SREIT – BT
Falling rents may take shine off S-Reits
SINGAPORE-LISTED real estate investment trusts, or S-Reits, are now finding favour with analysts.
UOB Kay Hian, for example, upgraded the S-Reit sector from market weight to overweight earlier this month due to the ‘overwhelmingly attractive’ yield spread. JPMorgan similarly said in a recent report that the Reit model is not broken. The research firm has ‘buy’ calls on seven S-Reits. Analysts from other research firms have also been recently issuing ‘buy’ calls on several Reits here.
This is quite a reversal from a year ago, when the S-Reit sector was considered unattractive. Many Reits were facing concerns about their ability to refinance debt amid the credit crunch. Acquisitions, which had been fuelling growth, were also becoming harder to come by.
But now, some of these Reits are seen to be sources of stable, visible and recurrent income in uncertain times. Yields are also at historic highs as stock prices continue their downtrend.
Analysts are now saying that debt refinancing will not be an issue for all Reits. For one, strong sponsors could act as lenders of last resort for Reits and prevent any fire sale of assets. Retail and industrial Reits are the most exposed to refinancing risk. So investors are encouraged to buy those Reits with strong sponsors and avoid certain sectors.
But the one thing that has been largely overlooked in most analyses is the impact of falling rents.
Rents will fall across most sectors – that much is certain. Office trusts, such as K-Reit Asia and CapitaCommercial Trust, will be among the first to be hit.
The massive upheaval in the banking system means that financial institutions are unlikely to continue with any expansion plans yet to be executed. Other businesses will have reduced access to bank credit and scale back expansion plans. With a reduced appetite for space and looming new office supply coming onstream in 2010, landlords are losing their bargaining power and rents will inevitably fall.
Kim Eng Research, for one, expects prime Grade A office rents to fall by up to 15 per cent by the end of 2009.
Rentals for retail Reits will also fall. Already, there are signs from retailers in Reit properties that they cannot afford the high rents being charged at the moment. Retail spot rents are being hit by slowing economic growth and falling visitor arrivals amid increasing supply. Goldman Sachs yesterday said that it expects retail rental rates to fall 15 per cent between now and 2010.
Reits here typically renew their leases on a revolving basis, with a certain fraction of tenants re-signing every year. So those tenants who signed three-year leases last year could be stuck forking out high rentals for another year or two. But tenants renewing their leases soon will ask for lower rents. In a couple of years – say, by 2010 – the bulk of a Reit’s tenants could be paying lower rents, leading to lower rental incomes for S-Reits. Their yields are not likely to look so attractive then.
Analysts are now beginning to factor falling rents into their calculations. Goldman Sachs yesterday downgraded K-Reit from ‘buy’ to ‘neutral’. ‘We have been positive on K-Reit, given its attractive pricing relative to book value and our expectation that organic growth for the next two years at least will still find good support from positive rental reversions,’ said the firm in a report. ‘However, we underestimated the focus by investors on the direction of spot rents and were not sufficiently conservative in terms of how far Singapore office rents could decline from their peak.’
However, even with falling rents factored in, S-Reits can be attractive, some maintain. After imposing worst-case operating assumptions for each property sub-segment, including a blowout of financing costs and accelerating the rental reversions to the entire portfolio, Daiwa Institute of Research’s David Lum still estimates that all S-Reits could deliver recurrent worst-case yields of at least 6 per cent per year.
But whether making ‘buy’ or ‘sell’ calls for S-Reits, it’s important to factor in the impact that falling rents will have on S-Reit rental incomes over the next 2-3 years. Refinancing is not the only concern.
AREIT – CIMB
Holding fort
• Two built-to-suit (BTS) projects completed and near 100% occupancy. Two of A-REIT’s BTS development projects have been completed and are nearly fully taken up. Indicative average gross rents suggest net yields of 9%, in line with our initial estimate.
• Changes in assumptions. As the global financial turmoil plays out, we expect slowing global and domestic economies to result in declining occupancy rates at AREIT’s multi-tenanted buildings. We have also cut our acquisition assumptions, and increase the cost of debt used in our model for FY10-11.
• Downgrading DPU forecasts; target price lowered to S$2.16 from S$2.60. Our FY09 DPU forecast remains unchanged while our FY10-11 forecasts have been lowered by 7-15%, reflecting our reduced earnings estimates. Following our adjustments, we have a new DDM-based target price of S$2.16 (discount 8.7%). This represents a total yield of 38.5% from a 9.2% forward yield and potential price upside of 29.3%. We remain convinced that with its spread-out debt maturity, optimal asset leverage, “A3“ credit rating, and strong sponsor in Ascendas, A-REIT will be able to access funds for refinancing. We continue to like its quality assets,
diversified tenant base and visible earnings. Maintain Outperform.
