S-Reits: Why stay away

Here are gd reasons not to come into S-Reits or to buy more.:

http://www.fundsupermart.com/main/research/viewHTML.tpl?articleNo=8173

Time to get real on retail Reits, and S-Reits generally?

Ong Kian Lin, an analyst with Maybank Kim Eng, wrote in a note dated March 22 that the recent S-Reit rally was not due to strong fundamentals but fuelled by inflated asset values from quantitative easing by the US Federal Reserve and ample liquidity.

He noted how retail and office property prices have gone up but rentals have been slow to catch up.

A Colliers International report reflected this divergence. As at the end of the first quarter of 2013, retail property rents in its areas of study have fallen from the previous quarter while capital values went up.

While maintaining a positive outlook for the retail and retail Reit sector, Savills’ Mr Cheong noted signs of trouble in that retail sales figures are trailing growth in areas such as tourist arrivals, population and inflation.

Retail sales fell 2.7 per cent in February. Tourist arrivals last year was 9.1 per cent higher than the year before. The consumer price index rose 3.5 per cent in February from a year ago. Total population growth was 2.5 per cent between 2011 and 2012.

The demand seen in the market right now is due to sentiment still being buoyant, Mr Cheong feels.

“At the moment it’s still rising, but it’s a binary issue. You cannot go and push to the tipping point, you push to the tipping point, everybody will bolt for the door like a fire in a cinema or retail mall. If everyone bolts for the door, everything will be vacated.”

NUS’ Prof Sing said retailers have increasing choices of malls. And the risk is that with greater choice, consumers may drift away from traditionally popular malls, leading to a downward spiral.

“When this happens, tenants will also start to move out. This cycle will continue, because you (as a manager) cannot pull in the crowd, I (as a retailer) cannot afford to pay such a high rent, I have to move out from the mall. So you put in another tenant that is not as good, so fewer people will come.”

Prof Sing and Knight Frank’s Mr Png said they are watching the Jurong East area, with several commercial and retail developments due for completion.

Retailers also have to cope with tighter foreign manpower policies.

“Much as the government would like to talk about productivity you find that retailers, the services business, is still very labour intensive,” Mr Png said.

http://www.cpf.gov.sg/imsavvy/infohub_article.asp?readid={4798875-17374-4688516258}

Err the issue of inability to raise income could also apply across the board to office and industrial reits too, given the economic slow down. Price rises can only depend on yields going down. FTR, I own various Reits.

DBS still loves Reits

It prefers those with stronger earnings growth potential and/or have potential to deliver earnings surprises. Preferred S-Reits are Perennial China Retail Trust (PCRT), MGCCT and Cambridge Industrial Trust based on their upside potential.

PCRT is seen as attractive due to its valuations and earnings visibility as operations are ramping up at its malls. New development assets are also completed and seen generating cashflow. Target price is around $0.84.

MGCCT offers investors “an attractive opportunity to own iconic, best-of-breed commercial assets”. The trust has resilient cashflow with strong organic growth drivers. The target price at $1.18.

As for Cambridge, its completed acquisitions and asset enhancement initiatives (AEIs) are expected to contribute positively. Its target price is seen around $0.93. I personally am not comfortable with Cambridge because it lacks a tai kor.

It advises investors who benefited from price gains in Mapletree Industrial Trust, AReit, Suntec Reit and Parkway Life Reit shares, to consider selling these.

S-Reits remain “betterst’ in region

S-Reits delivered the region’s highest dividend yield as at the end of last month, the latest month-end Asia Index Report produced by the FTSE Group has noted.

The FTSE ST Reit Index and the FTSE EPRA/NAREIT Singapore Reits Index ranked highest in terms of dividend yield and lowest in terms of volatility, relative to their regional counterparts.

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When ST headline is bullish, time to sell?

In SunT, the headline screamed,”Market risks ‘seem less threatening this year’”. Oh, dear. If ST reporters and editors are getting less cautious, isn’t this a contrarian sign. Maybe? But to be fair the forecast was made by a UOB Asset Management executive.

So far, as well documented here, I’ve been emphasising buying stocks with sustainable dividends or payouts, decent yields (slightly above our 5% inflation rate), with the possibility of capital appreciation. I’ve been long on smaller cap S-Reits that have tai-kors with money for several yrs. I’m not a buyer at these levels, but neither am I a seller. I’m a nervous holder. Until you cash out, the profits can evaporate. Taz why good, sustainable yields are important. But that means taking on more risk: Reits are not a play safe investment. Their gearing and the requirement to pay out 90% of their earnings, could result in investors coughing up in rights issue more than they got in payouts. Taz the reason for my nervousness.

Stocks on my watch list are SBS and SMRT. But they’ve been on my to buy watch list for three years already.

 

 

 

S-Reits: Gd analysis

The reason for the highest yield spread for SReits against other markets is due to the proportion of industrial, healthcare or emerging market REITs within the index.

In the case for Singaporean industrial properties, these are leasehold interests so the yield profile against Japanese assets is always going to be higher. Did’nt know that abt Jap assets

Hotels, Indonesian/Indian healthcare/retail properties trade at higher yields than office & retail properties.

So basically although the SReit index trades above its peers – there is a reason for it! And should not imply that SReits are cheap.

A reader made this comment on http://atans1.wordpress.com/2013/01/10/s-reits-cheong-all-the-way-says-ocbc-sec/

S-Reits: “Cheong all the way” says OCBC Sec

Especially industrial Reits ’cause of the 7% yields.

“Looking into 2013, we believe S-REITs would likely retain their shine, underpinned by three key drivers. First, the sector offers the highest yield spreads among its peers in other major markets. Second, S-REITs are likely to be in favour amid the uncertain macroeconomic outlook, given their defensive low beta nature. Lastly, the outlook and financial position of S-REITs are generally positive, which should translate to firm performances going forward.”

S’pore Biz Review

I wouldn’t be a seller, but I sure am not going to add to my exposure to Lippo-M, AIMSAMP or Fraser Commercial, or to buy any other reit. But watching like a hawk to find a reason to sell.

S-Reits: start thinking of taking profits?

The demand for S-reits is resulting in falling yields.

