REITs – BT
Scrip dividends violate Reits’ basic characteristics
THE authorities recently rejected the request of some real estate investment trust (Reit) managers to reduce the minimum payout ratio to unitholders while still being allowed to enjoy tax concessions.
Spelling out the government’s stand a few weeks ago, Senior Minister of State for Finance and Transport Lim Hwee Hua said: ‘The key characteristics of Reits as a stable, high-payout, pass-through vehicle are important considerations for investors and, hence, must be preserved.’
‘Ministry of Finance and Monetary Authority of Singapore have deliberated this issue and have decided that the minimum payout ratio would not be changed,’ she added.
Under current guidelines, Reits have to distribute to unitholders at least 90 per cent of their distributable income, in order to enjoy tax transparency, which means exemption from paying corporate tax at the Reit/vehicle, on the portion of income they distribute.
Reit managers have urged the government for a rule change as they deemed it conservative to retain cash in view of the very difficult credit market conditions. The worry is that they may not be able to get refinancing, and even if they could the costs may be exorbitant.
‘While we appreciate the refinancing difficulties faced by Reits, there are, at present, no strong grounds to justify a special tax treatment for Reits that is not made available to other entities,’ said Mrs Lim.
She noted that a few Singapore Reits have already managed to secure refinancing either through bank loans, loans from sponsors or recapitalisation, albeit at a higher cost. ‘It is unrealistic for S-Reits to expect to have continued access to cheap and easy credit during this recession,’ Mrs Lim commented.
While the authorities have made their stand clear on the minimum ‘payout’, the fact is there is another way within the confines of existing rules for Reits to conserve cash and yet still be entitled to the tax concessions: distribute scrip dividend instead of cash dividend.
By distributing scrip-only dividend, that is investors get additional units in the Reits instead of cash, these trusts are able to retain cash without altering their payout policies. Hence they are not in breach of their 90 per cent payout rule in order to be entitled to the tax concessions. Indeed, one Reit has already proposed doing that, and it is said that others are considering it as well.
Saizen Reit announced earlier this year that its board has proposed the adoption of a scrip-only dividend scheme. ‘Such scheme, if adopted, provides flexibility for Saizen Reit to pay out dividends in the form of units in future,’ it said. But it added that the payment of dividends in the form of units will be a temporary measure to conserve cash during this uncertain period. ‘Saizen Reit will resume its dividend payment in the form of cash once the loan refinancing issues are resolved,’ it assured unitholders.
Of course, distribution of scrip-only dividend is tantamount to a Reit not distributing its income at all. Hence, if adopted by many, it would mean that Reits’ key characteristics of being ‘a stable, high-payout, pass-through vehicle’ may no longer be met.
From the standpoint of unitholders, yes, they can sell the additional units received in the market to raise cash. But they will have to incur transaction costs. Furthermore, there is no telling what the market price will be in today’s environment. On the flip side, unitholders also don’t want to see the Reits collapse because of their inability to refinance their loans. That would not be in their interest at all.
In any case, the proposal of the scrip-dividend payout is still subject to approval by the Singapore Exchange (SGX). Given its inconsistency with the Ministry of Finance’s stand on preserving the key characteristics of Reits, it would be surprising if indeed SGX gives the go-ahead for the proposal to be implemented.
REIT – BT
Investment firm says once financial stability is achieved, Reits should do well as their underlying cash flows remain sound. By Genevieve Cua
REAL estate investment trusts are supposed to be stable assets and a core retiree holding, whose regular yield distributions help to cushion a portfolio. All these attributes went out the window in the wake of the severe and on-going credit crunch.
‘Real estate is very capital intensive. In Australia and Asia, most of the liabilities or loans have been relatively short term. Most of the issues relate to the need to refinance debt, and very little debt is available. It’s less of a real estate problem than a capital markets problem.’
Reits’ share prices have been battered amid the flood of deleveraging as investors dumped more liquid equity and bond holdings. Mr Redding, however, says Reits’ underlying cash flows remain sound. The caveat is that the more prolonged the credit squeeze, the greater the pressure on valuations and rentals. ‘Cash flows have been reasonably good. We think the world is focused on the wrong metric. To ascertain the value of a building an appraiser tries to find the cash flow or net operating income and arrives at a capitalisation rate. They look at other buildings . . . but we’ve had very few transactions. The way to really judge value in real estate is the cash flow. Right now, rents are under pressure, but lease terms can be long, so cash flows continue.’
Mr Redding has more than 20 years’ experience in real estate and has founded and co-founded three investment advisory firms specialising in real estate securities.
