Month: November 2008
REITs – BT
Reits treading warily in market minefield
Refinancing a bigger focus; acquisitions on hold; sector shakeup possible
The latest earnings season has been a chilly one for real estate investment trusts (Reits) hit by the credit crunch and a cooling property market.
Many Reits are working to shore up confidence in their credit positions. Property acquisitions are virtually off the table while industry watchers are divided on whether consolidation within the sector is on the cards.
‘Reits are definitely paying more attention to financing,’ said DMG & Partners Securities analyst Brandon Lee. The research house estimates that the sector has at least $4.5 billion up for refinancing in 2009 alone. With credit tightening and spreads widening, the market is watching closely for signs of trouble.
According to a CIMB-GK report, borrowing spreads for Reits have risen from an average of 150 basis points (bps) to 200-300 bps for three-year loans in the last six months.
‘While average all-in cost of debt for most Reits has been contained within 4 per cent thus far . . . we expect the all-in cost for those with significant refinancing due in 2009 to rise,’ said associate vice-president of research Janice Ding.
Reits have tried to soothe market anxiety in the past few weeks by releasing more details on debt. Ascendas Reit (A-Reit), for instance, won confidence votes when it said it had secured firm commitment of $200 million to help refinance a $300 million loan due in August next year.
Suntec Reit also made it a priority to refinance a $700 million loan due in December 2009. ‘Whilst we have no major financing needs in the next 12 months, we are keenly aware of the liquidity crunch,’ said the Reit manager’s CEO Yeo See Kiat last month.
Reits also have to worry about asset devaluation as the slowing economy weighs down on rents and occupancies. Lower property values would raise gearing ratios. Frasers Commercial Trust (FCOT) booked a revaluation loss of $83.5 million in the third quarter ended Sept 30.
Reits have pushed asset acquisition plans to the bottom of the agenda. Even organic growth has slowed. Suntec Reit shelved redevelopment plans for Park Mall. CapitaMall Trust also held back enhancement plans for three malls because of high construction costs.
‘We will review new commitments carefully and will not sacrifice our liquidity,’ said the Reit manager’s chairman Hsuan Owyang last month.
Analysts advise investors to be selective. While low unit prices have boosted yields, it would help to ‘pay extra attention to (Reits’) refinancing profile, especially the quantum of short-term debt due within the next six to nine months,’ said DMG’s Mr Lee in a note. ‘We like S-Reits with strong sponsors (and) excellent track record.’
CIMB-GK’s Ms Ding added: ‘The presence of strong sponsors and government-linked sponsors is advantageous at this juncture.’
FCOT, for instance, managed to take a $70 million loan from parent company Fraser and Neave last week to repay debt. The trust is in talks to refinance the $70 million loan and all debt maturing next year. In response, Standard & Poor’s Ratings Services took FCOT off ‘CreditWatch’ status and said that the outlook is stable.
ARA Asset Management Group CEO John Lim believes that consolidation in the sector seems unlikely because Reits would be more concerned about their own refinancing and asset valuation issues.
CIMB-GK’s Ms Ding said that in today’s market, it would be difficult ‘for any single entity to have enough funds to buy over the entire (Reit) unless it’s a distressed sale’.
But an industry observer believes that consolidation could happen because the sinking tide has left some Reits looking weaker than their peers. To avoid coughing up cash, a potential acquirer can offer units in itself to the target Reit, he added.
MI-REIT – BT
MI-Reit to refinance $201m of debt by Jan
Disclosure comes after Moody’s cuts rating, with possible further downgrade
MACARTHURCOOK Industrial Reit (MI-Reit) said yesterday it aims to refinance some $201 million of debt due in April 2009 by the end of January next year.
MI-Reit announced the plan a day after Moody’s Investors Service downgraded the Reit’s corporate family rating to Ba2 and said it remains for a possible further downgrade.