But the demand is underpinned by macroeconomic uncertainties that are expected to linger, and the fact that S-Reits’ yield spread remains one of the highest in the world, when compared to other major Reit markets, said Credit Suisse in a report issued on Thurday.

“In our view, S-Reits still offer an attractive investment proposition given yields of 5-6 per cent on average,” said Credit Suisse.

The weighted-average yield for S-Reits trading above US$1 million per day is at 5.5%, which implies that a further yield compression of 50 basis points should easily translate into about 10% share price appreciation, offering a total return of about 15%, added Credit Suisse.

The only problems, I have about trimming my portfolio is that that I hold “risker” Reits, and the payouts could increase.

But it’s “watch and watch” from now one.

FCT, Suntec: Cheong all the way say brokers

OCBC Investment Research raised its fair value on Frasers Commercial Trust (FCT) to S$1.31 from S$1.23 while maintaining its “Buy” call. The interest savings arising from the early refinancing of a S$500 million loan facility and stronger rental income after the acquisition of direct tenant leases at China Square Central are also positives, OCBC Investment said. And after selling KeyPoint for S$360 million (US$292.7 million), FCT is likely to sit on net proceeds of S$357.8 million and book in a gain of S$72.8 million. Frasers is likely to use the bulk of the sale proceeds to redeem half of its series A convertible perpetual preferred units and reduce its existing debt, OCBC said.

DBS Vickers says, “We continue to like FCT due to its stable income profile and the positive impact coming in from its management execution, as evident in Causeway Point’s enhancement strategy. Thirdly, given that it’s trading above book, we see opportunities of inorganic growth.” What the last means is that FCT can issue new units to acquire properties. 

Then there is Suntec REIT, with DBS Vickers citing its attractive yield and the positive earnings impact in the medium term from its asset enhancement initiatives.

Maybank Kim Eng, which earlier this week upgraded its rating on the REIT to “Buy” from “Hold”, while increasing its target price to S$1.66 from S$1.42, agrees citing as positives the progress of refurbishment work at Suntec Mall and Convention Centre and the near complete occupancy of its office portfolio against the negative of  a looming supply glut.

FYI1, AIMS AMP Capital Industrial Reit portfolio value has risen by 5.6 per cent, said the Reit on Tuesday. Based on the new valuation made on September 30, 2012, the Reit’s portfolio is now valued at S$965.7 million. Its previous valuation was on March 31, 2012.

FYI2,Bloomberg reported last month that the local REIT market has led the global league table so far this year, returning an average 37 per cent. That is twice the gains in the United States, United Kingdom and Japan, according to Bloomberg data, and better than Australia, which advanced 24 per cent.

Bearish news for First Reit?

Background info

Lippo Karawacial is First Reit’s financial sponsor: “On 11 December 2006, Lippo Karawaci became the first company in South East Asia to list a Healthcare REIT on the Singapore Stock Exchange with Indonesian assets. Assets in the First REIT includes the Siloam Hospitals Lippo Village, Siloam Hospitals Kebon Jeruk, Siloam Hospitals Surabaya, Siloam Hospital Cikarang, Mochtar Riady Comperhensive Center and The Aryaduta Hotel and Country Club Karawaci, and four Singapore based properties.”

http://atans1.wordpress.com/2012/07/20/first-reit-nav-revision-bonus/

Now the bearish news

One of the sources told Reuters that first-round bids were below expectations, but the sale process will continue to give the buyers an opportunity to bid higher. It wasn’t clear how much the bidders had offered for the stake in the first round.

 Blackstone, Bain Capital, KKR & Co and Dubai’s Abraaj Capital have been shortlisted for the second phase of an auction of a fifth of private Indonesian healthcare operator Siloam in a deal that could fetch as much as $300 million, sources said.

Seller PT Lippo Karawaci is seeking a valuation of more than 20 times Siloam’s forward core earnings for the stake, they said, declining to be named as the discussions were private. Siloam is the country’s biggest private hospital firm.

“Lippo may be back in the market next year if the valuation disparity is too big,” said one of the sources.

…

Lippo plans to sell a minimum 20 percent of unit Siloam Hospitals for between $200 million and $300 million, but could increase the stake to 49 percent if the price is right. It hired Bank of America Merrill Lynch to run the auction, sources have told Reuters earlier.

http://www.nytimes.com/reuters/2012/08/27/business/27reuters-lippo-privateequity.html?_r=1&src=busln&nl=business&emc=edit_dlbkam_20120827

So there may be no revision of First Reit’s NAV http://atans1.wordpress.com/2012/07/20/first-reit-nav-revision-bonus/

Might even be revised downwards. But Global buyout firms are keen on Indonesia’s consumer and healthcare sectors despite steep valuations, as they are betting on the country’s fast-growing economy.

Indonesia has one of the world’s lowest healthcare spending-to-GDP ratios, but its rising middle class – which represents more than half of its population of 240 million – is expected to sharply increase its medical spending and drive growth in the sector over the coming years.

“The healthcare sector still continues to remain the darling of private equity. Even with rich valuations it is easy to find bidders for this sector,” said Krishna Ramachandra, head of corporate finance and investment funds at law firm Duane Morris & Selvam LLP.

But a growing number of investment banks are advising clients that south-east Asian rivals such as Malaysia and Thailand now look more enticing than Indonesia. Morgan Stanley and Credit Suisse say the Indon economy is overheating. Barclays is relaxed abt the “problems”.

Far East Reit refuses to increase yield

Here I prophesised that Far East Reit would be forced to increase the expected yield on its trust from a niggardly 6-6.5%.

Well Morocco Mole (sidekick to Secret Squirrel) tells me that the Reit, which owns hotels and serviced residences in Singapore has not changed its pricing, despite CDL’s yield of 6ish% and Ascendas Hos of almost 8%.

So don’t subscribe if you are hoping for a pop in the price on listing day. CDL looks a better yield play. Got public track record.

Related post: http://atans1.wordpress.com/2012/07/30/ascendas-hospitality-trust-surprises/

Ascendas Hospitality Trust surprises

Ascendas Hospitality Trust (A-HTrust) closed at its issue price last Friday. Considering that the public offer was about 6.9 times subscribed and yields projected at 7.9% (FY13) and 8.0% (FY14), while CDL’s is 6% (admittedly that is trailing) and strong demand for the placement, I expected the securities to close higher.

