Month: September 2009
K-REIT – CNA
K-REIT to raise S$620m through one-for-one rights issue
It is offering about 667 million rights units at 93 cents each, representing a 21.2 per cent discount to K-REIT Asia’s closing price of S$1.18 per unit on September 30.
K-REIT Asia said it intends to use about 80 per cent of the gross proceeds to repay borrowings provided by Kephinance Investment. This includes a bridging loan to be drawn down for the acquisition of six strata floors of Prudential Tower.
The remaining proceeds are to be used to fund potential acquisitions and asset enhancement initiatives, as well as general corporate and working capital purposes.
When the rights issue is completed, K-REIT Asia said its aggregate leverage is expected to decrease from 33 per cent to 9.1 per cent.
Keppel Corporation and Keppel Land, which together own about 75.8 per cent of K-REIT Asia’s units, have undertaken to subscribe for their entitlement of rights units.
The remaining 24.2 per cent of rights units will be underwritten by BNP Paribas, Singapore Branch, which is acting as lead manager, underwriter and financial adviser for the rights issue.
An extraordinary general meeting is expected to be convened to approve the rights issue.
SREITs – BT
S-Reit outlook still negative: Fitch
This despite better share prices and refinanced debt
SINGAPORE-listed real estate investment trusts (S-Reits) have mostly refinanced their maturing debt obligations this year and have benefited from a recent share price recovery, noted Fitch Ratings in a new special report. But questions still remain regarding their financial flexibility and refinancing ability, the ratings agency said.
Fitch is also maintaining its overall negative outlook for the sector, owing to negative asset performance expectations. However, the credit performance of the sector is expected to be driven by the industry sub-sector, hence individual S-Reits may have different outlooks.
The report noted that 12 out of 20 S-Reits, for which information was publicly available, reported a decline in the value of total assets as at end June 2009, from a year ago, largely on the back of falling asset prices and write-downs. Office S-Reits, in particular, reported a 4.2 per cent drop in total assets in the year ended June 2009, compared with an increase of about 54 per cent in the previous year, while retail S-Reits added 1.5 per cent to their total assets in the same period.
S-Reits, like property-related companies globally, have been buffeted by the global financial crisis, Fitch noted.
‘A limited availability of debt financing and stock price corrections have forced S-Reits to restrict their previous aggressive asset acquisition programmes and concentrate on survival and tenant retention in a difficult market,’ noted the report.
But S-Reits responded to the changing market dynamics by sourcing bank loans in advance for their refinancing, and reducing their capex and acquisition plans as well as their development pipelines. Some S-Reits also successfully issued equity. But while these steps are positive from a ratings standpoint, they do not address other aspects of the debt structure and liquidity profile on which Fitch continues to have concerns.
‘In addition to dealing with a worsening asset performance, S-Reits are expected to tread cautiously in terms of their debt maturity profiles and liquidity provisions,’ said the report. ‘S-Reits will also need to improve their liquidity profiles as they come out of the crisis, to meet their debt refinancing requirements in the short to medium term.’
The requirement for S-Reits to distribute a major portion of their earnings affects their liquidity profiles, said Fitch. This, coupled with concentrated debt maturity profiles, can significantly increase the refinancing risk around S-Reits.
Looking ahead, S-Reits are now expected to continue their moderate leverage stance, but shift their focus to enhancing their capital markets reach. ‘They are likely to concentrate more on improving their debt maturity profiles, and expanding their relationships across banks to improve access to the bank loans’ market,’ said Fitch.
FCT – DBS
Paving the way for the next quantum leap
• Resilient suburban portfolio
• Two pronged re-rating catalyst from improving size and liquidity to drive growth
• Potential for upside earnings surprise
• Reiterate Buy with TP of $1.25
Resilient portfolio to withstand economic downturn. FCT’s well-positioned portfolio of suburban retail assets, within huge population catchment areas, offers investors DPU and portfolio value resilience in the current moderated economic environment. Rents are still reverting positively with occupancy remaining close to full.
Twin growth drivers. FCT holds significant potential for organic and inorganic growth. Within its current portfolio, enhancement works at Northpoint I has resulted in a 20% hike in average rents, which should impact earnings positively from FY10. New contribution potential from unlocking value at Causeway Point, which should be significant, has not been included into our existing forecast, thus raising the possibility of further earnings upside surprise in the longer run. Planned injection of its pipeline assets; namely Northpoint II and YewTee Point, are expected to expand asset base significantly, in view of the low base effect, while the current lower cost of capital would mean accretive additions even through using equity as currency.
BUY for sustained yields, TP S$1.25. The investment case for FCT lies in its portfolio resilience, good long-term earnings, valuation growth potential and potential rerating from expanding its asset size and improving liquidity and free float. Our target price of $1.25 based on an adjusted WACC of 6.5% and beta of 0.7x offers potential 17% absolute return over the next 12 months.
