Commercial Properties & REITs - General News

[winston]

Please use this thread to post any General News on REITs.

Please do post any company specific news inside the SGX stocks section.

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From DBS:-

According to Moody's Investors Service, Singapore’s REITs credit ratings will face pressure in the next 12 to 18 months because of their rising difficulty in raising funds from debt and equity markets.

Moody's has cut or put on review for possible downgrade the ratings of Allco Reit, Macquarie MEAG Prime Reit and CapitaCommercial Trust in the first quarter to reflect growing risk to the debt of the trusts.

It has also changed the outlook for CMT to negative, citing the increase in gearing ratio to 45% from 35% and other execution risks related to the redevelopment of Atrium.

However, DBS Research believes that REITs would be in favour owing to their defensive earnings qualities while valuations are still attractive with yield spreads of 260-360bps over the respective risk free rates, the highest in the last 2 years.

We are positive on retail REITs in Singapore where retail spending trend should be sustained. The government’s push to develop Singapore as a major tourist and MICE destination should have positive knock-on impact on retail sales.

Our top buys are CMT, FCT and Fortune REIT for retail exposure and CDL HT as a hospitality play in
Singapore. We think there is room for smaller REITs such as FCT and Suntec to play catch up given the disparity between the yields vs the larger market cap peers.

[winston]

From UOB-Kay Hian:-

Real Estate Investment Trusts - Office

Positive news from MBFC

There are several positive developments for the office market. Just last month, Commerz Real, subsidiary of Germany-based Commerzbank, bought 71 Robinson Road for a record S$743.8m, or S$3,125psf. The latest positive news relates to the new downtown and Marina Bay Financial Centre (MBFC).

Office space at MBFC well taken up. The strength of the office leasing market can be seen from the healthy take-ups at MBFC. Phase 1 with 1.6m sf and Phase 2 with 1.3m sf of office space will be completed in 2010 and 2012 respectively. Both phases are more than 50% pre-committed by major financial institutions. Standard Chartered has signed a 12-year lease for 508,300sf at MBFC Tower 1 with an option to extend for another eight years. DBS Bank has signed a 12-year lease for 700,000sf occupying 22 floors at MBFC Tower 3 (Phase 2). Other notable financial institutions include Wellington Investment Management, American Express, Barclays and Pictet.

More leases likely to be signed soon. According to industry sources, Standard Chartered and DBS signed at between S$8 and S$10psf. This is a discounted rental rate due to the huge space taken and the long duration of lease terms of more than 10 years. Most other tenants signed at between
S$12 and S$15psf pm for three-year leases. Smaller plots were even signed at S$18psf pm.

According to industry sources, an additional 15% of space at MBFC is in the advanced stage of negotiations. We see this as an important development. If successfully closed, this will bring the level of commitment at MBFC to above 70%, giving a boost to confidence in the office market. We
estimate MBFC accounts for 34% of office supply coming on stream over the next four years.

[winston]

From UOB-Kay Hian

Yields are more attractive now

Moody’s sees a negative rating outlook for Singapore REITs over the next 12 to 18 months. Moody’s cited negative sentiment and tighter liquidity, which will affect REITs’ access to capital markets. The same report also stated that “high occupancy rates support yields and cash flows”.

Rating agencies lag equity market. Rating agencies tend to lag the equity market as can be seen from the recent sub-prime crisis in the US. A good example is the AAA ratings accorded to bond insurers when their solvency was in doubt. Many collateralised debt obligations (CDO) also obtained AAA, AA or A ratings when their risk profiles made them unsuitable for many
investors.

Financial performances for REITs are disclosed on a quarterly basis. Investors are able to make an intelligent assessment of the outlook for each REIT and do not need to be guided by rating agencies.

Gearing for Singapore REITs. The larger REITs with economies of scale, such as Ascendas REIT (industrial), CapitaCommercial Trust (office) and CapitaMall Trust (retail), are well supported by Singapore banks.

Ascott, Frasers Centrepoint and K-REIT are able to tap the established banking relationships of their sponsors CapitaLand, F&N Group and Keppel Corp.

[winston]

From DB:-

Re-rating based on organic growth, acquisitions and availability of funding

We expect the re-rating of Singapore REITs to continue, based on:
1) firm trading performance,
2) the availability of funding allowing the return of acquisitions to the sector, and
3) steady physical asset markets. We see a return to a virtuous cycle for the larger REITs, which have demonstrated their ability to raise capital and acquire assets. The valuations for CMT and Suntec REIT are attractive (as CMT has been weak since the Atrium acquisition, and Suntec has lagged its peers).

Top picks
CMT (CMLT.SI),SGD3.27 Buy
Ascendas Real Estate (AEMN.SI),SGD2.42 Buy
Suntec REIT (SUNT.SI),SGD1.62 Buy

Better-than-expected 1Q08 earnings; reversion cycle supportive

The REITs delivered 1Q08 DPU growth ahead of expectations (avg 19.1% YoY), based on reversionary rental growth and full occupancy rates. The near-term outlook remains positive, as office and industrial passing rents still trail market rents and retail rents are firming up due to asset enhancements and the entry of new retailers.