‘The rating remains on review for downgrade primarily to reflect ongoing concerns surrounding MI-Reit’s significant refinancing risk, with 91 per cent of its total debts, or $201 million, falling due in April 2009 amid very challenging credit markets conditions,’ said Kathleen Lee, Moody’s lead analyst for the trust.
She also said the trust has an outstanding put- and-call option on plot 4A of International Business Park, which if completed by end-December 2009 on fully debt-financed terms, will result in a ‘material weakening of (the Reit’s) credit metrics’.
‘There also remains considerable uncertainty as to how this acquisition will be funded if the put option is exercised by the vendor,’ Ms Lee said.
In response, MI-Reit said yesterday it expects to finalise negotiations to refinance the bulk of its debt maturities by the end of January 2009.
And as for the new acquisition, finance will be sought via negotiations with banks, MI-Reit told BT.
The planned $91 million acquisition will lift the trust’s gearing from around 39 per cent now to about 47 per cent.
Moody’s said it also downgraded MI-Reit because it feels the Reit is not likely to meet the scale and diversity targets that were built into its original rating.
The Reit now shows high levels of asset and tenant concentration, more consistent with a Ba2 rating, Moody’s said.
MI-Reit, one of the smallest industrial Reits in Singapore, owns 21 properties worth a total of $559.9 million.
But being small does not mean the trust is riskier, MI-Reit told BT yesterday.
MI-Reit shares lost 0.5 cent to close at a one-year low of 25.5 cents yesterday. The stock has lost 76.8 per cent this year.
Hospitality – DBS
From Formula One To None
Tourist Arrivals Continue to Drop YoY: October 2008 tourism data extended the continued decline in visitor arrivals, which have been dropping yoy since June 2008. For the month, total tourist arrivals were 843,000, representing an 8.1% fall compared to the year-ago period. This brings 2008 year-to-date arrivals to around 8.4 million. With 2 months of the year remaining, visitor arrivals and spending are expected to fall short of the 2008 targets of 10.8 million and S$15.5bn respectively. If we project the similar c.8% drop yoy in tourist arrivals to November and December numbers, overall arrivals in 2008 will come in at just a touch above 10 million, and would represent the first yoy drop in annual tourist arrival numbers (from 10.3 million in 2007) since the SARS outbreak in 2003.
RevPAR Growth Hits A Roadblock: Average Room Rate (ARR) was estimated at S$241, which is an 8.4% increase over the year-ago period. The Average Occupancy Rate (AOR) for gazetted hotels was estimated at 82% in October, which was a drop of 6.8 percentage points over October 2007. RevPAR grew only by 0.1% yoy to S$199, the first month this year with flat RevPAR growth over the year-ago period.
Cautious on Sector, Banyan Tree TP Reduced: We remain CAUTIOUS on the hospitality sector. We retain our HOLD call on CDL HT (TP S$0.62), with its mid-tier to upscale hotel mix more likely to benefit from business travel downgrades, borne out by the reduction in RevPAR of around c.2% for these two segments in October 2008, compared to a c.9% drop in RevPAR for the luxury segment. We also maintain HOLD on ART (TP S$0.57) with our view that its earnings are likely to be most resilient among the hospitality plays, given longer leases and a likely increase in contract work (over permanent employment) in current uncertain markets. We retain our FULLY VALUED call on Hotel Properties (TP S$0.76), with its slate of local luxury hotels and regional luxury resorts likely to be impacted by the global economic downturn. We also maintain FULLY VALUED on Banyan Tree, and have increased the discount to its SOTP valuation of S$1.23 from 60% to 70% on account of the deteriorating political situation in Thailand, which we believe will impact tourism arrivals for some months to come. Our TP is reduced from S$0.52 to S$0.37.