PLife – BT
Parkway Life Reit raises rentals in line with CPI
PARKWAY Life Reit’s manager says it has raised the rent at Singapore hospitals under its portfolio by some 6.25 per cent, in line with the rise of the consumer price index (CPI).
Parkway Trust Management, manager of the Reit, said the revised rates will be effective from Aug 23 this year to Aug 22 next.
The new rental rates are based on the CPI+1 per cent formula. ‘Based on the information obtained from the Singapore Department of Statistics, the CPI for the first year of the term has been agreed at 5.25 per cent,’ Parkway Trust Management said in a statement.
About 80 per cent of Parkway Life Reit’s revenues come from its Singapore hospitals, consisting of Mount Elizabeth Hospital, Gleneagles Hospital, East Shore Hospital as well as 40 medical suites in Mount Elizabeth Medical Centre and the Gleneagles Medical Centre.
‘With the Singapore hospital properties as the main contributor to the performance of PREIT, the long leases and annual rent review pegged to CPI+1 per cent ensure there is downside protection and that our unit holders continue to enjoy stable and sustainable returns,’ said Justine Wingrove, chief executive officer of Parkway Trust Management.
From Aug 23 last year, the day it was listed, to June 30 this year, total gross rental revenue from the Singapore hospital properties in its portfolio was $40.75 million.
Apart from the Singapore hospitals, Parkway Life Reit also owns nine nursing homes and a pharmaceutical products distributing and manufacturing facility, all in Japan. It continues to eye assets in China, India, Japan, Malaysia, Singapore, Australia and Thailand for acquisition.
On Sept 30, the Reit’s portfolio size stood at $1 billion. Shares of Parkway Life Reit ended down 2 cents at 90 cents yesterday.
FSL – BT
High interest costs force First Ship Lease to lower DPU
Lending banks invoke ‘market disruption clause’ in loan terms, allowing them to increase rates
COMPANIES are coming out to reveal the impact of the tight credit conditions on their operations and their bottom line. Provider of bareboat leasing services, First Ship Lease Trust (FSL Trust), yesterday said that higher interest cost levied by FSL Trust’s lending banks in the fourth quarter of 2008, has led the trust to revise the distribution per unit (DPU) guidance for the fourth quarter of this year (from 3.11 US cents) to 3.08 US cents.
Banks that lend to FSL Trust include German banks Bayerische Hypo-und Vereinsbank AG, Singapore and Landesbank Hessen-Thuringen Girozentrale, Singapore’s OCBC Bank, and Japanese lender Sumitomo Mitsui Banking Corporation, Singapore.
In a statement to the Singapore Exchange yesterday, FSL trust said: ‘Due to the turmoil in the global financial markets, the lenders have been unable to obtain interbank fundings at or close to the quoted London Interbank Offer Rate (Libor). As such, the Libor is no longer accurate in reflecting the lenders’ actual funding cost, which has increased significantly.’
Because of this, the lenders have invoked a ‘market disruption clause’ in the loan terms during the recent interest rate resets. This allows the lenders to levy higher interest rates on FSL Trust based on their actual cost of funds rather than on the lower three-month Libor, plus margin, FSL Trust said.
The incremental increase in interest expense for the fourth quarter is about US$680,000, the trust said. ‘The invocation of the market disruption clause by the lenders reflects the state of the current credit market and is not connected to the credit quality of FSL Trust,’ Cheong Chee Tham, senior vice-president and chief financial officer of FSL Trust Management, said in a statement.
‘The credit margins on our facilities at 100 basis points and 120 basis points remain unchanged,’ he added. ‘Unfortunately, the invocation of the market disruption clause has rendered our floating-to-fixed interest rate swaps ineffective as we are receiving three-month Libor under these swaps, whilst paying the higher cost of funds of the lenders during this interest period.’
And the invocation of the market disruption clause is likely to remain for at least three months. According to FSL trust, the clause will remain in effect until the next interest reset dates between mid-December and early January next year.
The manager of the trust is providing DPU guidance of 3.17 US cents for the first quarter of 2009 – provided the market disruption clause is not invoked for the next interest rate resets.
