Month: March 2008
CMT – UOBKH
Proactive enhancements
CapitaMall Trust (CMT) invests in quality income-producing real estate used for retail purposes. It owns 13 retail malls, which are strategically located in the suburban areas and Downtown Core. CMT is the largest retail REIT with market share of 13% for private retail stock in Singapore. CMT has a 20% stake in CapitaRetail China Trust (CRCT), a China-based retail REIT listed on Singapore Exchange. CMT was assigned corporate rating of A with a stable outlook by Moody’s Investor Services. CMT is the first and largest REIT in Singapore.
Creating office blocks at Funan DigitaLife and Tampines Mall. CMT has received provisional permission to utilised unused gross floor area (GFA) of 385,500sf for Funan DigitaLife, which has only utilised 3.8 of its allowable plot ratio of 7.0. The unused GFA will be utilised to build a 4-storey office block with estimated net lettable area (NLA) of 277,630sf on top of the existing mall. NLA for retail will also increase by 14% from 296,601sf to 338,360sf. CMT was also granted an increase in plot ratio for Tampines Mall from 3.5 to 4.2. The additional GFA of 95,000sf will be utilised to build an office block on top of the existing mall. We expect construction to be completed by 2H 2010 and have factored in contributions from the two office blocks starting 1Q 2011.
Enhancing newly acquired properties. CMT submitted written permission to increase plot ratio for Jurong Entertainment Centre from 1.85 to 3.0, almost doubling NLA to 209,700sf. The asset enhancement initiative involves construction of an Olympic-sized ice skating ring. CMT has applied for the ice skating ring to be considered as civic and community uses, which provides
additional floor space of 35,000sf if approved. At Lot One, CMT will decant space occupied by National Library for construction of a 4-storey 16,500sf retail extension housing 50 new shops. Level 1 of the retail extension will be connected to Chua Chu Kang MRT station when completed in 4Q08. Sembawang Shopping Centre is being redeveloped. CMT will decant 42,610sf of residential area and shift more space into high yielding basement, level 1 and level 2. The new mall with NLA of 128,413sf will be completed in 4Q08.
No risk from refinancing. CMT has refinanced S$312.8m bonds due in Feb 08 with S$320m term loan due in Aug 09. Management plans to fix the interest rate to achieve all-in rate of not more than 3.3%, lower than all-in rate of 4.3% for the bonds. There is a smaller S$150m fixed rate note due to Dec 08. Current gearing is 35.3% after raising S$345.9m in placement to finance acquisition of remaining 72.8% stake in CapitaRetail Singapore, owner of suburban malls Lot One Shoppers’ Mall, Bukit Panjang Plaza and Rivervale Mall in Nov 07. CMT provides FY08 distribution yield of 4.51%, a healthy spread of 2.35% over 10-year Singapore government bond yield at 2.16%. Our target price is S$3.83 based on 2-stage dividend discount model.
KREIT – BT
K-Reit feeling effects of financial crunch
K-REIT Asia is going to find it a bit tough to raise the money it needs. The real estate investment trust (Reit) is looking to raise up to $700 million in a rights issue, in part to repay some of the $942 million bridging loan it took from Keppel Corp when it purchased its one-third stake in One Raffles Quay last year. The trust indicated in a recent circular to shareholders that it intends to price the new units at up to 20 per cent discount to the market price. However, K-Reit is seeking to issue only 420 million new shares. The limit is in place to ensure that at least 10 per cent of the total issued units are held by the public after the rights issue.
Keppel Corp and sponsor Keppel Land, who together own 72.7 per cent of K-Reit, have both given irrevocable undertakings to take up their respective allocations of the rights units. Both companies will also make applications for excess rights units that are not subscribed – essentially underwriting the fund-raising exercise. The 420 million share cap ensures that in the worst-case scenario where no other shareholder subscribes to the rights units, KepCorp and KepLand will still end up with less than 90 per cent – allowing K-Reit to avoid delisting.
While the circular helps to allay some concerns in the market with regard to potential delisting and consolidation by parent KepLand, there is a shortfall between how much the trust is hoping to raise (up to $700 million) and how much it could actually raise from a rights issue of 420 million shares.
In the circular, K-Reit used $1.20 (20 per cent off the market price of $1.50) for illustrative purpose. Assuming a rights issue of three new units for every two existing units, K-Reit will be issuing 372.1 million rights units and raising about $446.5 million in gross proceeds. K-Reit will come close to raising $700 million only in the highly unlikely scenario that it issues 413.5 million rights units on a five-for-three basis at $1.68 apiece, which will give it gross proceeds of $694.6 million.
For this to happen, the prevailing market price will have to be $2.10 – assuming a rights issue price which is at a 20 per cent discount to the market price.
K-Reit’s stock closed at $1.47 last Thursday, the last day of trading before the extended weekend break. Analysts believe that it is unlikely that the stock price will cross the $2.00 mark over the next few months amid a generally sluggish market. K-Reit said in its circular that the entire exercise is expected to be completed no later than mid-May.
