Mapletree Log Trust, Ascott Residence Trust are its picks
OCBC Investment Research has laid out three changes it hopes to see in the S-Reit sector for the year to improve corporate governance and transparency, and to yield more benefits to unit-holders.
One of the changes on its wishlist is for a substantial part of manager fees to be pegged to total shareholder return, and less on areas such as asset value and net property income (NPI).
Said OCBC Research’s Meenal Kumar: ‘Historically, S-Reits have relied heavily on acquisitions to grow both NPI and portfolio size, especially with the added kicker of acquisition fees. Depending on the pricing and financing structure, these two metrics can be increased with no net benefit (or even a cost) to unit-holders.’
She added: ‘No fee structure is perfect but we feel this issue warrants further attention and discussion.’
Ms Kumar also called for S-Reits to provide more transparency on their relationship with their sponsors. She said that the sector has a bias towards developer-sponsored Reits, which ‘are inextricably tied to their sponsors on several levels including property management, Reit management and through acquisition pipelines’. The current de-leveraging environment, she said, will see several sponsors sell their assets to their Reits. But while such pipelines can give S-Reits a competitive edge by providing investors with buying access to quality assets, ‘pricing and strategic benefit to the Reit is always a concern’, she said.
It will be good therefore ‘to see increased transparency of the acquisition decision-making process that goes beyond a comparison of the acquisition cost versus the independent valuation of the target property’, said Ms Kumar.
OCBC Research also hopes to see renewed focus on the value-add of proposed acquisitions as it expects Reits to return to the growth-via-acquisition strategy. ‘The market needs to ask harder questions including: Why is the Reit making this purchase? Does this purchase enhance the overall portfolio? What are the strategic considerations behind this decision? Is this a good buy on an un-leveraged basis?’ said Ms Kumar.
On top of laying out changes it hopes to see, OCBC Research also listed its top picks for S-Reits, namely Mapletree Logistics Trust and Ascott Residence Trust. It has a buy call for both plays, with a target price of 78 cents and $1.25 respectively for the two Reits. Mapletree Logistics Trust and Ascott Residence Trust closed trading yesterday at 78.5 cents and $1.28 respectively.
Ms Kumar said OCBC Research likes the valuations for both of these Reits, adding that Mapletree Logistics Trust has earnings stability and makes yield accretive acquisitions. Ascott Residence Trust’s earnings are also likely to increase on the back of the expected return of corporate travellers in 2010, she said.
OCBC Research also maintained its neutral rating on the sector as a whole, citing the sector’s ‘unexciting risk-reward ratio for 2010′. In its report on the sector in December, it stated that S-Reits trade on average at 0.78 times book, still below the 0.89 times average in 2006. It added that the potential 13.4 per cent increase from current levels is offset by book value risk from Q4 2009 revaluations. A 6.9 per cent potential upside from a distribution yield perspective is also offset by a mixed earnings outlook.
Source: Business Times, 5 Jan 2010
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