Maybe it’s the structure? The A-HTrust is a ‘stapled security’ comprising the Ascendas Hospitality Business Trust (80%) and the Ascendas Hospitality Real Estate Investment Trust (20%).

Mr Tan Juay Hiang, chief executive, Ascendas Hospitality Trust, said earlier last week: “The REIT structure does allow unit holders and investors to enjoy a more tax efficient structure. And the business trust will allow the platform to look at the potential development projects, unlike the REIT there is a limitation. So on a staple securities basis, it does provide quite a fair bit of benefits for unit holders and investors.”

Maybe it’s  because the trust said it’s looking at acquisitions to grow the value of its assets going forward. Rights issueS, more debt?

Maybe because as analysts said there are downside risks to hospitality trusts as the tourism market is highly sensitive to global downturns. Projections could go wrong.

Maybe it shouldn’t have allotted an additional 73.4 million securities to the placement tranche of its initial public offering in Singapore as part of its overallotment process?

Update on 31 July: Another reason could be that the assets are outside S’pore and investors place a premium on S’pore based assets. The reverse of the govt’s “FTs are betterest” policy.

Anyway, means the coming Far East Reit got to redo its sums again about being cheapskate http://atans1.wordpress.com/2012/07/24/far-east-reit-cheapskate/

Keep an eye on A-HTrust. Could be worth adding to portfolio for yield and capital appreciation. I like the combi of biz trust and Reit, though not sure if it will work in practice. Got to research the issue.

Far East Reit: Cheapskate

Far East Reit which owns hotels and serviced residences in Singapore, is being marketed at a yield of 6-6.5% Compares unfavourably about 7.9% offered for Ascendas Hospitality Trust (at issue price: expect it to fall to 6ish level when trading starts i.e. price moves up) and 6% for CDL Hospitality Trust

http://www.reuters.com/article/2012/07/20/us-fareast-reit-ipo-idUSBRE86J04L20120720

Bet you the yield will have to be improved (giving room for some capital gains) for the institutions.

First Reit: NAV revision bonus?

Indonesia’s PT Lippo Karawaci may sell as much as 49 percent of its unit Siloam Hospitals in a deal that would value the firm at more than $1 billion, drawing a slew of private equity firms to the sale as they bet on growth in healthcare spending in Southeast Asia’s biggest economy, sources said. Reuters

There is plenty of US private equity market sloshing around the region as article explains. And the IHH IPO and the coming one by Fortis (Religare Heath Trust) will ensure that the animal spirits of these investors remain bullish.

The Indon co is First Reit’s financial sponsor: “On 11 December 2006, Lippo Karawaci became the first company in South East Asia to list a Healthcare REIT on the Singapore Stock Exchange with Indonesian assets. Assets in the First REIT includes the Siloam Hospitals Lippo Village, Siloam Hospitals Kebon Jeruk, Siloam Hospitals Surabaya, Siloam Hospital Cikarang, Mochtar Riady Comperhensive Center and The Aryaduta Hotel and Country Club Karawaci, and four Singapore based properties.”

Kinda painful for me as I didn’t buy this Reit. Really dumb as I kept waiting price to correct. I aim to buy a Reit that is trading at a big discount to published NAV. The discount was smallish and now has disappeared. Big premium in fact.

FCOT: Great insight!

“FCOT sold a S$10 mil yielding KeyPoint for S$360 mil and bought a S$10 mil yielding Caroline for S$113 mil!”

http://www.investmentmoats.com/money-management/reit/frasers-commercial-trusta-reit-worth-looking-out-for/

Effectively it’s get the same yield but reducing the capital used by 31%, releasing the balance of 69% for hopefully more proftable use. Great financial engineering. F&N’s chairman should tell his sis-in-law at Temasek to pay F&N and FCOT to teach Temasek financial engineering.

And great insight by Investment Moats: worthy of a Buffett.

Bad PR by FCOT. It should enhance shareholder value be publicising its financial egineering skills.

Though must point out that the returns in Caroline’s case are in A$. Nevertheless …

But given that FCOT was gifted the Alexandra Technopark by F&N when F&N was trying to salvage its investment in FCOT during the financial crisis, there’s a danger that FCOT may have to return the favour. I was surprised that F&N shareholders did not kick up a fuss as the valuation then looked rather low, even taking into account the crisis. But then the property is “peanuts’ in relation to F&N’s assets. So there’s a gd chance that F&N would not ask FCOT for a favour.

As to the best use of the Keypoint money, redeem the convertibles in full: increasing leverage. Rely on F&N’s balance sheet: maybe pay it a fee for “renting”. Worst case: rights issue again. But then I’m a bit of a gambler (like the cowboys and cowgals at Temasek), even if I invest in Reits for the yield. Some habits die hard.

Cambridge Reit

Almost no coverage from analysts, so this might interest http://sreit.reitdata.com/2012/05/25/cambridge-dmg-4/

The yield is great, the gearing levels are ok but the lack of a big, conservative brother scares me. In times like this, need a big, stodgy brother like F&N, Keppel, or AMP; or effectively zero gearing (Lippo trusts). I consider CapitaLand too racy for me despite it’s a TLC.

Saizen Reit

 This article (“Residential properties have been the most popular among investors based on its stable return,” said Ishinabe. “Since last year, investors have expanded their interest into other types of properties such as office buildings and commercial facilities.”) on two bulls in Jap commercial property despite supply a’coming reminded me of u’m post on Saizen Reit that tot me the basics of this residental property Jap Reit. 

http://singaporeanstocksinvestor.blogspot.com/2012/05/saizen-reit-to-buy-or-not-to-buy.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+ASingaporeanStockmarketInvestorassi+%28A+Singaporean+Stockmarket+Investor+%28ASSI%29%29

 

Reits R financial engineering

Reits have a new tool to juice up returns: perpetual securitiesor perps. Could “leverage up” without “debt”. Shld not technically use the word “bonds” even though they are effectively bonds.

http://www.todayonline.com/Business/Property/EDC120504-0000036/Perpetual-bonds–A-boon-to-Singapore-REITs

Could be burps if shumething goes wrong.

