GOLDMAN SACHS yesterday (Jan 30) put out a report on Singapore REITS, saying capital raising is necessary, but REITs still have time on their hands.
”We believe a debt covenant breach, if any, for SREITs under our coverage will be slow to materialize as appraised valuations tend to lag, implying a breach is unlikely in 2009 and more of a 2H2010 risk.”
Goldman Sachs said REITs have up to 18 months and flexibility to engage in capital management initiatives.
In its view, REITs it covers could raise as little as S$100 million (in total) to reduce gearing to the debt covenant ceiling (60%) or up to S$2 billion (35% of market cap, excluding AREIT) for a relatively comfortable target gearing of 45%.
The dilution impact would be about 20%, and the sector's dividend yield would fall to 9% from 11%.
The SREIT sector raised S$4 billion in 2007 and S$1.7 billion in 2008.
Asset write-downs tend to lag, providing REITs with window
Taking a cue from revaluations seen during the upcycle, Goldman Sachs estimates appraised portfolio declines would be at a moderate pace: 10%/7% for retail and 25%/10% for office in 2009E/2010E, respectively.
Net revaluation gains since IPO: CapitaCommercial Trust (S$1.75 billion); Suntec (S$1.65 billion); CapitaMall Trust (S$1.43 billion) and AREIT (S$750 million).
Assuming gains were written off, Goldman Sachs estimated gearing would be CCT (51%), Suntec (57%), CMT (54%) and AREIT (40%).
Low solvency risk for REITs, especially those with good credit
The local banking system continues to be in good health, and the REITS with good credit should be able to refinance and have low solvency risk.
CCT’s successful refinancing on January 6 underpins this view of Goldman Sachs.
It estimates that REITs under its coverage have S$3.5 billion and S$2 billion of debt due in 2009E/2010E, with the next major refinancing tranches being CMT’s S$670 mn in Aug 2009 and Suntec’s S$700 mn in Dec 2009.
Cut TPs and earnings estimates; upgrade AREIT to Neutral
Goldman Sachs upgraded AREIT to Neutral with a new 12-month discounted cash flow target price of S$1.3 (post dilution) from S$1.37.
With the recent capitalization, we see lower risk of a debt covenant breach, said Goldman.
Goldman lowered Target Prices for CDL Hospitality Trust (Neutral) and Mapletree Logistics Trust (Neutral) by 54%/36% on higher beta, lower growth estimates; but maintained target prices for CCT (Buy), Suntec (Buy), CMT (Neutral).
It lowered 2009E-2011E dividend per unit for CDLHT by an average of 31%, and MLT 9%. REITs it covers offer an average 11% 2009E yield, which is +900 basis points over 10-year bonds.