Shipping Trusts – OCBC
Time to stop hoping for the best
Industry continues to struggle. The container shipping industry faces a major supply-demand imbalance. According to AXS Alphaliner, outstanding orders for new ships account for about 47.6% of the existing fleet. This translates to a 12.9% per annum growth in the world fleet over the next three years. With the global recession dampening demand, especially the US consumption story, we expect tough times ahead for the container industry. Major operators, including shipping trust customers, have announced lay ups, vessel redeliveries, and plans to attempt to delay order deliveries. About 1.1m TEUs, or 8% of the world’s total container fleet, is currently idle. This broader reality can have a major impact on the trusts’ cash flows – and consequently, on distributions to unitholders. Charterer performance will be key in the coming months – if economic conditions continue to deteriorate, we could see charterers approaching the trust to renegotiate leases.
Passively waiting out the storm. US-listed comparable, Danaos Corp [NOT RATED], announced that it was suspending dividend payments to divert cash towards funding its new-building program. It also delayed some deliveries. Back in Singapore, Rickmers Maritime (RMT) is contracted to acquire US$988m worth of containerships over the next two years, with partial debt funding currently in place. The manager has so far only said that it “is exploring all options” to finance its order book but this is not enough. The market needs more clarity on what RMT will do and whether it will (or can) follow the Danaos route of delaying deliveries or cutting dividends. Unlike RMT, FSL Trust (FSLT) and Pacific Shipping Trust (PST) have no committed orders. Meanwhile, FSLT will retain about 20-25% of cash income in 1Q09 (versus a 100% distribution payout previously) to prepay debt as a pre-emptive “good faith” gesture to lenders eyeing debt covenants. We believe there is room for FSLT to lower payout further to a point where both unitholders and lenders are satisfied. In comparison, PST is only paying out about 50% of cash income. An explicit debt repayment plan would also demonstrate FSLT’s commitment to sustainability, in our view.
Still NEUTRAL on sector. While the STI is down 4% YTD, Singaporelisted shipping trusts are down 10% for the year. On average, the sector is trading at a 66% discount to NAV but we are not quite ready to call this a “value” opportunity. In our opinion, a re-rating of the sector depends on 1) signs of an improving external environment and 2) the trusts taking more aggressive action to remedy some fundamental concerns.
Cambridge – Nomura
We cut our GAV estimate for CREIT by 3.5%, as we lower our industrial rental forecast to capture a peak-to-trough correction of 31.7% (vs. 23.9% previously). Lower GAV estimate suggests potential for CREIT to raise fresh equity to keep gearing within limit. Target price cut from S$0.30 to S$0.24. Maintain NEUTRAL.
Anchor themes
A rapid deterioration in the external sector and the economic outlook is likely to crimp demand for industrial/warehouse space amid rising new supply. We expect yields to soften by 150bp from June 2008, placing downward pressure on capital values.
Rental reversions/lease structures are likely to underpin REIT cashflows. That said, growing concerns over their ability to refinance debt have seen REITs trade below book. In such conditions, investors need to focus on underlying asset value/quality, while REITs with well-located assets should benefit from potential M&A activity.
Weaker asset outlook
- Worsening industrial outlook = a 3.5% cut in GAV estimate
- Lower GAV estimate = new equity potentially needed
- FY09-11F DPU cut 1.5% to reflect higher-than-previously guided cost of refinancing
- Maintain NEUTRAL; target price cut from S$0.30 to S$0.24
FSL – BT
FSL Trust seeking mandate for buy-back of units
Move will allow purchase of up to 10% of issued units
First Ship Lease Trust (FSL Trust) is seeking unitholders’ approval for a unit buy-back mandate.
FSL Trust Management (FSLTM), the trustee-manager, said FSL Trust will hold an extraordinary general meeting (EGM) on April 8 for this purpose. The mandate would authorise the trustee-manager to buy back up to 10 per cent of the total number of issued FSL Trust units as at the date of the EGM.
A unit buy-back would cut the number of outstanding units in the market, resulting in a higher ownership stake per investor on the profits of the firm.
