CRCT – JPMorgan

9 for ’09: China retail property looks like the place to be

• Refocus on property fundamentals: CRCT has de-rated more than 40% over the last 3 months, reflecting the stock’s relatively small market cap and illiquidity, and pricing in what we believe are extreme pessimistic assumptions. We think the era of virtual cycle fueled by cheap funding has ended, and we expect the market will start to re-focus on property fundamentals. In our view, CRCT will stand out given high quality management, resilient cash flow and strong organic growth. We believe the trust offers one of the best and purest proxies for the exposure to China retail and retail property sectors, and we add CRCT to our Asia Analyst’s Focus List.

• REIT model is not broken despite higher cost of capital: Part of CRCT’s share price underperformance could be attributed to concern about the REIT business model in a high-cost-of-capital environment. We believe, however, that CRCT will be able to withstand the current situation given a much higher asset yield and rental growth in China. We expect, on a normalized basis, the trust to acquire assets at 6-8% net yield, funded with capital cost about 4-6%, and to generate 3-4% longterm growth. In our view, it is also in CapitaLand’s interest to ensure CRCT maintains a competitive cost of capital.

• Private-equity-like return: Our Dec-09 price target is S$1.55/share, based on DDM. We estimate that even on an ungeared basis, CRCT’s portfolio offers a private-equity-liked five-year IRR of 20% (assuming exit cap rate of 7%). Furthermore, the long-term dual listing or listing restructuring potential should help to ensure the long-term valuation of the underlying properties.

• We reiterate our OW rating on CRCT. Key risks to our call include: 1) a significant decrease in retail rents or withdrawal of tenants due to a severe economic downturn in China; 2) a higher-than-expected cost of borrowings upon refinancing.

October 8, 2008 CRCT No Comments »

HWT – DBS

Growth story under the scanner

Story: Growth seems to be at a premium now, with access to funds drying up. As credit markets tighten up worldwide, Hyflux Water Trust (“HWT”) may find the going getting tougher to finance its potential acquisitions.

Point: HWT has been negotiating the debt funding required to finance the acquisition of the first tranche of nine assets from sponsor Hyflux but credit conditions have deteriorated since the initial announcement and spreads have widened to a level, which may render the acquisition
of certain assets unviable. As a result, HWT may choose to acquire only a part of the portfolio on offer, if the terms of financing are more favourable in that case. Thus, there is considerable uncertainty in the timing and quantum of the acquisition-driven growth story for HWT.

Relevance: As such, we see possible further downside to the share price, as current spread of HWT’s dividend yield over 3m USD LIBOR at 4.9% is lower than YTD peak of 6.2%. Moreover, compared to other SGX-listed business trusts, including closest peer CitySpring, HWT is trading at a much lower yield. Thus, we reduce our target price for HWT to S$0.53, based on blended valuation methodology – DDM and dividend yield valuation – to better reflect the importance of target yield for investors in this asset class, especially in the absence of a credible growth story amidst current credit market uncertainties. In addition, we cut our FY08 and FY09 DPU estimates by 3% and 13%, respectively, to factor in possible lower utilisation in existing assets and downgrade our recommendation on the counter to HOLD.

October 7, 2008 HWT No Comments »

Singapore REITS – UOB Kay Hian
Executive Summary

Singapore REITs have suffered the brunt of the stock market correction. Our index of 14 REITs corrected 16.9% in 1H08 and 27.2% in 3Q08 and underperformed FSSTI, which corrected 14.9% in 1H08 and 19.9% in 3Q08. The sector was affected by tightening credit markets and a steepening yield curve, which have resulted in higher costs of borrowings. Indiscriminate selling of REITs linked to embattled Macquarie Group and American International Group has also brought valuations to depressed levels.

Yield spread at historic high. Singapore REITs provide a distribution yield of 8.8%, which is almost two standard deviations above the mean of 6.0%. Yield spread between Singapore REITs and 10-year government bond has reached a historic high of 5.5%. On a weighted average basis, Singapore REITs are trading at a steep 39% discount to NAV. Market pessimism presents an exceptional value proposition.

Threat from inflation has eased. The fear of runaway inflation has subsided with the correction in the prices of crude oil and other commodities. Yield for 10-year government bond therefore corrected from a high of 3.9% in Jun 08 to 2.9% in mid-Sep 08. Although bond yield has rebounded to 3.2% recently, the upward momentum is not sustainable as further increases in commodity prices are expected to be mild.

REITs provide stable, visible and recurrent income. In addition, catalysts for recovery include the following: a) normalisation in credit markets as systemic risks subside over time, and b) eventual reflation in Asian economies due to fiscal stimuli and growth in domestic consumption. Ascendas REIT and Frasers Centrepoint Trust are well positioned to weather the credit crisis due to their A-rated credit standing and support from government-linked sponsors Ascendas and Fraser & Neave. Suntec REIT has refinanced its short-term borrowings and does not have a significant need for refinancing till Dec 09.

We have upgraded Singapore REITs from MARKET WEIGHT to OVERWEIGHT due to the overwhelmingly attractive yield spread. Our top picks are Ascendas REIT, CapitaCommercial Trust, Frasers Centrepoint Trust and Suntec REIT.

Retail REITs: Resilient and defensive. Retail REITs benefit from healthy job creation and population growth in Singapore. We like suburban malls that cater to non-discretionary consumer spending by the population base in the HDB heartland and are conveniently located next to MRT stations. They provide defensive shelter from the increase in supply at Orchard Road and stability in occupancy. BUY Frasers Centrepoint Trust for its focus on suburban malls and ready pipeline of acquisitions. BUY Suntec REIT for improved connectivity to Suntec City when the new Circle Line is ready in 2010 and positive rental reversion for Suntec Office Towers.