Other local shipping trusts said that their DPU has not been affected yet. Thomas Hansen, chief executive of Rickmers Maritime, told BT: ‘As Rickmers Maritime retains a portion of its distributable cashflow, its DPU would not be immediately impacted should any of its loans be subjected to market disruption clauses.’
He added that, in the past, circumstances that led to market disruption clauses being invoked have been ‘rare’. ‘However, in the current market turmoil, one must be prepared for it,’ he said.
Alvin Cheng, CEO of Pacific Shipping Trust Management said: ‘We would like to assure unitholders that PST has not received any formal notice on the market disruption clause from its lending banks and as such, there will be no impact on our distributions to unitholders for the third quarter 2008.’
He added: ‘We have enjoyed a very strong and supportive relationship with all our banks and the majority of our lenders have indicated that they have no plans to invoke such a clause at this point.’
For FSL Trust, the previously announced DPU guidance of 3.05 US cents for third quarter 2008 remains unchanged, while the first quarter 2009 DPU guidance of 3.17 US cents is 0.09 of a US cent higher than the revised fourth quarter 2008 DPU guidance of 3.08 US cents, it said.
Separately yesterday, FSL Trust also announced that American International Assurance Company has increased its stake in the trust from 8.995 per cent to 9.293 per cent.
The stake is held by the life insurance funds of American International Assurance Company Ltd, Singapore branch (AIA Singapore) and American International Assurance Company Ltd, Brunei branch (AIA Brunei) as well as the two Singapore-domiciled unit trusts and other investment funds managed by AIG Global Investment Corporation (Singapore) Ltd. An FSL spokesman said: ‘It is inappropriate for us to comment on a substantial stakeholder’s interest.’
In a third announcement yesterday, FSL Trust also said that it bought a 4,250 TEU containership, YM Enhancer, from a subsidiary of Taiwan-based and listed Yang Ming Marine Transport Corporation (YML). YM Enhancer has been concurrently leased back to YML for 12 years with a purchase option for YML at the end of the lease term.
The YM Enhancer was part of a three container vessel transaction that FSL Trust had entered into for a total amount of US$210 million.
The trust said that the acquisition of YM Enhancer is fully funded by FSL Trust’s recently announced US$65 million revolving credit facility and the existing US$200 million revolving credit facility. FSL Trust has hedged its interest rate risk through interest rate swaps to fix the interest rate until the maturity of the facilities.
The acquisition of YM Enhancer will be accretive to FSL Trust’s DPU from Q408 onwards, the trust said.
SREIT – OCBC
Credit market freeze raises refinancing concerns
Focusing on refinancing risk for now. Putting aside the defensiveness of S-REITs, we believe the focus is now on their credit health and refinancing risk. Spikes in USD 3M SIBOR rates since mid September signalled continuing stress in the credit market and with the tightness in the credit market not expected to abate any time soon, greater scrutiny has been placed on S-REITs’ gearing and debt refinancing over the next year. Some of the worst-performing REITs over the past month share some similar characteristics- like high proportion of current debt to total debt and relatively higher gearings than their peers.
Greater refinancing risk exposure for retail and industrial REITs. Based on data available, we estimate that S-REITs currently have a combined borrowing S$3.5b due for refinancing within a year. Retail and industrial REITs are the most exposed to refinancing risk. Retail REITs have S$1b of borrowings due for financing within a year, which is about 24.3% of their total borrowings. Industrial REITs have S$1.1b of borrowings due for refinancing within a year, which is about 32.7% of their total borrowings. Among the sectors, retail REITs also have the highest gearing of 39.2%.
Sponsors play a key role in tough times. With the freeze in credit market, REIT sponsors will have increasingly important roles to play as the pillar of funding support for their sponsored REITs. So far, we had seen Mapletree Investments, sponsor of MLT, taking up the excess units during its recent rights issue exercise; and Keppel Corp, a key shareholder of K-REIT, providing a new loan of S$391m to refinance the remaining bridging loan. In a scenario whereby banks freeze refinancing for REITs, we think strong sponsors could act as ‘lender of last resort’ for REITs and preventing any fire-sale of assets.
Refinancing is the key to re-rating. Under current market conditions, we think REITs with little or no near-term refinancing needs and backing from strong sponsors could outperform their peers. Risk-return matrix is turning attractive for the sector and we believe that re-rating should occur either when short-term refinancing needs have been addressed or when the credit market functions normally again. Our top picks for the S-REITs sector are Suntec REIT (Fair value S$1.53, FY08 yield 9.9%) and CapitaMall Trust (Fair value S$3.05, FY08 yield 7.9%).
Link – Table