Looking at the expected shortfall between what the Reit hopes to raise and what it probably could raise, it wouldn’t be wrong to assume that K-Reit might have to look at additional sources of funding. However, it is unclear what K-Reit plans to do if the rights issue falls short of the amount it needs. K-Reit said in its circular that, given current market conditions, a rights issue is the ‘most appropriate’ method of raising equity.
Raising funds from other sources will undoubtedly be hard in a squeezed credit market. Industry players have pointed out that the two upcoming integrated resorts (IRs) have mopped up much of the credit available in the market, making it much harder for smaller players to get loans and refinance debt. Also interesting is the fact that K-Reit seems to be looking to parent companies KepCorp and KepLand to tide it over the current financial crunch. If minority shareholders choose not to take up their rights units, KepCorp and KepLand are ready to step in, even though this might mean that K-Reit could suffer from poor liquidity and low trading volumes in the future.
Buying up all unwanted units will also raise KepLand’s stake in K-Reit. KepLand has said it intends to go asset light by divesting all its investment properties. By increasing its stake in the Reit, it is doing the opposite. Perhaps then it is time for KepLand to reconsider plans to keep K-Reit listed; going private will probably allow K-Reit to raise funds more easily in a tight credit market.
As for K-Reit, the rights issue will lower its gearing from the present 53.9 per cent (which is approaching the maximum allowable limit of 60 per cent) to 32.7 per cent – assuming the trust issues 372.1 million rights units at $1.20 each. But raising funds for future acquisitions may continue to be a problem if the Reit has to go back to the market once again.
AllCo – Phillip
Refinancing Concern Addressed
Allco REIT announced it had received extension on the maturity date of S$550 million of its debt, which was due in July 2008 to 31 Dec 2009. The balance of S$70 million will be repaid with the proceeds from the redemption of AWPF. With the announcement, we believe the clout over refinancing worries has been dispelled and thus will not lead to any force-sale of its properties.
Earlier, Moody’s downgraded Allco’s credit rating for the second time within a span of two months. Allco’s credit rating was downgraded from Baa3 to Ba1 on 31st Jan 2008 and was further downgraded one level to Ba2 on 18 Mar 2008. The latest revision centers on concerns of Allco refinancing progress as well as outcome of the possible divestment undertaken by Allco REIT of its Australian properties.
With regard to the strategic review, the manager of Allco Commercial REIT announced that it is investigating a potential divestment of its Australian properties. The decision stems from the strong Australian property market that has resulted in substantial capital gains as well as to redeploy capital to higher growth assets.
AWPF has stated its intention to dispose of its entire portfolio and Allco REIT expects to receive its proportionate share in AWPF in the 3rd quarter of 2008.
With the latest guidance from Allco, we believe a likely scenario would be Allco manages to refinance at a cost of 4%., while keeping both the Central Park and Centrelink properties and AWPF will be fully redeemed.
Scenario Analysis
We conducted a scenario analysis study of possible outcomes from Allco’s refinancing talk as well as the strategic review on the impact of DPU.
Scenario 1: AWPF fully redeemed, sold off Central Park to realise capital gain. Proceeds from sale used to reduce debt, gearing reduced to 26%.
Scenario 2: Proceeds from AWPF redemption reduces debt marginally to 42%
Valuation and recommendation. The downgrading of Allco’s credit rating has hurt the dividend payout, although fundamentally we believe Allco’s portfolio will continue to do well. Allco is a victim of bad sentiment surrounding the sector that resulted in a tight credit market making refinancing more difficult and most costly. The double credit rating downgrade stems from rating agencies taking a more cautious stance in their methodology after the sub-prime fiasco. Our analysis study indicates that under different assumptions, FY08F DPU ranges from 5.44 cents to 7.35 cents. This translates to a yield range of 7.8%-8.7%. We note the contrast to the 6.73 cents paid out in FY07 and represents a yield erosion of 19.1% in the worst case while a yield accretion of 9.2% in the best case. Fair value estimation ranges from S$1.00 to S$1.14. Our base case valuation is premised on the assumptions that Allco will refinance at 4%, which represents a margin of 200 basis points over SIBOR and Allco will retain the Central Park and Centrelink buildings. Fair value is lowered from S$1.21 to S$1.07. Maintain Buy.
Office REITs – UOBKH
Leveraging on positive rental reversion
Blessed are the office landlords. Rentals for prime office space within Raffles Place and Marina Centre has shoot up from S$8.60 in 1Q07 to S$15.00psf pm in 4Q07. Rentals for Grade A office space is even higher at S$17.15psf pm in 4Q07 (source: CB Richard Ellis). Rentals surged as tenants chased after limited pockets of vacant space within the Central Business District. There is strong demand from financial institutions (wealth management, hedge funds, insurers and commercial banks) and oil & gas companies. Average occupancy for Grade A office space at Raffles Place, Shenton Way and Marina/City Hall micro-markets reach unprecedented levels of 99%, 97.5% and 99.6% respectively (source: Colliers International).
Supply of office space is expected to remain constrained in 2008. Only 959,000sf of new office space will come on stream, the majority in fringe suburban locations. According to CB Richard Ellis, rentals for Grade A office space could average S$19.00psf pm by end-2008, a further increase of 10.8%.