MapleTree – OCBC
Likely to turn to inorganic growth
Waiting for stabilization. We expect Mapletree Logistics Trust (MLT) to report 3Q results in three weeks’ time and are keen to get an update on occupancy levels (prev: 98.3%). We will also focus on the tone of guidance versus 2Q, where the manager cautioned that “the environment remains challenging and occupancy and rental rates may be under pressure”. Business conditions have improved since then and this may ease downward pressure on rents and capital values, in our view. Still, there is a big difference between stabilization and recovery.
Turning to inorganic growth. We believe tenant retention, as opposed to positive rent reversion, continues to be a key priority for the existing portfolio. As such, MLT may turn to acquisitions to support and grow DPU. MLT is geared at 37.8% debt-to-assets. At 2Q results, the manager said it would not raise equity solely to reduce gearing. But it did indicate interest in third-party acquisitions, provided these buys are coupled with an equity issue to at least maintain (or reduce) current gearing levels. MLT’s rerating (up 114% YTD) and relatively looser credit conditions are conducive to this stance. The sticking point is property yields, which would have to be fairly high for the transaction to be DPU accretive. Third-party buys are more likely to clear this hurdle than the S$300m development pipeline from MLT’s sponsor in our view.
Prefer top-tier industrial names. We find a large divergence in value among the industrial REIT space. Price to book range is wide: MacarthurCook Industrial REIT [NOT RATED] trades at the low of 0.36x 2Q CY09 NAV but A-REIT [NR] trades at 1.21x book. The sub-sector is highly geared, with an average leverage of 39.7%. A-REIT has raised equity twice, and Cambridge Industrial Trust [NR] has raised funds once. This space offers some of the highest yield opportunities but gearing levels and an uncertain outlook continue to concern us. Consequently, we prefer to focus on the top-tier industrial names for now.
Attractive total return. We find MLT’s valuations (0.84x book, 7.4% estimated FY09 yield) fairly attractive. We also like the quality and diversification of its portfolio. We have not made any changes to our earnings estimates but have lowered our discount and cap rate assumptions to less rigorous levels. We revise our fair value estimate for MLT to S$0.78 from S$0.52 previously. While upside of 5% to current price is limited, total return of 12% is attractive (in our view). Upgrade to BUY.
ART – OCBC
Exploit the gap
Performance lags CDL-HT. Ascott Residence Trust (ART) has re-rated 15% since our July upgrade and has achieved our prior S$0.97 fair value. However, its performance lags closest peer CDL-Hospitality Trusts [CDLHT, NOT RATED]. Using end-June 2007 as a base, both S-REITs saw a roughly 83% decline to trough values. But CDL-HT has recovered 260% from its trough versus ART’s 177% recovery. A similar discrepancy plays out in price to book; CDL-HT is trading at 1.08x 2Q09 NAV while ART trades only at 0.71x 2Q09 NAV. There is also a 227 basis point trailing yield differential between the two.
Exploit the gap. Key drivers of this discrepancy, in our view: 1) CDL-HT is an earlier beneficiary of economic stabilization and any nascent recovery (shorter-stay hotels versus extended-stay serviced residences); 2) it is a purer IR play; 3) its balance sheet is stronger, with 19.3% leverage versus ART’s 40.7% leverage; which has led to 4) the market pricing in the possibility of a cash call. We believe value can be extracted from the gap between the two hospitality REITs even when those balance sheet risks are quantified.
FDI expected to bottom in 2009. The United Nations trade and development agency UNCTAD expects global FDI inflows to bottom in 2009 at below US$1.2 trillion and slowly recover to US$1.4t in 2010 and
US$1.8t in 2011. FDI flows are a fair proxy for corporate spend and travel and consequently, the health of the extended-stay business. We believe Pan-Asian markets, where ART operates, will continue to be attractive FDI destinations. We think ART may shine in the coming months as corporate spend and travel gradually return. At 3Q09 results next month, we will look for evidence of occupancy stabilization – the next challenge will be increasing rates, which requires sustained high occupancy levels.
Attractive, even with cash call assumption. We maintain our earnings estimates but lower our discount rate inputs. Our new SOTP value for ART is S$1.40, and we charge a 15% discount to derive a fair value estimate of S$1.19 (prev: S$0.97). Fresh equity could be utilized to support asset enhancement plans and fund acquisitions, but the manager has the luxury/inclination to wait for further re-rating, in our opinion. Note that with a hypothetical equity issue raising S$150m, our SOTP value could fall to S$1.28 (S$0.87 issue price, 10% discount to current price) or to S$1.21 (S$0.68, 30% discount). This still covers our S$1.19 fair value. Maintain BUY (30% total return).