Buy @ $0.95. New stock for my portfolio. Office REIT with Yield @ 10.158%, Gearing @ 27.6%. Chances of rights issue is not high unless they plan another major acquisition. Am expecting 1H09 div to be aro’ 4.8ct. Am prepared to hold even tho’ yield will likely drop due to falling office rentals, but will also contra if opportunity arises. 😀
Office REITs – Comparison
- Suntec : Yield 13.6% @ $0.87 ; Gearing 34.4%
- KREIT : Yield 10.3% @ $0.94 ; Gearing 27.6%
- FCOT (using ex-rights figures) : Yield 9.2% @ $0.115 (TERP) or mkt price @ $0.175 ; Gearing 38.5%
- CCT (using ex-rights figures) : Yield 7.6% @ $0.795 ; Gearing 30.7%
I classify FCOT as Office REIT as I assume that since F&N already has FCT focussing on Malls, they’ll likely move FCOT in that direction (ie Office assets).
Conclusion
- KREIT has the 2nd best yield. Suntec has best yield but it also has malls assets and the continued issuance of shares due to their deferred payment scheme will cause further dilution and share price weakness.
- KREIT has the lowest gearing
For FCOT, I have not factored in the impact of CPPU conversion (which will reduce gearing further but which will also reduce yield), which, at the earliest will happen 3 years later.
I personally prefer KREIT for Office REIT, at this point in time. Note that volume can be very illiquid due to low free float (Keppel Corp holds 75% – perhaps Kepland will distribute out KREIT as div in specie in future).
Caution
Latest reports have shown that Ofiice rentals are dropping aro’ 20%. I believe the impact to DPU due to falling rentals and occupancy will be gradual as most tenants are on 3-5 years lease. For eg, if we assume the average lease is 4 years, then every year, there’ll be an average of 25% tenants up for renewal or 6.25% every quarter. If the rental drops by 20%, then every quarter, the impact is 20% of 6.25% or 1.25% only. (Please check if my reasoning is right). The impact will be greater if we assume a large no. of tenants terminating their lease and foregoing their deposits.
The greater and more immediate impact to DPU is Higher Interest Rate (banks are taking this crisis opportunity to offer less favourable terms like higher interest rates and shorter loans) and dilution due to rights issues (a 1-f0r-1 rights issue immediately halves the DPU, eg. CMT, CCT, Starhill, FCOT,..).
To be safe, either wait for the dust to settle before going in, or focus on REITs that have low gearing (my own target is below 30%). Let’s also watch the DPU for this coming quarter for directions.