New supply well taken up. The strength of the leasing market can be seen from healthy take ups at Marina Bay Financial Centre (MBFC). Phase 1 with 1.6m sf and Phase 2 with 1.3m sf of office space will be completed in 2010 and 2012. Both phases are more than 50% pre-committed by major financial institutions. Standard Chartered has signed a 12-year lease for 508,300sf at MBFC Phase 1 with option to extend for another eight years. DBS Bank has signed a 12-year lease for 700,000sf occupying 22 floors at MBFC Phase 2.
Capital values supported by keen foreign interest. Investors’ interest in office properties remains strong, especially from foreign funds. Foreign investors accounted for the majority of large transactions in 2H 2007. Capital value for prime office space in Raffles Place is estimated at 3,100psf, an increase of 6.9% qoq and 106.7% yoy (source: CB Richard Ellis).
Office REITs – OVER WEIGHT. We favour the office market due to positive rental reversion and limited supply coming on stream in 2008 and 2009.
CapitaCommercial Trust (BUY/S$1.90/Target: S$2.45). CCT is well positioned to benefit from positive rental reversion as 56.9% of its leases for office space are up for renewal in 2008 and 2009, when supply coming on stream is fairly limited. It will redevelop Market Street Car Park into a premium Grade A office tower with estimated net lettable area of 680,000sf. CCT’s gearing is low at 24% in Dec 07 and has secured funding for refinancing of short-term borrowings and the acquisition of Wilkie Edge.
K-REIT Asia (BUY/S$1.47/Target: S$1.96). K-REIT Asia has proposed a renounceable rights issue of up to 420m units priced at a discount of up to 20% to the prevailing market price. Keppel Corporation and sponsor Keppel Land own 72.7% of K-REIT in aggregate and have given irrevocable undertaking to take up their respective allocations of rights units. We believe the stock is oversold. Our target price for K-REIT is S$1.96 assuming 372.1m new units were issued at S$1.20 each in a 3-for-2 rights issue.
Suntec REIT (BUY/S$1.40/Target: S$2.10). Suntec REIT will benefit from improved connectivity to Suntec City due to the Esplanade and Promenade MRT stations when the new Circle line is ready in 2010. It has acquired 14,677sf of state land for construction of new extension at Park Mall, which increases gross floor area by 67,810sf or 17.7% to 451,727sf.
Suntec REIT has issued 5-year S$250m convertible bonds, convertible into cash or new units. The conversion price is initially S$1.968/unit. The bonds bear interest rate of 3.25% and yield to maturity of 4.25%. Suntec REIT intends to settle the bonds in cash on conversion to minimise dilution. We have factored in the higher cost of debt in our forecast and lowered our target price from S$2.18 to S$2.10.
MMP – BT
RECENT developments in the S-Reit market suggest that consolidation has begun and more merger and acquisition (M&A) activity is imminent, says Macquarie Capital Advisers executive director and global head of property group Antony Green.
In case there is any doubt, future M&As could turn hostile and will almost certainly grab the headlines. But Mr Green says: ‘History shows the first few deals are always friendly.’
He believes that the current state of the S-Reit market corresponds to that of the Australian market about 10 years ago.
In 1999, the number of Australian-listed property trusts (LPTs) peaked at 46, then slowly dwindled to around 26 today, with the asset pool remaining largely the same.
Consolidation, if or when it is considered by S-Reit players, will be trickier because property assets have surged in value recently, making acquisitions less likely to be yield-accretive.
Mr Green says that although yield-accretiveness ‘is one of the first tests’ when making an acquisition, ‘you have to think of total return’.
‘There is strategic merit in buying something that in several years’ time is going to create more value for you as an investor,’ he adds.
He also says: ‘With a bit of synergy, maybe a management fee waiver of some sort, a bit more or less debt, you can make it positive for both sides.’
Mr Green could, of course, be talking about Macquarie MEAG Prime Reit (MMP Reit), which recently announced a strategic review, on which he is advising.
MMP Reit could be sold in its entirety or have its underlying assets sold piecemeal.
On the attractiveness of MMP Reit, Mr Green says that while it was trading for around $1.05 a unit before the strategic review announcement, its NAV based on the underlying assets had been valued around $1.61 a unit. And at the end of the trading day on Thursday, it closed at $1.19 a unit unchanged.
For current investors, however, MMP Reit has not delivered growth.
‘A lot of S-Reits have traded on the fact that they will provide growth. MMP Reit, given its cost of capital, struggled to provide the acquisitions and the growth,’ Mr Green says.
He has no comment on the details of MMP’s strategic review, but says it is in Macquarie Group’s interest not to sell its 26 per cent independently but to seek an offer for all unitholders instead.
On consolidation of the S-Reit market and the Reit market in Asia in general, he believes this will make it more ‘efficient’. ‘Some Reits will disappear and some will go from strength to strength.’
Mr Green does not think the S-Reit market has matured yet. But the perception that S-Reits are a growth vehicle is changing. ‘Some of that gloss has come off a bit,’ he says.
‘It is not a bad thing that people realise what Reits actually are and not what they think they are supposed to be.’