FSL – OCBC
Quasi-debt instrument with attractive yields
Basic attraction is distribution yield. First Ship Lease Trust (FSLT) is a listed shipping trust. Its shipping income is tax-exempt and distributions are also tax-exempt for all investors. Based on its existing assets, FSLT offers an annual distribution of 10.332 US cents for FY08. With its current price at S$1.13, this amounts to a whopping yield of 12.9%. In comparison, the Singapore 10-yr government bond yields 2.3%.
Distribution payout not just return on asset. Part of FSLT’s high distribution payout consists of a return on the unit-holders’ invested capital. Vessels are depreciating assets and FSLT fully pays this amount out every year. So while the payout is high, the value of assets has declined correspondingly. FSLT also pays out the depreciation charge (or part of the principal) on its leveraged assets. This is similar to the return of unitholders’ capital, except that FSLT is paying out the debt principal to unit-holders. This boosts payout in the earlier years, but ultimately unitholders have to repay debtors in the later years.
Acquisition plans. FSLT is targeting US$300m worth of acquisitions every year. It is aiming for an average asset yield of 10.5% and a target IRR of about 7.5%. There is no regulatory ceiling on its gearing, and FSLT’s longterm debt-to-equity target is 1x. Since listing, it has made about US$158m worth of debt-funded and DPU accretive acquisitions. We believe that once FSLT hits the 1x debt-to-equity target, it would look to raise new equity – which based on its yearly US$300m target could be as early as 2009.
Initiate coverage with BUY rating. Our DCF valuation only looks at the value of the unitholders’ stake in the trust – that is, the remaining value after repayment of debts. Our valuation assumes another US$330m worth of acquisitions over FY08-09 based on debt-to-equity of 1x. Using above, our DCF value is S$1.25, or a 10.6% upside from the current price. This assumes that the investor sticks with FSLT until the end, when all debts would have to be repaid (we estimated 2015 but FSLT plans to refinance as and when its facilities mature). However, for the next 1-2 years, we acknowledge that FSLT offers much higher returns based on the estimated DPU from its existing assets and its intention to continue making various DPU accretive acquisitions. We are initiating coverage on FSLT with a BUY rating.
Budget 2008
From Budget 2008. The Key initiatives for REIT and Trust is as followed:
- Allow listed real estate investment trusts (REIT) and registered business trusts to claim input GST on business expenses
MI-REIT – Phillip
3QFY08
MacarthurCook Industrial REIT (MIREIT) reported financial results for 3QFY08. MIREIT reported gross revenue of S$8.4 million and net property income of S$6.3 million. Distributable income amounts $5 million, translating to a DPU of 1.92 cents for the quarter and an annualised DPU of 7.62 cents.
Acquisitions during the quarter contributed to top-line growth. Gross rental revenue increased 14.5% compared to the last quarter and net property income rose 6.5%. However net income dropped 7.1% mainly due to higher management fee, borrowing cost and trust expense associated with an enlarged portfolio size. DPU for the quarter increased from 1.86 cents in 2QFY08 to 1.92 cents in 3QFY08.
MIREIT expanded its portfolio from 12 properties at IPO to 19 properties currently, with a further 3 in progress of completion. Asset size grew from S$316.2 million to S$512.6 million. NAV increased from $1.13 to $1.30. Current gearing stands at 34.4%. We note that gearing will increase to 40% upon completion of in-progress acquisitions.
Capital management. Including the completed acquisitions, MIREIT has debt of $176 million, which has an expected maturity in April 2009. MIREIT has in place derivative instruments to manage its borrowing costs.
If the base rate continues to stay low, we estimate that the effective interest rate will be 2.5%, however we have assumed a cost of debt of 3.5% in our valuation model to stay conservative.
Valuation and recommendations. MIREIT has no short term debt concern and the initial low gearing has given it the capability to expand with debt funding. Although it has delayed a capital raising exercise recently, there is no short term refinancing issue and gearing is within management’s target range of 40%-45%. We retain our revenue estimates at this point with a FY08F DPU of 7.76 cents, which would translate to a yield of 8.21%. We have raised the beta and risk premium used in our DCF model to account for investor’s lower risk appetite and the volatile market condition. Fair value derived from our model is lowered subsequently from $1.43 to $1.13. Maintain buy.
MMP – BT
Macquarie may sell Reit stake after review
MACQUARIE MEAG Prime Reit is expected to undergo a strategic review soon that may result in the Macquarie group selling its 26 per cent stake in the Singapore-listed Reit, industry sources said.
The move is believed to be prompted by the trust trading at a steep discount to its net asset value (NAV). MMP last traded at $1.06, compared with its NAV of $1.61 as at Dec 31, 2007. Among MMP’s current assets are Wisma Atria and Ngee Ann City.
Macquarie, it seems, has floated the ‘strategic review’ proposal to the other two shareholders of the Reit’s manager Macquarie Pacific Star Prime Reit Management – MEAG Munich ERGO Asset Management GmbH and Investmore Enterprises Ltd – both of which are likely to have reservations about the move.
MEAG is part of the Munich Re group, one of the largest reinsurance groups in Germany, while Investmore belongs to the fast-growing Pacific Star group founded by Singaporean entrepreneur Jeff Tay.
Industry observers said that since Macquarie bought into the Reit during the IPO, it has been calling the shots at the Reit and its strategy for growing the Reit’s footprint in Asia does not always agree with those of the other two shareholders.
In the event of a sale, unitholders may raise the question of a potential conflict of interest as Macquarie is the single largest unit holder of the Reit, as well as manager of the Reit and its properties.
Also, some feel that if Macquarie wishes to divest, it should get its own investment bank to carry out a private tender rather than have the Reit manager do so in a public manner that may create uncertainty for tenants, employees and business associates during the review period, expected to take a few months.
MMP – DBS
Who will mine the Orchard Gold ?
Story: According to news reports today, it has been quoted that sponsor Macquarie Group could be reviewing its 26% stake in MMP with a possible divestment in the works. The news report also cited that there could also be potential differences between Macquarie and other main shareholders within the MMP REIT manager in terms of strategic direction that may also see some resistance for any potential divestment.
Point: The above piece of news is likely to cast doubts on the cohesiveness of the REIT manager. In the near term, this piece of news may also result some overhang on the unit price. However, this supports our earlier view that M&A could emerge as a positive catalyst for the stock and MMP to be a likely target due to the following : i) MMP has a relatively fragmented ownership structure; ii) its position as an independent REIT without a developer as a sponsor; iii) Attractive yield spreads of c.200 bps compared to its Singapore-listed peers which supports MMP’s attractiveness as a takeover target; and iv) MMP’s portfolio is backed by prime assets in Singapore such as Wisma Atria (41% of portfolio value) and Ngee Ann City (47% of portfolio value) and is currently trading at an attractive 34% discount to NAV.
Relevance: We are maintaining our BUY on MMP which is currently trading at an attractive 7.0% FY08 yield and 7.3% FY09 yield and at an attractive 34% discount to NAV backed by prime retail assets. Target price is S$1.63 based on DCF.