Reits forge ahead

Business Times - 31 Jan 2009

Most Q4 earnings met analysts' forecasts. Earnings for this year expected to be stable.

ALL but one of the real estate investment trusts (reits) listed in Singapore had reported their quarterly earnings by yesterday - and most met analysts' expectations. And looking forward, reits are set to deliver stable earnings in 2009, analysts say - inasmuch as anyone can predict anything with any certainty at the moment.

Most reits' Q4 2008 earnings announcements so far have been followed by 'buy' and 'outperform' calls from research firms.

Many reits already have a substantial portion of their FY 2009 earnings locked in. Frasers Centrepoint Trust (FCT), for example, says it has 90 per cent of its FY 2009 income locked in. CapitaMall Trust (CMT), on the other hand, says gross rental revenue locked in for 2009 already exceeds 87 per cent of 2008's total gross revenue. And CapitaLand's other trust, CapitaCommercial Trust (CCT), says 79 per cent of 2009 forecast gross rental income has been locked in.

Reit managers also say they have been 'actively engaging' tenants for forward lease planning.

Bearing all of this in mind, analysts expect most reits will post flat growth but meet distribution per unit (DPU) forecasts for 2009.

'Income streams for reits should be all right in the first half of this year,' says CIMB analyst Janice Ding. 'As for the second half, things look less certain.' The impact from the economic slowdown will likely be really felt only in 2010, she said. And that year she expects office reits to take the biggest hit as a large amount of new space comes on stream.

The main area of concern remains the expected fall in office and retail rents. Retail rents, in particular, are expected to be hit as shopper traffic and retail spending gradually taper off following Chinese New Year. As such, tenants' bargaining power could increase, sparking either a fall in retail rentals or a restructuring of existing leases, notes DMG & Partners Securities analyst Brandon Lee.

But even taking rent drops into account, reits are still considered attractive from a valuation standpoint. Following CCT's results announcement, Citigroup analyst Wendy Koh said she is revising CCT's DPU and target price to reflect prime grade A office rental rates at $6 per square foot.

And despite her cautious view on the office sector, she maintained her 'buy' rating on CCT 'for valuation reasons'. 'The shares offer a 13 per cent yield,' she noted in a Jan 20 report.
But refinancing still remains a major area of concern for reits - despite a few major refinancing deals reported over the last few months. While Cambridge Reit, CCT and Ascendas Reit (A-Reit) all recently announced successful capital-raising exercises, this also suggests that the already-limited pool of ready credit has shrunk.

'With several Reits yet to refinance major chunks - such as CMT, CDL Hospitality Trusts (CDLHT) and Frasers Commercial Trust (FCOT) - and the credit markets still not exhibiting distinct signs of ameliorating, we believe the fight for credit will toughen further,' says DMG's Mr Lee.

Suntec Reit, for example, is now looking to refinance $700 million of commercial mortgage-backed securities due in December 2009. At present, the trust's management is talking with several banks to secure finance.

Other than the fact that the pool of ready credit has decreased, Mr Lee thinks another issue will plague Suntec Reit's refinancing - office and retail capital values could head further south from current levels as rents and occupancies taper off amid the weakening macro-economic environment. This implies a rise in loan-to-value (LTV) ratios that could make banks more cautious when it comes to extending credit.

In 2009, more equity issues could be on the cards. During its Q4 results briefing, A-Reit announced an equity fund-raising via private placements and preferential offerings of up to 354 million new units to raise gross proceeds of $400 million.

The trust's equity raising was within expectations, but the timing took some by surprise, as refinancing with bank debt was not an immediate problem. More Reits can be expected to take such pro-active steps to lower their gearing, although at least one - CCT - has come out to say that it has no 'immediate' plans to raise equity.