Month: April 2008
CCT – BT
Is CCT getting 1 George Street too easily?
CAPITACOMMERCIAL Trust’s (CCT) $1.165 billion proposed acquisition of 1 George Street from CapitaLand announced last month will be put to a vote of unitholders before June 30 – with CapitaLand abstaining.
By all accounts, CCT unitholders will approve the acquisition. After all, it’s not easy for Singapore real estate investment trusts (Reits) to grow through acquisitions these days. On the one hand, tight credit market conditions make it difficult to get debt funding while on the other, Reits are trading at relatively high distribution yields – because of the general stock market slide – making it difficult to make yield-accretive acquisitions if they need to raise equity to foot the bill.
CCT, however, is more fortunate. It won’t be issuing any equity and has secured full debt funding for its proposed purchase of 1 George Street; and even then, its gearing will rise to only about 40 per cent from 27 per cent now.
However, CapitaLand shareholders will not get to vote on the sale of 1 George Street to CCT because the size of the transaction does not cross any of the thresholds that would trigger a mandatory shareholder vote. Put simply, although the transaction is big, it’s small relative to CapitaLand’s size.
Some parties are complaining that CapitaLand should have conducted an open competition to ensure that it obtained the highest price for the award-winning property.
CapitaLand may have gotten more than the $1.165 billion or $2,600 per square foot (psf) of net lettable area that it will get from CCT. A competition would have been more transparent, especially since the deal with CCT involves an income-support element. CapitaLand will top up any shortfall to ensure a minimum annual net property income of $49.5 million till 2013.
Bidding competition
Another reason CapitaLand should have had a bidding competition is because the headline price of $2,600 psf is lower than the $2,700 psf at which the asset was valued in a deal last August when CapitaLand bought the remaining half-share in the property – notwithstanding that confidence in the office market is weaker today and that the higher price earlier reflected control premium.
From the viewpoint of CapitaLand shareholders, the group could make a bigger profit from selling 1 George Street to external parties than the $47.1 million it expects to book from the proposed deal with CCT. (This amount is after accounting for the five-year income guarantee and CapitaLand’s 30.5 per cent stake in CCT.)
Last month, when the deal was announced, CapitaLand Commercial CEO Wen Khai Meng said that the group has a ‘certain responsibility to help our sponsored-Reit to grow’. CapitaLand is aiming for a balanced strategy on its office portfolio by allocating part of it for outright divestment to reap capital gains – as it has done for Temasek Tower, Hitachi Tower and Chevron House – and keeping a core portfolio of office properties for recurring income by divesting them to its sponsored Reits, which provide a tax-efficient structure for holding income-producing assets. Not only does CapitaLand retain a sponsor’s stake in such Reits, it earns fees from managing the Reit – forming an integral part of its successful property fund management model. This strategy is a key attraction to CapitaLand as a stock.
Move is a departure
However, critics also note that CapitaLand’s decision to offer 1 George Street directly to CCT marks a departure of what it has done for its divestments of other Singapore office assets in the past year or so. Temasek Tower, Hitachi Tower and Chevron House were sold through a competitive bidding process to external parties.
In the case of Temasek Tower which was sold in March 2007, CapitaLand Group president and CEO Liew Mun Leong subsequently revealed that CCT had made an offer for Temasek Tower, but its price was below the $1.04 billion offered by the eventual buyer, Macquarie Global Property Advisors Group. ‘Its (CCT’s offer) was below Macquarie’s. We have no reason to give them. That shows we are very transparent. We are not inbreeding. Fair game,’ Mr Liew had said.
Why was 1 George Street different? One point to note is that CapitaLand owned Temasek Tower, Hitachi Tower and Chevron House jointly with other parties, so it could not simply offer these office buildings to CCT on a platter; CCT would have had to compete with other bidders if it had wanted to buy these assets. 1 George Street is also a newer, higher-grade office block compared with the three sold earlier and hence a more desirable asset to CCT.