The central bank is worried that retail investors may not understand perps*. I’m worried reit managers may be seduced by investment bankers to use perps indiscrimately. Us investors get shafted. So invest in reits where the sponsor is big, stodgy and conservative (like F&N, or AMP), and has a big stake in reit.  If sponsor doesn’t meet the first criteria, think long and hard. I did in case of LMRT, and bot in.

Update: Comments on ST article abt central babk’s stance.

———————————–

*Bankers said MAS officials had voiced their concerns over retail holdings of perpetual bonds during at least two informal meetings in recent weeks.

The central bank’s scrutiny is preliminary and there is no suggestion of any wrongdoing on the part of the banks or companies involved in the recent flurry of perpetual bond issues. But the discussions show that the regulator is worried individual investors may be taking on too much risk without a full understanding of the product.

http://www.todayonline.com/Business/EDC120515-0000049/Perpetual-bond-rush-causes-alarm-in-Spore

MIIF & FCT: Useful updates

Never summed up the courage to buy MIIF because although it is a China infrastructure play, yirld is super, and MIIF is net cash, its underlying investments are up to their eyebrows in debt: could affect MIIF’s payouts, NAV and price. But chk out for yrself  http://www.investmentmoats.com/money-management/dividend-investing/amfraser-have-some-seriously-optimistic-cash-flow-projections-for-miif/

For the working stiffs who got cashflow from day jobs. Not for retiree who gambled his cashflow.

 CIMB likes Frasers Commercial Trust I own shume.

Update: DBSV likes FCT too http://sreit.reitdata.com/2012/05/18/fcot-dbsv-3/

Ascendas India: DBS is bullish

http://sreit.reitdata.com/2012/05/02/a-itrust-dbsv/ (Ya I know technically it’s not a Reit, but it looks like one.)

So am I. )))). BTW, the Indian rupee has strengthened after the government said on Monday that it would delay proposed laws targeting tax avoidance by one year.

But five things wrong with the Indian economy.

Gd Reit table

http://mystocksinvesting.com/wp-content/uploads/2012/05/Singapore-undervalued-REIT-stock-comparison-5-May-2012.png

Thanks to complier.

Lippo Reit: OCBC is bullish, but Indon economy is slowing

http://sreit.reitdata.com/2012/05/02/lmir-ocbc-14/

So am I. But Indonesia’s economy grew at its slowest pace in 18 months amid a slowdown in exports as demand from key markets such as the US, Europe, China and India weakened.

Worse, the Indonesian rupiah has fallen 8% against the US dollar in the last twelve months: a weak currency may hurt the purchasing power of domestic consumers and dent demand. Remember domestic consumption accounts for nearly 60% of its economy. http://www.bbc.co.uk/news/business-17980123

Other analysis, info on LMIRT:

http://s-reitinvestmentblog.blogspot.com/2012/05/analysis-of-lmir.html

http://diyvalueinvesting.blogspot.com/2012/04/lmir-q1fy2012.html

Not another excuse to promote S-Reits?

(Or “S-Reits: Is an amber light flashing?”)

Regular readers will know that I’m up to my eyeballs in Reits (AMP, Fraser, Lippo and Ascendas India, ya I know AI is a biz trust, but it’s a Reit except in form). Greedy for the yield, what with inflation at above 5%. And no high salary to fall back on. In fact no salary at all. (((

Generally Reits are up 10% in 1Q, and taz without taking into account the payouts! So I’m not complaining.

But I’m getting concerned abt future total returns (price + payouts) when the expected appreciation of the S$* is given as a reason to buy Reits. “If they [investors] expect the dollar to appreciate … there will be more interest in Singapore-dollar-denominated assets … Reits that are listed in Singapore and traded in Singapore dollars will benefit as well,”  someone senior from SIAS Research was quoted by MediaCorp as saying recently. And remember that SIAS is the self-proclaimed watch dog for retail investors!

WTF, ever heard that quite a number of Reits are diversified geographically, or are exposed to a specific country like India, China or Indonesia? If a Reit has oversea income, that income would be “reduced” when translated into an appreciating Singapore dollar.

Anyway, as of last week, DBS Vickers liked Mapletree Logistics Trust, Ascendas India Trust and Frasers Commercial Trust. These were Reits to accumulate ahead of payout declarations because it expected the payouts to exceed mkt expectations.

CIMB favoured CapitaMall Trust and Frasers Centrepoint Trust for their retail exposure and strong growth potential. And OCBC prefered industrial REITS, which offer yields in excess of 8% to outperform.

But do remember that unlike companies, Reits have by law to payout out 90% of their income. There is no such thing as keeping something for “a rainy day”. Something that “dividend stocks” like Haw Par, SPH or F&N do. With a Reit, if income drops, the payout drops and the share price will drop to reflect the reduced payout.

As a Reit investor, you got to sell when the going gets good, or be prepared to hold it through down-cycles and be prepared to cough up monies then for rights issues to shore up the financials.  Net-net, could use up the payouts you got in gd times.  

————–

*Following the recent announcement by the central bank to allow the Singapore dollar to appreciate at a faster pace.

Tesco Thai Property Fund Debuts Strongly as Yield Play

Even Bangkok punters play the yield game.

http://www.nytimes.com/reuters/2012/03/19/business/19reuters-tesco-thailand.html?_r=2&src=busln&nl=business&emc=edit_dlbkam_20120319China%20IPOs:

Do Reits have unintended commercial consequences for SMEs?

I invest in Reits for the yields and the brokers and local media have discovered Reits as a great defensive play. But SMEs claim that Reits have caused their rentals to escalate unreasonably.  JTC has been asked to review its current policy of divesting industrial space to private entities (like its Ascendas).

Business Times – 02 Feb 2012

SMEs blame Reits for growing rental pains

JTC asked to review its current policy of divesting industrial space to private entities

By MINDY TAN

(SINGAPORE) Rising rentals for commercial and industrial space have emerged as a pressing issue for small and medium enterprises (SMEs), and the fingers are pointed squarely at the dominance of real estate investment trusts or Reits as landlords.

The Reits’ drive to enhance yields and returns for unit holders – which usually translates into rental hikes – have left many SME owners, who feel they have limited alternatives here, fuming.

