Suntec – DMG
Lehman Issue a Non-Issue
Lehman occupies minimal amount of office space. In the wake of Lehman Brothers’ (Lehman) debacle and subsequent Chapter 11 bankruptcy filing, its Singapore operations has also ceased after SGX suspended it from taking new securities and derivatives positions. As such, it is inevitable that we examine the implications for its present office landlord – Suntec REIT (SRT). We note that Lehman presently takes up approximately 40,000 sf of office space in Suntec City Office Tower Five. This represents a mere 3.1% of SRT’s total Suntec City Offices portfolio of 1.29m sf, and an even smaller 1.4% of its entire portfolio of 2.90m sf. Although Lehman employees have not vacated and talks over any possible settlement have yet to commence, we predict a minimal 0.9% dip in FY09 DPU in the event of a termination by end-Sep 08 and a replacement tenant cannot be found within the next six months. As such, exposure to the Lehman collapse is not a major issue. In any case, Lehman is legally obligated to fulfil its remaining lease tenure (renewed early last year) if termination occurs.
Staying on course for positive rental reversions. As Lehman’s lease agreement was only renewed in early-07 at the prevailing market rents then, SRT does stand to benefit from positive rental reversions if a new tenant were to step in. Most importantly, the organic drivers underlying Suntec City Office Towers remain intact, with a considerable 42.7% of the leases due in FY09 still paying at significantly below market rents, coupled with high occupancy levels. Other banking & financial services tenants within SRT’s portfolio, such as Deutsche Bank and UBS (Suntec City Office Towers), as well as Deutsche Bank, Credit Suisse, UBS, ABN Amro and Barclays (One Raffles Quay) have either remained relatively unscathed or managed to remain solvent.
Medium-term office story still stands. The recent signing of new leases at Marina Bay Financial Centre Phase 1, as well as new leases and renewals at Capital Tower and One George Street, provide positive reminders of Singapore’s growing position as a regional financial hub. At a time when the global investment climate is severely weakened, this implies that demand for office space remains and that the medium-term office story is still thriving.
Maintain BUY at S$1.87. Of late, office landlords, particularly office REITs, have been absorbing a sizable amount of flak on the back of global macroeconomic uncertainty, as well as expected falls in occupancy levels, dips in capital values and rental rates. The creeping up of unemployment rate (from 4Q07’s 1.7% to 2Q08’s 2.3%) has not contributed positively. Given the historically low P/B levels of office REITs at 0.5x currently, share prices appear to have factored in these negativities. Although we are not expecting the weakened sentiments to cool off anytime soon, we continue to believe that SRT will be able to grow organically. On a YTD comparison, it has also outperformed the other office REITs. Since the Street first got wind of Lehman’s highly possible collapse, SRT has slipped 15.0%. We believe any remaining overhang should evaporate with SRT’s limited exposure to Lehman. At present levels, the stock is trading at a FY08-09 yield of 7.2 – 8.7%, implying a 430 – 580 bps premium over the 10-year SGS bond yield of 2.9%. Maintain BUY at S$1.87.
PST – BT
PST takes delivery of its biggest vessel so far
PACIFIC Shipping Trust (PST) yesterday took delivery of its biggest vessel to date – the 4,250-TEU (twenty-foot equivalent unit) CSAV Laja, increasing its slot capacity by 24 per cent to 21,714 TEUs.
It also announced that subscription for its preferential offering to raise about US$92.3 million begins today.
The move is aimed at positioning it for yield-accretive acquisitions.
The 11th vessel begins its five-year time charter to Compania Sud Americana de Vapores SA today following PST’s acquisition of the vessel from Pacific International Lines unit Tranpac Holdings Inc, Panama, which at the same time raises its total indicative asset value to US$435 million.
