Source : Business Times – 2 May 2009
REAL estate investment trusts (Reits) turned in a solid set of earnings for Q1 2009 – unlike the developer stocks – with most of the major Reits reporting incomes that were in line with analysts’ estimates.
And refinancing fears, which were dampening the market performance of Singapore-listed Reits just three months ago, now seem less urgent.
‘For the Reits under my coverage, the results were largely in line,’ said DBS Vickers analyst Derek Tan.
While the office sector here faces the greatest risk of seeing a sharp drop in rentals, first-quarter earnings were buffered by the fact that most leases up for renewal were signed three years ago. What this means for Reits is that when tenants sign new leases, they might pay below the current market rate, but still more than they were paying under their previous lease agreements. This provided income support for office Reits in Q1 2009, Mr Tan said.
For example, K-Reit Asia said that gross rental income from its properties – Keppel Towers, GE Tower, Prudential Tower and Bugis Junction Towers – rose 29 per cent year-on-year in Q1.
CapitaCommercial Trust (CCT), another office Reit, likewise said that rental reversion remained positive in Q1, at about 49 per cent higher than previous rents on a weighted-average basis.
However, some Reits here – such as CapitaMall Trust (CMT) and K-Reit – saw a fall in dividend per unit (DPU) because of enlarged share bases after rights issues.
More such DPU falls could be on the cards as some Reits here might still need to look for fresh funds, analysts said.
CCT, for example, said on Thursday that it has it has secured a three-year term loan facility for up to $160 million, which means that it has no more refinancing requirements for 2009. But Macquarie Research analysts Tuck Yin Soong and Elaine Cheong said in a note that they think there is still a risk of equity issuance in the next six to nine months to bring gearing down ahead of expected falls when assets are revalued at the end of this year.
Likewise, Suntec Reit also announced during its Q1 earnings that it has secured an $825 million loan facility. With this fresh loan, the office and retail trust has no further refinancing needs until 2011, it said. The cost of the new debt is slightly higher; the blended all-in interest margin now works out to less than 3.75 per cent, as compared to an all-in financing cost of 3.02 per cent in Q1 2009. Analysts said that this was a fair reflection of the current lending environment.
‘This announcement clears one ‘elephant in the room’ but it does not change our view on Suntec’s potential need for an equity issue to address falling capital values,’ said OCBC Investment Research analyst Meenal Kumar, who has a ‘buy’ call on Suntec Reit.
But on a whole, refinancing concerns, which were a sore point for many Reits at the end of last year, seemed to be less of a sticking point in Q1 2009 with some Reit announcing fresh refinancing deals. This led to some analysts to issue fresh ‘buy’ calls on some Reits. DMG & Partners Securities analyst Brandon Lee, for example, upgraded his recommendation on Suntec Reit to a ‘buy’ after the trust announced that it had secured the $825 million loan facility.
Reits are cautious heading into the rest of this year. Singapore’s largest Reit by market capitalisation CMT said that its first-quarter distributable income climbed 8 per cent after it added one property to its portfolio and completed improvements at two others. Rental renewal rates in Q1 2009 saw a moderate growth of 1.3 per cent over preceding rental rates, and gross revenue locked-in for this year exceeds 90 per cent of gross revenue for the whole of 2008.
But despite this, CMT – which owns malls such as Raffles City and Plaza Singapura – is cautious on its outlook. ‘The revenue outlook for CMT will depend on the extent, depth and duration of the economic recession and financial uncertainties on CMT’s tenants as well as new demand for retail space,’ said Lim Beng Chee, chief executive of the trust’s manager. Retail sales in Singapore fell for the fifth straight month in February.
And one fresh concern that has cropped up over last few days is swine flu and its potential impact on the Singapore market. A widespread pandemic or epidemic is likely to affect stocks related to travel and tourism, said OCBC Investment Research in an April 28 report.
‘Hospitality-linked Reits such as CDL Hospitality Trusts (CDLHT) and Ascott Residence Trust will likely be affected in such a scenario,’ OCBC’s research team said. ‘We believe the impact will be larger on CDLHT which derives its revenue from short-stay hotel properties.’
And on a broader scale, retail Reits such as Frasers Centrepoint Trust and Suntec Reit could also be affected. In particular, ‘premium’ malls that rely on high tourist traffic as compared to the suburban malls will be affected, said OCBC’s report.
‘Big picture: we feel the macroeconomic crisis has already pushed sector valuations to distressed levels,’ said OCBC’s research team. ‘A pandemic scenario would depress near-term yields, but our investment calls should be relatively unaffected.’
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