Raising capital, a pick-up in acquisitions; majors gaining market share Singapore REITs have announced S$2.9bn of acquisitions YTD as activity from opportunistic funds have slowed. AREIT’s acquisitions have gained momentum at the expense of competitors who face funding constraints.

The REITs have been able to raise funds for acquisitions and debt refinancing, and the completion of KREIT’s S$552m rights issue helps to address concerns over refinancing. Funding costs have been largely contained, as declining swap rates offset a rise in spreads.

Physical market steady as REITs and core funds stepped up to acquire
More than 2/3 of the REITs are trading below book NAV. Recent investment transactions, such as 71 Robinson (S$3,125psf), One George Street (S$2,600psf), and the Serangoon White Site (est. breakeven S$2,000psf), suggest firm asset pricing due to REITs and core funds being more active. Book NAVs for commercial REITs are typically conservative and are at discounts to recent open market transactions.

Focus on large, quality names; smaller REITs likely takeout plays
Yield spreads remain well above average at yields of 5.0% for CY07 and 6.1% for CY08E, representing a 342bps spread over the 10-year gov’t bond and avg. 9.1% discount to book NAV.

Inflows into real estate funds have improved in recent weeks, supporting global REIT markets. We prefer the larger REITs which are able to deliver organic growth, mobilize funding, and potentially gain market share. We view the smaller REITs as likely takeover targets if deep NAV discounts persist.

Top picks for REIT sector: CMT, Suntec REIT and AREIT
CMT is attractive after the pullback following the CB issue for the Atrium deal. We believe that CMT has the right platform to extract value and synergies from that asset. Suntec REIT continues to benefit from robust demand in both the office and retail segments.

We also like AREIT for its leverage on the rising business park segment. Risks include any protracted economic slowdown affecting demand, further deterioration in credit markets, and inability to refinance.

[winston]

From UOB-Kay Hian

Big is beautiful.

We remain positive on Singapore REITs with economies of scale, such as CapitaCommercial Trust (office), CapitaMall Trust (retail) and Ascendas REIT (industrial).

On average, Singapore REITs provide a distribution yield of 5.5%, which is fairly attractive. The strong S$ helps to cushion against inflation.

Also, Singapore is very different from Vietnam, an emerging economy that has just opened up to foreign investment. Vietnam’s bond and equity markets are relatively small and undeveloped compared with those of other countries in the region.

We have, however, adjusted our target prices for Singapore REITs to factor in a higher risk-free rate of 2.50% vs 2.35% previously. We will make further adjustments depending on how the financial system responds to higher commodity prices and inflation.

Our preferred BUYs for Singapore REITs are Ascendas REIT, CapitaCommercial Trust and Suntec REIT.

[mojo_]

From DBS:-

According to Moody's Investors Service, Singapore’s REITs credit ratings will face pressure in the next 12 to 18 months because of their rising difficulty in raising funds from debt and equity markets.

I think it is the other way around:

Singapore's REITs

face rising difficulty in raising funds from debt and equity markets

because

their credit ratings face pressure from Moody's Investors Service.

eg. what Moody's did to Allcoreit recently just as it was about to renew it's debt

[winston]

From Credit Suisse:-

We remain positive on S-REITs given their defensive revenue stream as rentals are locked in for at least 2 years and rental reversions remain strong. The sector has delivered strong Q1 2008 distribution per unit (DPU) growth averaging 19.1%, on the back of reversionary rental growth and full occupancy rates.

Acquisitions at the financially strong trusts such as Ascendas REIT and CapitaMall Trust are also picking up momentum, and contrary to expectations, the REITs have been able to raise funds for new acquisitions and debt refinancing at low financing costs.

With some of the S-REITs trading near to or below their net asset values, conditions for
M&As (merger & acquisition) could become conducive as the credit market improves, a trend observed in more mature REIT markets.

Our top picks are CapitaMall Trust (CT SP, BUY), Suntec REIT (SUN SP, BUY), and Ascendas REIT (AREIT SP, HOLD).

[winston]

From UOB-Kay Hian

Real Estate Investment Trusts

Risk-reward balance turns negative as yield curve steepens

Long-term interest rates pulling SIBOR higher. Benchmark 10-year Singapore government bond yield has further increased from 3.3% to 3.61% last week. Three-month SIBOR has remained relatively stable at 1.25% but six-month, nine-month and 12-month SIBOR have trended marginally higher. Three-month SIBOR is likely to have bottomed out and a move towards 1.5%
by end-2008 is highly likely.

Mounting challenges for Singapore REITs from higher interest rates.

The Monetary Authority of Singapore (MAS) has raised the Consumer Price Index (CPI) inflation forecast to 5-6% in 2008, an upward revision from 4.5- 5.5% previously. Although downside risk has heightened in recent months, MAS has maintained the Singapore GDP growth forecast of 4-6%. The strong S$ is expected to provide some cushion again inflation.

