AscottREIT – CIMB
Changing seasons
• Above expectations. 3Q08 results were in line with consensus estimates but above our expectations due to lower-than-forecast interest expense. DPU of 2.61cts grew 31.2% yoy to form 32% of our forecast of 8.16cts for FY08. Gross revenue of S$53.0m was up 25.3% yoy on double-digit revenue per available unit (REVPAU) growth in Singapore (+31%), Australia (+63%) and China (+55%). YTD DPU forms 87.4% of our full-year estimate, above expectations.
• Slower last quarter guided. While the going was good in 3Q08, management guides that the fourth quarter of the year is typically the weakest. Strong REVPAU growth in China from a surge in average daily rates during the Olympics Games is likely to normalise from now.
• Changes to assumptions. In line with our house view that the US financial crisis could result in a marked slowdown in Asia, we have cut our REVPAU forecasts (a function of occupancy and average daily rates) to reflect up to a 20% decline per annum in the next three years. Separately, we reduce our acquisition assumption for FY08 to S$84m (acquisition of Somerset St Georges Terrace in Perth) from S$364m as we do not expect any acquisitions in the current credit climate. We also lower our cost of debt assumption for ART to 3.5% from 4% for FY08.
• Downgrade to Underperform from Outperform; new target price of S$0.56 (from S$1.45). Following our adjustments, our FY08 DPU estimate increases by 5%, while our FY09-10 estimates decrease by 26-39%. We apply a higher discount rate of 10.5% (previously 8.5%) (risk free rate 5.0%, market equity premium 4.6%, beta of 1.2) to our DDM valuation to reflect increased risks for the short-stay tenures of the hospitality industry (average of eight months for ART’s portfolio) in this climate vs. other property segments (average 3-year leases). Our earnings reductions account for 80% of the change in our target price. Our new target is
S$0.56 (from S$1.45). Downgrade to Underperform in view of the weakening macroeconomic outlook.
PST – OCBC
Stronger balance sheet post offering
Acquisitions boost 3Q. Pacific Shipping Trust (PST) posted US$11.2m in revenue for 3Q08, up almost 12% QoQ due to the first full quarter contribution from new vessel Kota Naga and 14 days of time charter income from PST’s latest vessel CSAV Laja. Its results were generally in line with our estimates, except for higher than expected time charter expenses due to start-up costs. Income available for distribution rose to US$4.3m, up 3.6% QoQ. The trust will distribute almost 1.10 US cents to unitholders on pre-preferential offering (PO) units.
PO completed in 3Q. PST raised about US$92.3m in gross proceeds from its PO. Sponsor Pacific International Lines (PIL) had agreed to subscribe for both its pro-rated shares as well as any unsubscribed units. Approximately 57.2% of the new units were unsubscribed, and PIL has subsequently seen its stake in PST increase from 34.64% to 59.2% after the partial equity “bail-out”. Charters to PIL, a top 20 liner company1, account for about 70% of PST’s annual revenue. In essence, the risk quantum for PST has become a proxy for the risk of the parent company.
Stronger balance sheet post PO. While we do not like the smaller free float, the benefits of having a strong sponsor and a stronger balance sheet are clearly advantageous in the current climate. The PO proceeds are being used to finance and refinance the four new vessels costing US$222.2m slated for acquisition in 2008: Kota Nabil (delivered in March); Kota Naga (May); CSAV Laja (mid-September); and CSAV Lauca (expected in mid- November). Fully debt-funded, the 2008 acquisitions would have bumped PST’s debt-to-equity up to 2.1x by year end. We are now projecting a debt-to-equity level of 0.9x at year end with no near-term debt expiry. PST has a conservative loan repayment structure (which we like) and no capital commitments post 2008. We also like PST as it is the only Singaporelisted shipping trust without a loan-to-market value covenant on its loan documents – so there is no risk of a technical default because of falling asset values.
Downgrade to HOLD. For the reasons discussed above, the risks on PST are potentially lower than its peers – but these still exist. Our focus is on the business risk stemming from the looming global recession and difficult credit conditions: a charter party defaults or charter rate renegotiation and consequent asset devaluation. A shock on the revenue side is especially of concern as PST utilizes about 40% of its cash income on debt repayment. Downgrade to HOLD with 24.5 US cents fair value.
MI-REIT – BT
Three property, infrastructure funds allay fears
Two MacarthurCook funds and one Macquarie fund update financial positions
THREE property and infrastructure funds yesterday issued statements in a bid to allay market concerns about tighter credit, and to provide updates on their financial positions.
Facing a possible rating downgrade by Moody’s Investors Service, MacarthurCook Industrial Reit (MI-Reit) reassured investors that it is ‘advanced in negotiations’ to refinance a $220 million facility maturing in April 2009. Discussions should be finalised in January next year.
Moody’s said on Tuesday that MI-Reit, with a Baa3 corporate family rating, ‘faces significant refinancing risks’ as this amount of debt is not covered by available committed facilities.