It has also led to calls – including a recommendation by the newly formed SME Committee – for JTC Corp to review its current policy of divesting industrial space to private entities like Reits and return to its previous role of an industrial landlord, so that it can provide ready and affordable industrial space to SMEs.

‘Rentals and capital values of properties are going up, impacting business costs for SME owners and eating into their bottomline,’ said Lawrence Leow, chairman of the SME Committee.

Primer on Yields of Reits & Biz Trusts

The u/m is an extract from a BT article written by Teh Hooi Ling. Senior Correspondent and CFAer, published on 3 December 2011. It gives some very interesting insights on the yields offered by the various types of Reits, shipping trusts and other business trusts*. (Note some bad news for shipping trusts) 

Thanks BT,  Ms Teh and the unnamed fund manager, “Merry Christmas and a Happy New Year”.

For investors who are keen on Reits and other business trusts, here is some advice from a fund manager friend on how to go about picking the right ones.

Industrial properties usually have 30-year leases, or 30+30. Assuming a 30-year lease, it means it depreciates at a rate of 3.3 per cent pa, versus one per cent pa for a 99-year lease for a retail or commercial building. So the yields for industrial Reits have to be up to 2.3 per cent pa higher than retail or commercial Reits. Usually however, it is less due to the time discount factor.

‘Ships are usually scrapped after about 25-30 years. I think typically they are depreciated over 15 years or so. Even if ships are scrapped after 30 years, shipping trusts should command a higher yield than industrial Reits because the ship lessee can ‘disappear’ with the ship, but not the industrial building tenant.

‘Hospital Reits like Parkway Reit is a rare breed as its revenue is based on a consumer price index formula. You can think of it as having zero vacancy rate (but the main issue is counterparty risk). So given the same counterparty risk, it should trade at a lower yield than retail Reits, which should trade at lower yields than commercial Reits, given the same tenure (because it’s easier to lease out retail units).

‘In turn, commercial Reits should trade at lower yields to industrial, which should trade at lower yields to hospitality (as vacancy rates of hotels/service apartments can be quite high during recessions).

‘Hospitality Reits should trade at lower yields to shipping.

‘But note that industrial can trade at higher yields to hospitality as the former has shorter tenures.

‘As for Hutchison Port Holding Trust and SP Ausnet, I would value them as companies rather than Reits, as usually the rates they charge are prone to fluctuations – unlike Reits and shipping trusts which usually lock customers up for years.

‘SP Ausnet is not structured even as a business trust and pays its dividends out of net profit rather than cash profit. I think every year, it pays out the same dividend per share even though its earnings fluctuate. I would value it the same way I value SingPost.’

Note that unlike a company, a Reit cannot maintain payouts if it hits a bad patch because, at least, 90% of net income has to be paid out. While this is not true of biz trusts, their attraction is that they promise to pay out most of their free cashflow. Companies usually pay out only a portion of their net income, hence there is something in reserve, if they hit a bad patch, and dividends can be maintained for a while more. Hence the importance to investors of what analysts call “dividend cover” which shows how many times over the net income could have paid the dividend. For example, if the dividend cover was 2, this means that the firm’s profit attributable to shareholders was two times the amount of dividend paid out. Not true of Reits, and biz trusts. Got problems, payouts get cut.

*Related post: http://atans1.wordpress.com/2011/12/10/reits-and-business-trusts-similarities-differences/

Reits and Business Trusts: Similarities & Differences

In Reits, property assets are held in trust by a trustee and a separate manager is appointed to manage the Reit. The rental income is used to pay out dividends to unit holders.

Like a Reit, the business trust is created by a trust deed. The trustee has legal ownership of the assets, and is also the manager.  The business will be in a sector that provides stable income like utilities.

Reit or Business Trust by MoneySense looks at the two different structures in more detail and also spells out the key differences.

Reits: A blast from the past

Our constructive, nation- building media are promoting Reits as “safe” investments, so maybe it’s time to read or reread “Initially, I wanted to title this post “The Disastrous Singapore REITs Model” but decided otherwise”, written late last year?

It analyses what went wrong in the S-Reit sector in the period up to massive rights issues in 2009.

In a report issued last Thurday, CIMB identified K-Reit Asia, Frasers Commercial Trust (FCOT), Ascott Residence Trust (ART) and Suntec Reit as those likely to engage in equity fundraising in the near future. “The first signs of more cash calls to come have surface.”

The Reit industry is stronger than it was three years ago, CIMB said. Across the sector, the proportion of short-term debt to total debt stood at 8%  in September, much lower than the 38% in June 2008. With reduced pressure from short term liabilities, Reits are less likely to make cash calls, even if the industry’s average gearing did climb to 36%  (from 34% in 2008). But some Reits -(especially those in the office sector) could be vulnerable to asset devaluation as a downturn looms. Lower property values push up gearing ratios.

According to CIMB K-Reit, ART and Suntec Reit had gearings of 42%, 41% and% respectively at end-Sept, higher than the average of 36%.

The risk of a cash call is greatest for K-Reit. Its aggregate leverage remains high despite a massive rights issue (17 for 20) now underway to fund the purchase of Ocean Financial Centre from parent Keppel Land, and 20% of its debt is due for refinancing next year.

 ART not only has high leverage but its European assets could see a devaluation, raising its leverage- a vicious cycle. But if it divests Somerset Grand Cairnhill, which has provisional approval for redevelopment into a residential and hotel project, a near-term cash call could be avoided.

Suntec Reit  may not need a cash call until it is ready to acquire Phase 2 of Marina Bay Financial Centre and its capital expenditure needs could be partly met by proceeds from selling Chijmes.

FCOT is  a potential candidate for a rights issue because of  its relatively high leverage of 37%  and low interest coverage ratio. Also, all of its debt is maturing next year. But it could divest KeyPoint. Given F&N as its “big brother”, it could refinance its debt at lower interest rates.

But CIMB believes that Reits are still safe, maintaining its ‘overweight’ call on the sector.

Industrial Reits: not that defensive says Credit Suisse

Last week, Credit Suisse issued a report on industrial Reits. Excerpts from report’s Executive Summary.