The AMP Global Property Securities Fund has US$1 billion in assets. In the year to end-December, the fund generated a return of minus 44.8 per cent in Aussie dollar terms, against minus 45.6 per cent by the UBS Global Real Estate Investor Index. Since inception in November 2004, the fund has delivered an annualised minus 3.8 per cent loss, compared to the index’s minus 5.9 per cent. The fund is not available to offshore investors.
Mr Redding notes that valuation metrics are at the lowest levels historically, with substantial yield spreads against Treasuries. In Singapore, listed Reits’ yield spreads against 10-year Singapore government bonds are well into double digits. In a March report, OCBC Securities’ Meenal Kumar estimates that S-Reits are currently valued at a 61 per cent discount to reported NAVs. ‘Lenders’ appetite for loan-to-value (LTV) have fallen because of an expectation of falling capital values and a decreased appetite and capacity for risk,’ she wrote.
Mr Redding is sanguine even as he notes that many Reits are in technical breach of their LTV covenants. ‘But if you look at the interest cover, or cash flow to service debt, that’s still very strong. In Australia, which is struggling, (Reits) have 2.7 times interest cover. We think lenders have so many problems, it’s hard to imagine that they would force companies that can adequately pay their interest costs into bankruptcy. Rational minds will prevail.’
He is often asked by investors if they should remain invested, and when is the right time to re-enter the market. The firm, which manages some US$2.9 billion in securities, saw net inflows last year. This year, some US investors have also allocated capital. ‘If we do have financial stability and one day we flip to inflation, Reits will do quite well.’
He sees some positive signs in California where home sales have picked up. US households’ savings rate have also shot up to 5 per cent from minus 2.5 per cent last year. ‘The sooner people repair their balance sheets and work off a solid base, the better off we’ll be.’ Large firms such as Westfields are beginning to scout for acquisitions – a sign that the market is on the mend.
The portfolio is defensively positioned with securities that the firm puts into the top quintile in terms of quality. Mr Redding, however, says that he is beginning to scrutinise lower quintile firms for opportunities. ‘I have to be an optimist. I think US$3.4 trillion in US fiscal stimulus will ultimately stabilise the system. So then the companies that would do best are those that trade like they are almost going into bankruptcy. They could see a very rapid rise in share prices. But we have to be cautious because we don’t know how long capital markets will stay frozen.’
Meanwhile, Moody’s in a January report maintained its negative outlook on the Singapore Reits sector due to a number of risks relating to refinancing, asset devaluation and a weaker operating environment. Moody’s has since downgraded three S-Reits, including Ascendas, and put a number of others on credit watch.
The firm says 11 rated S-Reits have some $3.7 billion in debt maturing this year and nearly half are CMBS (commercial mortgage backed securities). As the latter market is now moribund, the Reits will have to rely on bank lending. It points out that S-Reits also have a high level of encumbered assets, which limit their financial flexibility. For rated S-Reits, only 17 per cent of assets are unencumbered against 70 per cent among rated Australian Reits. ‘As S-Reits try to get new loans over the next 12 to 18 months, the relative share of secured debt is likely to increase through new charges over assets.’
The prospect of asset devaluation is yet another concern. S-Reits have enjoyed sharp rises in property values in the last couple of years. ‘This rise in property values masks an underlying high level of leverage, even though debt-to-asset metrics have remained well below 45 per cent. The ratio of debt to Ebitda, however, presents a different picture. Several rated S-Reits are close to or have already breached their trigger levels for downgrades.’
Moody’s reckons that a 15 per cent decline in S-Reits’ asset values would have the most impact on those trusts with high leverage and covenants tied to such measures.
CMT – BT
FairPrice sub-underwrites CapitaMall rights issue
It will take up to 27m rights units if issue is not fully subscribed
SINGAPORE’S largest supermarket chain NTUC FairPrice has agreed to spend as much as $22.1 million to buy up to 27 million rights units in CapitaMall Trust (CMT) if the issue is not fully subscribed.
The sub-underwriter arrangement comes under a standby purchase agreement. The 27 million units represent about 1.8 per cent of the rights units that have been offered by CMT and, if fully allocated to NTUC FairPrice, will raise its substantial stake from 6.35 per cent to 7.3 per cent. This also assumes that the groceries retailer fully subscribes for its own entitled rights shares.
As a sub-underwriter, NTUC FairPrice will receive a fee of $332,100, or 1.5 per cent of the price for the 27 million rights units.
The standby purchase agreement was inked between NTUC FairPrice and the joint lead managers and underwriters.
CMT said that the commission that NTUC FairPrice earns is part of the commission paid to the joint lead managers and underwriters – DBS and JPMorgan.
Early last month, CMT announced a nine-for-10 rights issue to raise $1.23 billion.