Moody’s review also reflected concerns over MI-Reit’s asset and tenant concentration, which could be ‘much greater…than is consistent with a Baa3 rating.’
To this, MI-Reit said that its income is protected by a long lease expiry profile. For instance, only 3.6 per cent of the trust’s rental income will be subject to lease expiry in FY2010.
Head lease arrangements and a diversified portfolio of quality tenants also contribute to income security, it added. Around 36 per cent of rental income comes from manufacturing facilities which ‘tend to have higher tenant retention rates in an economic downturn’.
MI-Reit ended trading yesterday with an unchanged unit price of 33 cents.
Another fund, the MacarthurCook Property Securities Fund, also updated investors on its operations yesterday.
‘While interest rates around the world are now trending down, the ability to source competitively priced debt, combined with the anticipated slowing in economic growth, continues to be a concern for the market,’ said Richard Haddock, chairman of fund parent MacarthurCook Fund Management Ltd.
A priority is to further reduce debt and prudently manage its underlying portfolios, said the MacarthurCook Property Securities Fund. One strategy is to cut its weightings on unlisted property and use those funds to reduce debt.
A third fund, the Macquarie International Infrastructure Fund Limited (MIIF), said yesterday that it has no bilateral dealings with known troubled financial institutions.
According to the fund, borrowings held by its underlying businesses have remaining maturities of three to 14 years, and most of its interest exposures are also hedged for the medium to long term.
MIIF also said that its businesses are performing strongly in line with management’s expectations. It therefore expects income this year to be comparable with that received last year.
The unit price for MIIF rose 2.5 cents yesterday to close at 37.5 cents.
AscottREIT – BT
Ascott Reit’s DPU up 31% in Q3
ASCOTT Residence Trust (ART) achieved a unitholders’ distribution of $15.86 million for the third quarter ended Sept 30, a 32 per cent increase year-on-year. Distribution per unit (DPU) for the quarter is 2.61 cents, a 31 per cent increase from a year earlier.
Lim Jit Poh, chairman of Reit manager Ascott Residence Trust Management Ltd (ARTML), said: ‘Ascott Reit posted a strong operating performance. Revenue increased $10.7 million. Sixty-six per cent was attributable to organic growth across the portfolio. The other 34 per cent was contributed by newly acquired properties subsequent to Q3 2007.’
ARTML chief executive Chong Kee Hiong said ART continued to benefit from geographic diversification and its extended-stay business model. Its properties in Beijing enjoyed strong growth in average daily rates during the Olympic Games. And its Australian and Singapore properties also performed well.
As at Sept 30, ART’s gearing was 34.9 per cent – well within the 60 per cent gearing limit allowable under MAS’s property fund guidelines.
The trust’s average cost of debt was 3.3 per cent, and its interest cover a healthy 5.1 times. ARTML said that more than 70 per cent of ART’s debt is on a fixed-rate basis, as it has consistently taken a conservative approach to capital management.
Some $84.6 million or 15 per cent of total debt is due for refinancing in the current Q4. The trust said it has sufficient cash and bank facilities to meet these refinancing needs. More than 80 per cent of total debt is not due for refinancing until 2011 and beyond.
‘We will continue to focus on active management of our properties to maximise asset yields to deliver stable returns to unitholders, despite the difficult economic conditions,’ Mr Lim said.
PST – BT
Pacific Ship Trust’s revenue up 29%, DPU flat in Q3
PACIFIC Ship Trust (PST) maintained a steady course in the third quarter, lifting gross revenue 29 per cent to US$11.2 million from US$8.7 million but keeping distribution per unit (DPU) flat at 1.0953 US cents.
The higher gross revenue came on a full quarter’s contribution from the vessel Kota Naga, which was delivered and commenced charter on May 28, and 14 days’ time charter income from the vessel CSAV Laja, which commenced charter on Sept 16.
Net profit after tax rose to US$3.2 million from US$589,000, mainly due to higher revenue and a reduction in fair-value losses on interest rate swaps.
Other expenses – professional and regulatory fees, vessel tonnage tax, advertising and administrative costs – rose US$300,000, related mainly to the acquisition and charter of four new vessels. Finance expenses increased from US$6.4 million to US$7.5 million.
Since the first quarter of FY2008, PST has retained 10 per cent of distributable income for use as working capital. As such, Q3 distributable income was US$3.71 million, almost unchanged from US$3.67 million previously.
DPU for the nine months ended Sept 30 was 3.1553 US cents, slightly lower than 3.19 US cents previously, as distributable income eased to US$10.7 million from US$10.8 million.
‘PST enjoyed a strong Q3 performance despite volatile market conditions,’ said Alvin Cheng, CEO of trustee-manager PST Management. ‘We will endeavour to pursue sustainable returns for unitholders by maintaining a prudent risk management and yield accretive growth strategy.’
PST units closed unchanged at 24.5 US cents yesterday.