Industrial REITs: Bucking the trend. Industrial REITs provide defensive strength with a weighted average lease term to expiry of 5.5 years for Ascendas REIT and 6.4 years for Cambridge Industrial Trust. They are protected by security deposits for long-term leases amounting to 10.4 months for Ascendas REIT and 17.0 months for Cambridge Industrial Trust. Industrial REITs also benefit from positive rental reversion as many companies are relocating non client-facing backroom, data centre and other support functions to suburban locations. BUY Ascendas REIT as business & science parks and hi-tech industrial buildings account for 52% of its portfolio.

Office REITs: Correction underway. Office rentals peaked in 2Q08 as the volume of leasing transactions driven by expansion fell. Negative dynamics will prevail with impending supply coming on stream starting 2010, which is substantially concentrated within the CBD. This is exacerbated by the government's intention to decentralise commercial activities and additional supply coming from transitional office sites. However, our stress test indicates that current share prices for office REITs have imputed a drastic 70% collapse in rentals to below S$5psf pm for Grade A office space in Raffles Place. While we agree that the outlook for office REITs is lacklustre, we find CapitaCommercial Trust oversold.

October 7, 2008 REIT No Comments »

PLife – DBS

7 more nursing homes in Japan

Story: ParkwayLife REIT (PREIT) has entered into a sales & purchase agreement to acquire another 7 nursing homes in Japan for a total consideration of JPY7.9bn (S$105.7m).

Point: The average net operating yield of the properties is 6.9%. Each of the nursing homes has a long term lease agreement with an operator and the average unexpired lease term of the properties is 17 years. There is also a rental guarantee provided by vendor Kenedix Inc for a period of 7 years and 3 months, capped at 5% of the purchase price, in event of any defaults and/or late payments by the tenants. The acquisition is DPU yield accretive and will be funded by a 3-year JPY fixed rate loan.

Relevance: In our view, we feel that this is positive for the REIT as it is DPU yield accretive, further diversifies its exposure to overseas markets and maximizes its gearing head- room. In addition, given the aging population and the structure of the deal (with back-up operator, rental guarantee and long leases), downside risks are minimized, in our opinion. With the latest acquisitions, our FY09F DPU forecast is raised to 7.38 cents, from 7.17 cents. At current levels, PREIT offers a net yield of 7.0% and 7.6% for FY08F and FY09F respectively.

Maintain Buy; TP: S$1.31. Our DCF-backed TP is adjusted down slightly to S$1.31 (from S$1.35) as we factor in a higher adjusted beta in lieu of recent volatility (WACC of 6.3% and terminal growth of 1%). The counter is now trading at about 30% below its NAV. Given the defensive nature of its assets and revenue stream, particularly its Singapore hospital (downside protected by 1%+CPI), we believe it is a good opportunity to accumulate the shares.

October 2, 2008 PLife No Comments »

PLife – CIMB

Acquires seven nursing homes in Japan

S$105.7m worth of acquisitions. Parkway Life REIT announced last night that it has completed the acquisition of seven nursing homes in Japan for S$105.7m from Yugem Kaisha KSLC, a wholly-owned subsidiary of Kenedix Inc. The net initial yield of the portfolio is 6.9%, with individual yields ranging from 6.7% to 7.2%. All the assets have freehold tenures.

Long lease structures of 17 years. All seven properties have average lease terms of 17 years with an operator, with five having back-up operator arrangements. The average occupancy level of the portfolio is 94%.

Rental guarantee from vendor. Kenedix Inc., a Japanese real estate asset manager with S$11.3bn of assets under management, has granted PLife a rental guarantee for seven years and three months, which would cover any deficit in revenue from any of the seven properties, capped at 5% of the purchase price. This is a provision separate from the long-term lease agreements with the nursing-home operators. Management assures that the provision was given as an additional safety precaution and there has been no default payment in the last three years. There are also market rent reviews at 2-5-year intervals specified in the leases.

100% debt funding; current debt to be refinanced on 3-year tenure. PLife will be financing the acquisition with debt, drawn temporarily from a short-term facility. This raises its total debt to about S$200m (inclusive of S$94m short-term debt as at 2Q08). However, management will be refinancing the S$200m debt with a 3-year bilateral loan within one month. Half of the loan has been committed while the other half has received in-principle approval pending documentation. All-in cost of debt for the 3-year facility is 3%, below our assumption of 3.2% for FY08. The debt will be fixed at this level over its full tenure. Borrowing currency is the Japanese yen, providing a natural hedge.

Asset portfolio exceeds S$1bn; gearing rises to 19.7%. With the completion of this portfolio, PLife’s assets increase from S$902m to S$1bn. Full funding with debt will increase its asset leverage from 10.2% to 19.7% after the acquisition. This is still significantly lower than the optimal level of 45% and regulatory limit of 60%.

Growth of Japanese nursing home industry. Japan has one of the fastest aging populations in the world. The company forecasts that the number of people over 65 years of age is expected to reach 34.7m in 2015, or 26% of Japan’s population, up from 18% in 2002. According to management, the Japanese nursing-care industry has blossomed since the implementation of the National Nursing Care Insurance System in 2000. Under this system, the government subsidises about 50% of the nursing-care expenses of the elderly. In a nursing home, a cash deposit or bond equivalent to five years’ payment of fees (excluding nursing-care fees) is typically collected from residents on admission. This bond may vary with the age of the resident and the type of accommodation provided. Subsidies from the government and the high level of cash deposits collected underpin the cash flows of nursing homes, while an aging population should ensure the relative resilience of the nursing-home industry in Japan.

September 30, 2008 PLife No Comments »