Not as defensive as perceived: We assume coverage of the Singapore industrial Reits sector with a slightly negative stance as we believe that the perception of its defensiveness (due to longer lease tenures) is misplaced.

… we have done thorough analyses on the factory, business parks and warehouses sub-segments, and conclude that we are most positive on the warehouse sector fundamentals.

… flat to low single-digit growth for factory rents driven by high occupancy, and business park rents to moderate due to the oncoming supply pressure (including new supply of decentralised office space).

Potential weak demand may slow rental growth: Singapore industrial rents have surpassed pre-sub-prime crisis peaks and are at 10-year highs.

… upside is limited from here on, given the moderating economic growth outlook, Singapore’s high exposure to the US and European economies and the appreciating currency which will reduce Singapore’s competitiveness as an industrial location of choice.

However … the few less labour-intensive, higher value-add fields, and sectors/ players with better pricing power, like biotechnology, water technology, environmental/energy sciences will likely be less impacted by cost inflation.

This should underpin rental growth for the class of industrial assets exposed to these sectors.

… expect rents in (logistics) warehouse – our preferred industrial sub-segment – to continue to remain strong on the back of fairly strong 90-91 per cent occupancies based on limited supply completion over the next three years. While supply for all factories over the next five years looks manageable, at 9-10 per cent of existing supply of 332 million sq ft NLA for factories and business parks … rents for older-specs factories could come under pressure especially given current economic uncertainties, which will likely impact SMEs and less cost-efficient companies (those at the lower end of the value chain).

… hi-tech and business park rents to moderate, due to the oncoming supply of business parks over the next four years amounting to 29 per cent of existing supply, coupled with existing high vacancies.

M&A increasingly challenging: Despite the supportive capital-raising environment, in our view, with cap rates continuing to compress on the back of rising competition for land (as industrial assets have the highest yields), … becoming increasingly challenging for a Reit to make an accretive acquisition, particularly in Singapore, where capital values today are at 10-year highs.

Based on our analyses of Ascendas Reit (A-Reit), Mapletree Logistics Trust (MLT) and Mapletree Industrial Trust (MINT), we conclude that (1) A-Reit has the most debt headroom with $1 billion available for future acquisitions; (2) A-Reit and MLT both have the strongest acquisition pipeline, with $1 billion each of injection pipeline from their sponsors; and (3) MINT and MLT have the highest risk of placement, depending on the size of transaction given their gearing levels of 39.3 per cent and 40.6 per cent, respectively.

Three investable names, at this stage: After screening for market cap of over $1 billion and liquidity of US$1.5 million/day, only three of the seven industrial S-Reits are deemed investable: A-Reit, MLT, MINT.

DBS bullish on KepLand and UOL

We believe stocks are currently priced for a slowdown but not a recession. Our strategy would be to adopt a stock picking strategy in the property sector. Within the office segment, office landlords are trading in excess of -1 standard deviation to historical RNAV discount while S-Reits are trading at less than 1 SD to the long-term yield.

We believe office stocks have more than priced in the muted outlook and valuations appear attractive currently. While we have widened target price (TP) discounts and lowered TP for landlords given the higher risks going forward, upside to our TP remains significant.

Our top picks remains Keppel Land and UOL. Keppel Land is currently trading at 46 per cent discount to RNAV of $5.57 and offers 40 per cent upside to our lowered TP of $4.18.

We remain positive on UOL, thanks to its multiple growth engines that spans commercial, residential as well as hospitality. Our TP of $4.96, based on a wider 20 per cent discount, offers 9 per cent upside. We have lowered our call on Singland to Hold due to its large 75 to 80 per cent exposure to the office sector.

DBS loves Reits too

In the recent equity market sell off, the FSTREI (S-Reit index) while corrected by some 5 per cent versus the 12 per cent and 25 per cent fall in the STI and FSTREH (property developers index) respectively. S-Reits now offer a prospective FY11-12F distribution yield of 6.5-6.7 per cent, which represent a 500 basis points spread above the long-term government bond. It is now closer to -1 standard deviation of the sector historical yield trading range. We believe that S-Reits continue to offer a compelling investment proposition.

We reiterate our preference for retail Reits. Even in the event of an economic downturn, retail Reits’ exposure in necessity shopping (eg supermarkets, F&B outlets) have kept earnings fairly stable. Industrial S-Reits also offer strong stability and visibility given a larger proportion of their income deriving from master-lease structures. While we continue to see hospitality Reits delivering good numbers going into a seasonally busier 2H11, we believe that growth momentum should be slowing down.

We see value emerging in CapitaMall Trust (Buy, TP $2.05) which is our big cap pick with attractive FY11-12F yields of about 5.3-5.9 per cent. Mapletree Commercial Trust (Buy, TP $1.09) is attractive for its strong organic growth coming off from a first renewal cycle at its VivoCity retail mall. Among the industrial Reits, Mapletree Logistics Trust MLT (Buy, TP $1.07) stands out post an active H1 FY11 and is poised to deliver strong earnings growth into H2 FY11. We continue to see relative value amongst the smaller cap S-Reits – Cache (Buy, TP S$1.07) and Frasers Commercial Trust (Buy, TP $1.05), which offer higher than average yields with limited earnings downside.

S-Reits: What can go wrong?

S-Reits are the flavour of the moment. Witness this gushing report.

“The current yield gap between S-Reits and the 10-year government bond is attractive to us at 5.1 percentage points versus 0.8 percentage point during the 2007 boom, and an average of 3.4 percentage points over the past seven years,” said Royal Bank of Scotland analysts in a report last week.

The report put S-Reits yields for 2011 and 2012 at 6.7 per cent and 7.1 per cent respectively. The high yields now being provided by S-Reits are well supported by a stable rental outlook, low interest costs and acquisitive growth potential, the RBS analysts said.

RBS has an ‘overweight’ call on the S-Reit sector.

As reported earlier http://atans1.wordpress.com/2011/08/21/cimb-on-reits/, CIMB is “neutral” on developers as a whole but “overweight” on S-Reits.

So what can go wrong? Nomura Singapore said that one of the current concerns of investors in the Reits space is the potential risk of recapitalisation if asset values were to fall significantly. In simple English, investors are afraid of rights issues if the gearing of Reits goes sky high if property values supporting the loans collapse. This happened in late 2008.