‘Apart from the increased revenue, the entry of this newbuilding is significant because it further diversifies PST’s vessel sizes and charterers. CSAV is one of the oldest shipping companies in the world and the largest in Latin America and we look forward to increasing our portfolio of long-term charters to such reputable industry players,’ said Alvin Cheng, CEO of PST Management Pte Ltd, the trustee-manager.
In November, PST is expected to take delivery of its 12th vessel, bringing total slot capacity to 25,964 TEUs, with a total indicative asset value of US$510 million.
Mr Cheng added: ‘We have started to see the correction of vessel prices, which we had earlier anticipated – this will provide us with possible opportunities to improve our returns by seeking out yield-accretive acquisitions at the right price. This is in line with our diligently managed growth plans for PST and we aim to continue generating attractive returns to unitholders.’
PST’s preferential offering will strengthen its capital structure and provide it with an increased borrowing capacity, thus enhancing PST’s financial flexibility to pursue medium-term yield-accretive growth opportunities, Mr Cheng said.
Singapore-registered unitholders will be able to subscribe for their entitlements from today to Sept 24.
The offer is on the basis of three new units at 36.5 US cents each for every four existing units held.
‘We look forward to the participation from each and every Singapore-registered unitholder of PST as the preferential offering will lower our debt levels and create room to raise new investment funding to react swiftly to acquisition opportunities when they arise,’ said Mr Cheng.
PST shares closed half a US cent down at 35.5 US cents yesterday.
Cambridge – CIMB
Steady income generator
• Assets have nearly doubled in size since listing. Listed on the SGX on 25 Jul 06, Cambridge Industrial Trust (CIT) is a real estate investment trust (REIT) that invests in income-producing industrial assets. Its assets have nearly doubled from S$519m at the time of listing to S$967m as at 30 Jun 08. Properties under management also increased from 27 to 43. All of CIT’s assets are located in Singapore. However, management has a mandate to acquire industrial properties in Asia.
• Visible earnings from long leases with built-in rent increases. Long lease tenures averaging 6.4 years, built-in rent increases, controlled property expenses as well as resilient demand from the manufacturing sector add visibility to CIT’s earnings in the medium term.
• Full shariah compliance positive for future funding. CIT is in the midst of conversion to full shariah compliance, which will enable it to cultivate a new investor pool when it raises capital or issues debt.
• Initiate with Outperform rating and target price of S$0.90. Using DDM valuation, we initiate coverage with a target price of S$0.90 (discount rate 8.0%, terminal growth 2%). This offers a total prospective return of 72% from potential price upside of 61% and a forward yield of 11%. Its current price of S$0.56 is at an all-time low since listing and a 29% discount to its NAV of S$0.79, representing an attractive entry point in view of its visible earnings and attractive dividend yields.
Link – Table
FSL – BT
FSLT’s bold move to woo US investors
WITH shipping trusts caught between the devil and the deep blue sea trying to boost volume while fighting investor ignorance, First Ship Lease Trust (FSLT) has embarked on a brave overseas foray to quote American Depository Receipts (ADRs) on the US-based International OTCQX trading platform in a bid to raise interest and unit price.
It’s a bold move and – should it prove successful – one that may be emulated by the other two shipping trusts wallowing on the Singapore Exchange (SGX). The theory is that exposure to the more mature US market will improve liquidity and expand the base of unitholders over the long term, according to trustee-manager FSL Trust Management’s president and CEO Philip Clausius.
FSLT certainly needs help. The trust has never regained its IPO price of 98 US cents or about $1.50 at the prevailing exchange rate. It hit a low of $1 in January and is now languishing around $1.10. There is a large dividend yield gap – that is, its units are underpriced – between FSLT (13-14 per cent yield) and US peers such as Seaspan Corp and Danaos Corp (7-8 per cent yield), which the trust hopes to close as more investors take up its units.
‘US investors tend to have a better understanding of shipping stocks due to a critical mass of shipping companies listed there,’ UOB KayHian Research said in a note last week.