‘The mandate is intended to provide FSLTM with a flexible and cost-effective tool of capital management that seeks to improve the net asset value per unit of FSL Trust and return on equity for unitholders,’ the trustee-manager said.
Cheong Chee Tham, chief financial officer of FSLTM, said that the actual unit purchase, if any, would depend on the current market conditions, working capital requirements, the availability of financial resources and the expansion and investment plans of FSL Trust.
The trust would also hold its annual general meeting (AGM) on the same day to get approval for the renewal of general mandates for the issuance of new units. This includes units to be issued based on the FSL Trust distribution reinvestment scheme, under which unitholders can choose to receive their distributions in new units instead of cash or a combination of both.
‘With reference to the general mandates for the issuance of new units, FSLTM currently has no plans to raise equity for FSL Trust,’ said the trustee-manager.
It added that such mandates are ‘regular resolutions’ at AGMs and provide the trustee-manager greater flexibility to manage the trust’s capital structure.
Industrial REITs – CIMB
Relative resilience
• Industrial P/BV at 0.37x; appears resilient. The industrial sector looks attractive at an average P/BV of 0.37x, close to the REIT sector average of 0.34x. Resilience is underpinned by a historical time lag between changes in leading industrial indicators (including NODX, sea and air cargo throughput) and occupancy levels that could exceed 12 months.
• Expect further support from government for industrial users. The government traditionally supports industrial users by reducing industrial land and building rents, and dishing out rental and property tax rebates. We anticipate this assistance to continue as the manufacturing sector remains the single largest driver of Singapore’s GDP. We expect industrial REITs to benefit three ways from this: 1) reduced land rent payments for industrial REITs; 2) increased sustainability for REIT tenants paying land rent directly to JTC; and 3) increased sustainability of the other industrial property users, on which industrial REITs’ tenants are inter-dependent.
• Low tenant default risks. Within the industrial REIT space, we prefer REITs with low tenant default risks. These would be represented by large and diversified asset and tenant bases, limited concentration on single tenants and significant MNC representation.
• Good capital management. All three industrial REITs are comfortably geared at below 40% with no major refinancing needs over the next two years. Cash calls for MLT and CREIT are not likely in the current year. In terms of capital management, all three industrial REITs look well-positioned to weather the storm
• Maintain Overweight; A-REIT our top pick. Among industrial REITs, we favour AREIT for its least tenant default risk, attributable to its large and diversified asset base, and large and quality tenant base. We also like MLT for its geographical diversification which moderates its risk of asset concentration. CREIT is our least preferred stock for its smaller asset base and higher tenant-concentration risks.
PLife – Phillip
Good Health, In Good or Bad Times
We initiate coverage on Parkway Life REIT (Plife) with a fair value estimate of $0.95. The unique revenue model of Plife ensures rental income is inflation protected and provides unitholders with stable and growing dividend payout.
Plife is currently trading at 0.54 times price/book and we have a forecasted FY09F 10.4% yield. Although not the highest among the S-REIT, but resiliency of earnings give it an edge over the rest.
The initial portfolio of Plife consists of three private hospitals in Singapore. It has expanded its portfolio to include one pharmaceutical products distribution facility and 9 nursing homes in Japan. Total asset value increased 35% from S$774.6 million to S$1047.8 million. Revenue contribution is approximately 80% Singapore based and 20% Japanese based.
Plife has a revenue model that ensures rental revenue will not erode with rising inflation. The Singapore properties are under a master lease agreement with an inflation-linked formula to calculate rental. For the Japanese properties, part of the rental is also inflation-linked to Japan’s inflation. As such, unitholders are assured that dividend distributions are stable and not subjected to the cyclical economic cycle.
We believe Plife’s low gearing is a reflection of the management prudence. Current gearing is 24% and it has no near term financing requirement. Total debt is $250 million and the next round of refinancing is estimated to be in 2011. In 2008, Plife made $216 million of acquisitions of properties in Japan. We do not think Plife is aggressive in its growth strategy although we believe it is a tough balance in managing overseas acquisitions and ensuring the objective of stable distribution to unitholders as there are inherent foreign exchange risks. Plife strategy is to divest into mature countries with good legal framework and healthcare system while keeping its core focus in Singapore.