Even if property values don’t collapse, Reits could face banks refusing to renew their credit facilities, and asking for their money back if the banks face a liquidity crunch. This too happened in late 2008.

CIMB on Reits

CIMB loves them based on a research note dated Aug 18 2011 where it called for an “Overweight” on the Reit sector.

CIMB recently hosted nine Singapore and Malaysia real estate investment trusts (Reits) at our inaugural Asean Reit conference. While investors were generally not pricing in a double dip, most appeared increasingly cautious.

Coupled with value emerging from the recent selldown, we sensed increased interest in Reits, with a particular preference for those in more resilient segments like industrial, retail and healthcare.

Our top picks are Ascendas Reit, Frasers Commercial Trust, Starhill Global Reit and Cache Logistics Trust. We also like CapitaMall Trust and CDL Hospitality Trust at current valuations.

During the conference, we sensed increased caution among investors after the recent market selldown, with more turning to S-Reits given increased risk aversion. Most Reits also gave the feedback that they had been receiving more investor interest and enquiries. While turning cautious, investors were not yet pricing in a double dip.

Questions centred on rental growth and expansion via acquisitions or development. Most agreed with us that S-Reits have emerged with stronger balance sheets and portfolios from the last crisis.

Recent market volatilities and developments in advanced economies have not affected Reits yet.

Notwithstanding slowing growth in advanced economies, industry participants remained positive on growth in the region. However, most would be monitoring developments closely.

Industrial Reits continued to expect positive rental reversions on the back of rising spot rentals and rental step-ups. Investors liked the stability from industrial leases but were slightly wary of a seeming slowdown in manufacturing in Singapore.

Industrial S-Reits, however, noted that manufacturing remains a core component of Singapore’s economy and continued to see bright spots as local manufacturing transitions to higher-value-added products and services.

While spot rents for most office S-Reits remained healthy, more investors were starting to question rental growth next year. We noted a moderation in tone among the office S-Reits, on the back of a slowing leasing momentum, significant physical completions in 2012 and potential growth concerns. Most expected rental growth to be more moderate in 1H12, before picking up again in 2H12 as supply tightens in 2013.

Most Reits are still keen to grow through acquisitions. Opportunities are, however, limited with the system still flush with liquidity.

Industrial Reits noted a difficult acquisition environment, given increased competition from new entrants such as private funds, smaller players and other industrial Reits. Most were thus gravitating towards development (mainly build-to-suit) and redevelopment, given their enhanced yields, the small capital outlays, short gestation periods and Reits’ ability to mitigate leasing risks by building to suit.

Similar concerns on compressed yields and a lack of quality assets for acquisition were expressed by the office S-Reits.

Citi continues to prefer Reits

Citi continues to prefer Singapore Reits over developers, because of the current uncertain economic environment. “Despite attractive valuations, continued policy risk implies that it remains difficult to suggest picks within the real estate developer space”.

Citi prefers Reits that are operationally more defensive, including retail Reits such as Mapletree Commercial Trust and Fraser Centrepoint Trust, where passing rental rates are below market ones.

CIMB still likes FCOT

On I August 2011 when FCOT was at $0.88 (note I own some shares), CIMB came out with report where it maintains ‘outperform’. Q3 2011 distribution per unit (DPU) of 1.38 cents meets our forecast and Street expectation at 24 per cent of our FY2011 figure. 9M 2011 DPU forms 74 per cent of our estimate. DPU was up 10 per cent y-o-y on stronger net property income (NPI) contributions from almost all its self-managed assets mainly on better occupancy. Occupancy at KeyPoint had improved for the ninth consecutive quarter.

An improving underlying portfolio at China Square Central meanwhile should position Frasers Commercial Trust (FCOT) for upside when it takes over direct management in March 2012. No change to our DPU estimates or dividend discount model-based target price of $0.99 (discount rate: 9.4 per cent).

With an improving portfolio, stable capital structure and a strong sponsor in F&N, we see no reason for its 35 per cent discount to book amid forward yields of 7 per cent. We see catalysts from early refinancing, the unlocking of value from AEI at China Square Central and improvements in occupancy and rentals.

NPI was up 10 per cent y-o-y on stronger contributions from Central Park, Caroline Chisholm Centre and Keypoint. Q-o-q, NPI was up 4 per cent as there were improvements at its Australian assets. Occupancy at KeyPoint also continued to improve for the ninth consecutive quarter to 86 per cent since the in-house team took over property leasing in Q2 2009.

Passing rents were stable at about $5 per square foot with limited exposure to higher rollover rents locked in at the 2008 peak.

China Square Central’s underlying occupancy improved 20 basis points, with recent leases renewed at $6.30-8.00 psf versus expiring rents of $6.30 psf and passing rents of below $6 psf. Continued improvements in occupancy and rentals on the back of more proactive management by FCOT and an upcoming Telok Ayer MRT station could position FCOT for upside when it takes over direct management following the expiry of the master lease in March 2012.

Asset leverage had been pared down to about 37 per cent after the divestments of AWPF and Cosmo Plaza. This entire amount ($745 million) will mature in 2012. With a high cost of debt of 4.3 per cent and prolonged low interest rates, FCOT could save in terms of interest following the refinancing of this debt. We estimate that a 50-basis point interest rate reduction could lift its DPU by 11 per cent.

OUTPERFORM

More from DBS on S-Reits

Retail Reits are expected to see positive rental reversions going forward, supported by the current positive consumer sentiment.

Frasers Centrepoint Trust (‘buy’, TP: $1.73) is expected to deliver a good set of numbers in the coming quarters, as reconstruction works at Causeway Point have passed the most crucial stage, with committed occupancy at over 99 per cent. In addition, the impending purchase of Bedok mall will act as a re-rating catalyst for the stock.

Mapletree Commercial Trust (‘buy’, TP: $1.05) should also see strong reversions in rental growth of about 10 per cent in the coming quarters, coming off from a first renewal cycle at its VivoCity retail mall.

S-Reits have collectively acquired about $1.9 billion of assets year-to-date, which should start contributing to earnings in the coming quarters.