While maintaining that FSLT has no regrets about choosing to list on SGX, senior vice-president and CFO Cheong Chee Tham hopes to appeal to this better knowledge of US investors through the ADR quotation.
He is keen to reach out especially to institutional and boutique investors who, due to their mandates, may not have been able to invest directly in FSLT units on SGX. ‘By doing this ADR programme, we are exposing the company to this particular group of investors or others who may not have heard of us,’ he said.
Both analysts and FSLT stress that it’s important to get a critical mass of investors interested in shipping trusts for the sector to take off. And Mr Cheong certainly hopes the US move will jumpstart this process. It is hoped that with greater coverage, more shipping trusts will choose to list on SGX.
But this may be too simplistic. Both Seaspan and Danaos have market capitalisations of more than US$1 billion, which dwarfs FSLT’s $550 million. And whether notoriously parochial US investors take notice of a small Asian-listed shipping trust is debatable.
Asian investors have not been impressed so far. ‘Liquidity for the trusts is not there. If it’s a down-cycle, why do you want to be in shipping and if up-cycle, then you should be in something more leveraged,’ said an analyst.
The few research houses that cover the trust, such as DBS Research and UOB KayHian, have ‘buy’ calls with target prices of $1.65 and $1.61 respectively. But others point to the chicken-and-egg factors of lack of choice and liquidity for staying away. These were the same reasons given for the laggard performance of real estate investment trusts when they were first listed back in 2002. Yet over the past six years or so, they have taken off and are seen as a viable investment option.
Perhaps shipping trusts will slowly gain popularity in the same way. But more may need to be done to nudge the process along. Actively reaching out to foreign companies may be one idea. For example, Lloyd’s List reported that Indian shipping companies will need as much as US$18 billion by 2012 for fleet replacement and will need to find ways to raise cash. These companies could be encouraged to come here to set up shipping trusts to raise funds.
Shipping Trusts – OCBC
Ships and sustainability
Priced or mispriced? The three Singapore-listed shipping trusts – Pacific Shipping Trust (PST), Rickmers Maritime (RMT) and First Ship Lease Trust (FSLT) – are currently trading at very high distribution yields of about 12- 15%, or a staggering 10,000 basis point spread over the 10 yr Singapore government bond yield. While this particular asset class is new to Singapore, similar structures exist elsewhere. The trusts have historically traded at a 300-500 basis point premium over their US peers. While the headline yield is attractive, it is not a free lunch (in our view) as it comes hand in hand with some significant debt and equity requirements.
Business model relies on external financing… Vessels decline in value as they age and the shipping trusts address their need for fleet renewal either indirectly or directly by using their cash earnings to: (1) pay out the depreciated asset value as fair compensation for the loss in equity value (which increases the headline yield number but is not income), (2) partially repay debt and preserve net asset value or (3) retain and use towards buying new vessels. Debt-funded assets are also depreciating and the principal value must eventually be repaid (or refinanced). On top of this, all three trusts have ambitious growth plans. The cash earnings generated and retained by the trusts is not enough to fund these growth plans internally.
…in an uncertain world. Keeping in mind an aggressive payout policy (of varying degrees) and aggressive growth plans (across the board); we believe that the shipping trust model relies extensively on external financing. We believe that in today’s market conditions, there is limited investor (or even lender) appetite for structures that are reliant on debt and equity expansion to sustain their business and growth model. The weakening outlook for the shipping industry is a further complication. Based on the risk-reward quantum in play today, we downgrade our rating on the shipping trust sector from Overweight to NEUTRAL.
We peg our fair value to ‘floor value’. In the current climate, we prefer to continue to value the shipping trusts on a discounted free cash flow to equity basis. On this ‘floor value’ basis, we have a BUY rating on PST [fair value: US$0.41], a BUY on RMT [fair value: S$1.22], and a HOLD recommendation for FSLT [fair value: S$1.20]. Our top pick is RMT because of its relatively less aggressive payout policy and the credit facilities it already has in place to partially support its growth plans.