The steeper yield curve poses challenges to Singapore REITs as it hampers efforts to secure longer-term funding. Investors will be concerned that REITs may face difficulties refinancing short-term borrowings and growing via acquisitions.

We have further adjusted our target prices for Singapore REITs to factor in a higher risk-free rate of 3% vs 2.50% previously. We are using a required rate of return of 8.5% for our dividend discount models.

We have cut our target prices for Singapore REITs by another 4% to 6%. We have also downgraded our recommendation for CapitaMall Trust to HOLD as the stock provides upside of only 2.1%.

[winston]

REITS DROP ON MORGAN STANLEY DOWNGRADE

Shares of Singapore real esate investment trusts, such as CapitaCommercial Trust , fell by as much as 5 percent after Morgan Stanley downgraded the industry to "equal-weight", dealers said.

CapitaCommercial Trust fell to a low of S$1.87 with over 2 million shares changing hands after the bank lowered its target price to S$1.86 from S$2.42.

Morgan Stanley analyst Melissa Bon downgraded Reits like CapitaCommercial Trust, CapitaMall Trust and Suntec Reit , but maintained an "overweight" rating for Ascott Residence Trust .

"We are downgrading the S-reit sector as rising interest rates imply higher hurdle rates for new acquisitions and higher costs of funding," she said in the report.

CDL Hospitality Trust also dropped as much as 2.3 percent to hit S$1.70.

[ishak]

How to Evaluate a REIT
Taken from http://www.deloitte.com/dtt/cda/doc/content/REITGuide2(1).pdf

What to look for in a REIT
The following characteristics appear to be prevalent, in varying degrees, among those Canadian REITs that have been most widely accepted and rewarded by the market:

• An experienced sponsor with a proven track record for the property type of the REIT;
• A focused portfolio (i.e., by either property type or location);
• Strong net operating income, cash flow and sustainable income growth (at present, investors are looking for a 7% to 10.5% current return, with a 3% growth factor);
• Limited debt (REITs that have debt of more than 60% of their market capitalization have been penalized by the market in the past. This philosophy has changed in recent times; as investors gain confidence in the REIT they are willing to allow a greater amount of leverage.) If debt exists, it should have a fixed rate of interest, and have a long-term maturity to eliminate the effects of interest rate swings on the REIT's yield;
• Management that holds a significant investment in the REIT (10% to 20%) as this aligns management's behaviour with investors' goals;
• Sufficient size to capture the brokerage community's interest, to ensure adequate liquidity and attract institutional investors. The REIT must have also achieved economies of scale with respect to its fixed overhead costs (to achieve this, the REIT's initial asset size should be in excess of $250 million with an ability to quickly grow its asset base to over $500 million);
• An infinite life (rather than a finite one), and the ability to use sales proceeds to finance accretive new property acquisitions, and not be required to distribute capital gains; and
• Distributions in the range of 80% to 95% of its distributable income. This will allow the REIT to use its retained operating funds to grow its asset size without going to the market for potentially dilutive (at least in the short-term) capital injections.

Secondary Factors
• management fees;
• other REIT costs;
• degree of tax deferral;
• exposure to lease rollovers;
• obligations to distribute income;
• degree of reliance on acquisitions for future income;
• amount of cash in the REIT and anticipated timing of future market issues;
• historical performance of REIT and its manager;
• level of disclosure in reporting to unitholders;
• investment criteria for new properties;
• operating plan of the REIT;
• environmental risks and controls;
• guidelines on dilution;
• sunset provisions;
• non-conflict and non-competition provisions for the manager; and
• governance issues.

How Should REITs Be Evaluated?
The price of a REIT is based primarily on its anticipated income stream and, in recent years, some recognition has also been given to the management structure, the underlying asset values and the potential for capital appreciation. Assuming an investment in a REIT yields x% compared with alternative investments yielding y%, the investor assesses whether or not the spread provides adequate compensation for the incremental risk associated with a REIT investment.

Recently there have been conflicting views among investors, analysts and management about how REITs should report profitability and what is the most effective measure of a REIT's performance. This debate is ongoing, as many believe that current reporting practices of REITs do not allow for comparability with other companies in the market.

A REIT's value is derived from its ability to deliver consistent cash distributions, as well as appreciation in the underlying assets. In periods of low expected capital appreciation and low interest rates, the emphasis in valuation will be on yield. Yield is typically calculated by dividing the following year's target distributions per unit by the current market price per unit. Taxable investors will be interested in the post-tax yield, while non-taxable investors will concentrate on pre-tax yield. Even if the pre-tax income of the trust remains constant, the post-tax yield will change over time as the tax shelter in the REIT changes.

In times of rising interest rates, the implied inflation may result in higher rents and thus capital appreciation of the underlying real estate assets. During such times, investors who seek a means by which to measure the future capital appreciation potential will likely begin considering the discount or premium to net asset value (NAV) in their valuation.