After two months of relatively flattish distribution per unit, we believe Mapletree Logistics Trust (‘buy’, TP: $1.07) is poised to deliver a strong uptick in earnings momentum, boosted by recently completed acquisitions

FYI, yields for the above trusts are very decent and all three trusts have strong Tai Kors. F&N for Frasers and Temasek for the other two.

Frasers Centrepoint — 6.8%

Mapletree Commercial — 5.7%

Mapletree Log — 6.7%

 

DBS on smaller cap S-Reits

We see relative value among certain smaller-cap S-Reits. Cache Logistics Trust (‘buy’, TP: $1.11), which currently offers a yield of over 8.0 per cent, is attractive, backed by transparent earnings structure and armed with a low leverage of 26 per cent, having the headroom to acquire further.

Frasers Commercial Trust (‘buy’, TP: $1.05), at a P/B of 0.6 times, is unjustified in our view, given that the yield-enhancing steps taken by management and plans to re-finance its expiring loans should result in future interest savings.

I’m glad someone sess value in FCT where I have a holding. Yields 6.77%.

Mapletree Logistics is interesting

This Temasek-related Reit invests in logistics facilities in the region. Its latest investment is in S Korea.

Its yield is 6.8%. While its last traded price is $0.92 and its last reported NAV is $0.85, OCBC recently came out to say that OCBC calculated that its revised NAV is $1.01 (also OCBC’s target price for the stock). Not a rich discount to the share price but pretty decent, given its Temasek credentials.

I might add it to my portfolio.

Moody’s on S-Reits

Ratings agency Moody’s Investors Service reiterated its ‘stable’ outlook on Singapore-listed Reits (S-Reits) for the next 12-18 months.

“We expect S-Reits to use their well-capitalised balance sheets to continue acquisitive strategies and assume they will fund potential acquisitions with a mix of debt and equity while maintaining leverage within targeted limits of 40-45 per cent”.

Bullish on Orchard Rd rentals?

Starhill Global Reit should interest you.

DBS is retaining our ‘buy’ call for Starhill Global Reit following updates from management and the Hong Kong non-deal roadshow.

Starhill Global Reit’s unique value proposition lies in its prime retail offering and niche office exposure along the Orchard Road belt. FY11-12 yields of 6.9-7.3 per cent imply attractive 280 basis points spread over the risk-free rate, backed by the top class commercial assets in town and a reputable sponsor.

There is good earnings visibility going forward, led by organic growth potential and proactive asset enhancements. At current valuations of 0.7 times P/B NAV versus its commercial peers’ 0.8-1.3 times, valuations are attractive. At $0.73 target price, the stock offers 23 per cent total return.

BUY

Note I don’t own shares in this Reit yet. Nothing wrong with the numbers (the 6.9% is attractive and sustainable) but in times like this I would prefer its “big brother” to be an international name, not a M’sian cotporate, albeit a respectable name.

Perennial Retail Trust: the case against

In today’s ST, Perennial China Retail Trust took out a full-page ad in colour in ST to extol the IPO’s merits.

Two pages away, ST carried a story headlined ” CapitaLand’s share dip linked to China”. In juz slightly smaller type face, the headline went on, “Poor showing due to concerns over firm’s greater exposure, vulnerability to policy changes”.

If I were Perennial, I’d ask ST for a refund. This headline sums up the thesis why this is an IPO to avoid.

Indonesia: Retail Reit paradise?

There are some interesting Indonesian consumption patterns according to a recent report by Indonesia’s Kresna Securities.

It cited a survey by research firm MARS Indonesia saying that discounts and promotions are able to change 67% and 52% of window shoppers into buyers respectively even though they may not have been interested in buying at first.

‘Indonesian consumers are dominated by shop lovers and lifestyle shoppers, who accounted for 54.5% of total consumption in 20.

In my view, a locally-listed Reit that will benefit from these trends is Lippo-Mapletree Indonesia Retail Trust. It is a Singapore-based real estate investment trust with a diversified portfolio of income producing retail and retail-related properties in Indonesia.

Check it out yrself as I can’t say more. I bot some shares earlier this year.

Starhill Reit: DBS likes it

Healthy financials: Gearing remains healthy at 30.2 per cent, well below the optimum level of 45 per cent. With no major refinancing needs till 2013, the group is in good financial position to make further acquisitions.

We maintain our ‘buy’ call, TP of $0.73. The improving office outlook and stabilised retail market should lead to further improvement in its Singapore portfolio that represents 60 per cent of its total revenue. We see relative value in SGReit with the stock trading at 0.7x P/BV and offering forward FY2011-2012 yields of about 6.9-7.3 per cent.

When buying distressed reits or shipping trusts

Don’t focus on rising NAVs.

Focus on their ability to service their debts and the options they have to refinance. The improvement in NAVs is a subset of these issues.

Office reits: OCBC is bullish

OCBC Investment Research, late last week wrote, We found a few common themes in the guidance given by office Reit managers. Firstly, most office Reits with Grade-A office assets expect negative rental reversions to bottom out by end-2011.

In FY2010, negative rental reversions were still prevalent in some Grade-A properties such as Six Battery Road and One George Street. One Raffles Quay and Suntec City also saw y-o-y declines in gross revenue contributions, but this is expected to turn around in 2011-12.

According to CB Richard Ellis (CBRE), Grade-A rents averaged $9.90 psf a month in Q4 2010, reflecting an increase of 10 per cent q-o-q and 22.2 per cent y-o-y.

Starhill Reit: Worth a look at?

Yield of 6.2%  is decent, even though one can find reits with higher yields, even within its sub-sector,.

But it trades at 64.5cents, a large discount to its lasyed reported RNAV of 89 cents. There is room to gear up further given its gearing is 31%. In other words it doesn’t need to calls a rights issue to fund run-of-the mill acquisitions.

Better still rents along Orchard Rd are likely to go up further by another 3-5% yearly (no new supply) likely, analysts say. Remember Starhill generates two-thirds of its revenue from Ngee Ann City and Wisma Atria.

Kim Eng is bullish on Starhill noting that about 20% of its retail leases in Singapore are expiring this year and that so far, the rates of those leases are about 30 per cent below rentals in the fourth quarter of last year. Kim Eng sees a positive rental revision in the next two years.

Might buy some for myself. Better than keeping money with CPF.