CMT – JPM
Not more than a small tidy-up of balance sheet required
• The optics of gearing in a market intolerant of it: CapitaMall Trust (CMT)’s gearing is the highest of the top four S-REITs at 43.3%. Whilst our review of CMT’s financials in an adverse but (in our view) plausible downside scenario indicates a high level of resilience in the
REIT’s credit position, a modest equity fund-raising of between 10-20% new units would push gearing down below 40% whilst a 1-for-3 entitlement offer would raise sufficient equity to lower gearing to 31%.
• Operating and financing conditions have changed: Whilst Singapore’s suburban retail property fundamentals have been resilient through recessions, CMT’s operating risk has risen with 28% of the portfolio in non-suburban retail property assets (by value). The trust has S$1.8billion of debt (56% of the total) maturing in 2011-2012, which is sufficiently distant but we believe a far-sighted CFO will want to keep those debt maturities in view in any re-configuration of the REIT’s liability profile. CMT’s 2013 convertible bonds are trading at a yield to 2011 put at approximately 13.5%, and skew the trust’s aggregate cost of capital. We estimate CMT’s current implied cost of equity at 12.1%.
• Sectoral re-capitalization to be the dominant price factor: We expect the S-REIT sector’s debt refinancing and re-capitalization, including CMT’s own initiatives, to be the most significant factor propelling the trust’s unit price in the next 6 months.
• Dec 09 price target of S$2.20/unit: Our new price target (previously S$2.78) is based on a DDM using an 8.1% discount rate. A 1-for-3 entitlement issue raising about S$551 million would lower our estimate of CMT’s NPV by an immaterial 4% due to the offsetting effects of reduced financial risk. Key risks to our price target and rating come from a worse than expected deterioration in operating fundamentals, or a prolonged capital markets disruption which prevent a resolution of the anomalous costs of equity and debt capital.
MI-REIT – BT
Moody’s cuts MI-Reit’s ratings; review for possible downgrade
Moody’s Investors Service has on Wednesday downgraded Macarthurcook Industrial REIT’s (‘MI-REIT’) corporate family rating (‘CFR’) to Ba2. The rating remains on review for possible downgrade.
‘The downgrade reflects Moody’s views that MI-REIT is not likely to meet the scale and diversity targets that were built into its original rating when it was first assigned ‘, says Kathleen Lee, Moody’s lead analyst for the trust.
‘As a result MI-REIT shows high levels of asset and tenant concentration, more consistent with a Ba2 rating,’ adds Lee.
‘In addition, the trust has an outstanding sale & lease-back arrangement with a call and put option in respect of 4A International Business Park (entered into since August 2007) which if completed by end-December 2009, on fully-debt financed terms, would result in a material weakening of its credit metrics’, continues Lee.
‘There also remains considerable uncertainty as to how this acquisition will be funded if the put option is exercised by the vendor,’ she added.
‘The rating remains on review for downgrade primarily reflecting ongoing concerns surrounding MI-REIT’s significant refinancing risk with 91% of its total debts, or S$201 million, falling due in April 2009, amid very challenging credit markets conditions’, says Ms Lee.
‘The absence of available committed facilities and the REIT’s lack of extensive relationships with banks have significantly constrained MI-REIT’s liquidity profile and increase the risk of further downgrades’ adds Ms Lee.
Moody’s acknowledges that MI-REIT’s rating continues to be supported by its steady revenue streams supported by a relatively long lease maturity profile and adequate lease deposits that partially mitigates the trust’s low asset diversification and moderate tenant concentration.
The review will continue to focus on:
1) MI-REIT’s progress in securing committed financing to meet its debt maturities in April 2009 as well as the final contracted terms & conditions once refinancing is raised, and
2) the funding plan for the committed acquisition. The ratings could decline rapidly if material progress on securing committed financing for its April 2009 debt maturities is not made over the course of the next 2 months.
Headquartered in Singapore, MI-REIT is a real estate unit trust that was formed primarily to own and invest in a diversified portfolio of industrial properties. The company reported total assets of approximately S$568 million and gross revenue of $12.4 million for the first quarter ended 30 September 2008.