed to destination-based malls in the primarily shopping belt. Thus, management does not consider Plaza Singapura to be competing directly with the three new malls that will be opening along Orchard Road over 2009-10. Non-suburban properties in CMT’s stable are limited to four assets: Atrium@Orchard, Raffles City, Funan DigitaLife Mall and Bugis Junction.
Traffic count at Tampines Mall stronger at opening of Tampines One. Despite the strong draw of new-to-market brands such as Uniqlo and Cache Cache Paris at competing mall Tampines One that opened in April, traffic count at Tampines Mall has not been worse off. In fact, within the first week of Tampines One’s opening, traffic at Tampines Mall increased 15% due to its larger number of food outlets and car-park lots.
Confident of renewing leases expiring in 2H09. There are 550 leases accounting for 21.5% of gross rental income which will be expiring in 2009. Almost half will come from IMM Building and Plaza Singapura. Leases due in IMM Building are mainly from offices and warehouses, and management is confident of renewing these leases or securing new tenants as passing rents are below market rates. We estimate current passing gross monthly rents for IMM offices at S$2.91 psf and warehouses at S$1.45 psf.
As for Plaza Singapura, the bulk of the space is taken up by hypermart, Carrefour, whose current lease was secured at the rental lows of 2003. We estimate current gross monthly passing rent for Carrefour at S$5.35 psf. Management is confident that competing malls in the Orchard area will not be able offer the same size at current passing rents. Moreover, if existing tenants decide not to renew, rates from new tenants are highly likely to surpass their rental levels.
Why rights issue? Management explained that although refinancing options are available to CMT, banks are only willing to lend up to three years, representing shortterm solutions. Stretching the current debt for another 2-3 years would result in a new expiry in 2011 or 2012 when significant debt would also be due. (This assumes that convertible bondholders will redeem at the 2011 option date.) Taking the rights issue path would allow CMT to pay down some debt and reduce its gearing. Following its rights issue and assuming immediate pay-down of debt due in 2009, asset leverage should come down to 29.2% from 43.1%. CMT’s long-term leverage will be about 35%.
Organic growth via asset enhancement. Management guides for flat DPU of 8.4cts for 2009-10 as increased contributions from newly enhanced Raffles City and Lot One could be diluted by reduced gross turnover rents and possibly flat reversions. Management intends to commence asset enhancement work at Jurong Entertainment Centre (JEC) at the end of 2009 and Atrium@Orchard at the end of 2010. Capex for both is estimated at S$300m. Prior to commencement, the following will have to be fulfilled: 1) leasing pre-commitments of 50%; 2) construction costs fixed; and 3) financing secured.
Leasing pre-commitments at JEC have been secured from the previous cinema operator, a supermarket as well as a food court. Leases for these anchors will range from three to 10 years. The decision to postpone asset enhancement work at JEC although operations have ceased since Nov 08 was based on expectations of declining construction costs by 2H09, when Singapore’s two Integrated Resorts will be close to completion. For Atrium @ Orchard, management expects approval from the relevant authorities to take another 12-18 months.
Acquisitions. Clients also wanted to find out management’s acquisition plans, particularly for Ion Orchard (jointly owned by sponsor CapitaLand and Sun Hung Kai). Management indicated that a stabilised yield from Ion Orchard will be needed before acquisition, and new malls typically take one year to achieve that. Hence, a more realistic time to acquire Ion Orchard would be after 2H10.
Valuation and recommendation
Maintain Underperform at S$0.87 for now. We came away from the roadshow with more clarity on management’s growth strategy. CMT has a post-rights adjusted P/BV of 0.83x and a forward yield of 6.8%. We maintain our Underperform rating and DDMbased target price of S$0.87 (discount 9.7%) for now. We are reviewing our estimates for a potential upgrade.
Office REITs – UOBKH
Office REITs – Outstripping Improvement In Fundamentals
The Federal Reserve extended the TALF programme to commercial mortgage-backed securities (CMBS) starting 1 Jun 09, hence the optimism and rally for S-REITs. However, we believe the rally in the past two weeks for office REITs has already factored in the improvement in fundamentals.
Office rentals still falling but at a slower pace. Due to the ongoing financial crisis, rentals for prime office space corrected 6.8% in 4Q08 and 30.0% in 1Q09 to S$10.50psf pm after hitting a peak of S$16.10psf in 3Q08. The Raffles Place micromarket registered the steepest fall of 17.9% in 4Q08 and 28.5% in 1Q09 to S$10.50psf pm. Our survey of office REITs indicates that office rentals have fallen by a slower 5-10% so far in 2Q09 due to an improvement in market sentiment.
Deals starting to flow. There are more transactions in the secondary market for strata office space recently. Capital value for Suntec City Office Towers has rebounded 10.8% to S$1,781psf ytd. Capital value for International Plaza has similarly rebounded by 9.2% to S$1,100psf. Unlike in previous recessions, there has been no distress or fire sale in the office market during the current recession. As such, cap rates have been stable.
Revaluation results in higher gearing. We remain concerned about the correction in office rentals due to new supply coming on stream. A total of 8.3m sf of office space will be completed from 2Q09 to 2013, representing 11.5% of total stock. A markdown in the value of investment properties on revaluation will result in higher gearing and potential rights issues.
Maintain OVERWEIGHT for REITs. Current yield spread is 3.61%, higher than the historical average of 2.97%. We expect yield spread to contract further as credit markets normalise. Refinancing risk has abated with the potential reopening of the CMBS market. We prefer switching to laggard retail and industrial REITs. BUY Frasers Centrepoint Trust and Ascendas REIT. Our only BUY for office REITs is K-REIT Asia.
Link : Table