The 1.5 billion units are to be issued at 82 cents apiece. Most of the funds raised would be to repay borrowings, CMT had said.
NTUC FairPrice has been a substantial unitholder of CMT since the trust was listed in 2002.
The supermarket was set up by unionists in the 1970s to ‘help moderate the cost of living for low income households in Singapore’, its website said.
NTUC FairPrice’s group net profit after contributions for the year ended March 31, 2008, fell 23.8 per cent to $63.3 million from $83.1 million. This followed higher contributions to Singapore Labour Foundation.
Total cash in its coffers stood at $290 million as at end-March 2008, compared with $224 million a year earlier.
StarHill – Macquarie Research Equities
Event
Post the change in shareholding of Starhill Global REIT (SGREIT) and its management early this year, we revise our estimates in light of the weaker economic outlook in 2009. Our DCF valuation and target price is now S$0.58 (from S$1.56 pre the strategic review) and we maintain our Outperform recommendation.
Impact
Given the significant increase in new Orchard Road supply of 1.2m sq ft within this year (660k sq ft from ION Orchard, 250k sq ft from Orchard Central, and 294k sq ft from 313 sq ft at Orchard), we expect prime retail rents to fall ~10−13% this year. We have assumed that SGREIT’s retail occupancy falls to 88−90% from 96−99% by 2010.
As the bulk of the revenue from Ngee Ann City is secured under the Toshin master lease, the focus will be on maintaining performance of Wisma Atria basement retailers. The potential uplift in basement traffic once ION Orchard opens by June 2009 could boost sales and may provide some support for renewal rents.
Gearing is one of the lowest in the sector at 31% and the company has healthy interest cover of 4.3x. The majority of borrowings of S$671m is to be refinanced only in September 2010. As its S$380m CMBS was collateralised against its Orchard Road assets, which were valued at S$1.8bn as of December 2008, we see little refinancing risk given the low 20% LTV. Management is looking to refinance this at the end of 2009/early 2010.
The 2009 budget provided for 40% commercial property tax rebates, which SGREIT will pass through to tenants, though possibly not across the board. The group is considering rebating loyal tenants but details are still being deliberated at the board level.
Earnings revision
FY09−11 DPU estimates were lowered by 22−30% on lower retail rents and occupancy, as well as higher interest rates upon refinancing.
Price catalyst
12-month price target: S$0.58 based on a DCF methodology.
Catalyst: Potential uplift in basement traffic once ION Orchard opens in June 2009. Better than expected renewal rents.
Action and recommendation
Maintain Outperform. The stock has no refinancing requirements this year, is trading at a 70% discount to NAV/unit of S$1.44 and offers an attractive 14.6% FY09 yield. In the retail space, our preference is for CapitaMall Trust (CT SP, S$1.07, OP, TP: S$1.45) as we believe suburban retail rents will be more resilient than prime in a downturn.
AREIT – DBS
Defensive attributes!
We believe that current price for A-REIT reflects a drastic 40% vacancy levels in its MTB(Multi-Tenanted Buildings) portfolio, which in our view is unlikely to occur. Earnings visibility is boosted by the fact that c43% of A-REIT’s income is locked-in over the next 7.6 years, based on our estimates. At current price levels, investors are getting an attractive FY10-11 yield of 11% for a blue –chip backed reit with strong financial flexibility, good access to credit and an experienced management team which will steer the reit to emerge stronger post the current recession. Maintain BUY, TP S$1.51 based on DCF.
Emerging stronger post recapitalization. With fresh capital of S$408m in its coffers post its recapitalization efforts, A-REIT has emerged as one of the financially stronger reits with a low gearing of 33%(rising to c37% post inclusion of new development properties). Interest cover is still expected to remain high at 4.2x over FY10-11.
Earnings resilience expected. Even with a 15% increase in vacancies assumed in its Multi-tenanted Buildings (MTB) portfolio, A-REIT is expected to sustain yields of 11% over FY10-11F, supported by its portfolio of Sales & Leaseback (SLB) properties (43% of revenues) backed by an average 7.6 yrs.
40% vacancy levels assumed in stock price. Based on our estimates, the current stock price assumes a relatively drastic scenario of a 40% drop in occupancy levels in its MTB portfolio. We view that the likelihood of such a scenario occurring is unlikely given pro-active efforts from the reit in engaging tenants and government initiatives to help SMEs reduce business costs.
Maintain BUY, TP S$1.51. We maintain BUY on A-REIT, TP $1.51 maintained based on DCF. Barring any unforeseen circumstances, we believe that A-REIT should deliver a relatively stable FY10-11 yield of 11%.