Perhaps CapitaLand may wish to make clear the criteria it uses in deciding when to offer assets directly to one of its sponsored Reits and when to have an open competition. Otherwise, some big-name overseas property investors may feel that there’s a lack of transparency and a level playing field.
Of course, one could also argue that such investors may have to accept that Reits will always get the first bite when it comes to its sponsor’s assets. After all, that’s what it means to have a long-term sponsor committed to ensuring the Reit’s growth.
FSL – BT
First Ship Lease Trust to pay out US$12.95m in Q1
DIVERSIFIED shipping trust First Ship Lease (FSL) Trust has announced a distribution of US$12.95 million for the first quarter ended March 31, 2008 – working out to 2.59 US cents per unit.
There were no comparative figures for the previous corresponding period as FSL was constituted and listed in March last year. Compared with the preceding fourth quarter’s 2.42 US cents, the Q1 DPU of 2.59 US cents was 7 per cent higher. This came as FSL added ships to its portfolio.
Q1 revenue rose 10.1 per cent from Q4 to US$16.6 million as the impact of the purchase and concurrent leaseback of two product tankers from Groda Shipping and Transportation in November was fully realised during the quarter.
The distribution translates into an annualised DPU of 10.36 US cents, 7 per cent higher than the annualised DPU of 9.68 US cents in the preceding quarter. Based on FSL Trust’s closing unit price of S$1.10 on April 22, this translates into a distribution yield of 12.7 per cent per annum.
Trustee manager FSL Trust Management (FSLTM) said it will continue to pursue acquisition opportunities as part of its strategy to grow the trust. To support this effort, it has broadened the transaction origination platform by hiring a head of sales (East of Suez), who is joining the management team next month.
FSLTM is confident of achieving the previously announced acquisition target of US$300 million for financial year 2008. In fact, with the recent US$140 million Geden Lines transaction involving two Aframax class crude oil tankers announced earlier this week, about 50 per cent of the acquisition target has already been achieved.
‘In view of the greater difficulty in raising conventional bank financing in the current tight credit environment, ship operators are turning increasingly to alternative financing solutions such as leasing. We are bullish in meeting the balance of the acquisition target of US$160 million over the next eight months of this year,’ said FSLTM chief executive officer Philip Clausius.
Funding for these future acquisitions will be from the newly secured US$200 million credit facility, of which about US$150 million remains undrawn.
AscottREIT – BT
Ascott Trust Q1 payout per unit up 47%
ASCOTT Residence Trust (ART) achieved a unitholders’ distribution of $14.17 million for the first quarter ended March 31 – a 76 per cent rise from a year earlier. And distribution per unit (DPU) rose 47 per cent to 2.33 cents.
The trust said its serviced residences continued to benefit from strong demand for accommodation from business travellers in Asia. The improved operating performance of its properties and contributions from new acquisitions also boosted its performance.
Serviced residences posted 15 per cent growth in revenue per available unit (RevPAU) overall, led by a strong RevPAU increase of 29 per cent in Singapore and higher RevPAU in China, Indonesia, the Philippines and Vietnam.
In addition, rental housing properties in Tokyo have performed well since they were acquired in December last year, achieving average occupancy of about 90 per cent, according to ART.
‘We will continue to focus on maximising asset yields to drive organic growth and making yield-accretive acquisitions to deliver stable and growing returns to unitholders,’ said Lim Jit Poh, chairman of Ascott Residence Trust Management Ltd.
Added Chong Kee Hiong, ARTML’s chief executive officer: ‘Our strategy of maintaining a balance of properties in stable as well as emerging markets in the Pan-Asian region will continue to provide a high degree of income stability for the portfolio.’
Upon completion of its latest acquisition in Perth, expected in the current Q2, the trust’s portfolio will expand to $1.52 billion, comprising 37 properties with 3,550 units in 11 cities across seven countries.
PST – UOBKH
Lower DPU in 1Q08, but should improve with new ships
Pacific Shipping Trust (PST) reported a net profit of US$0.47m for 1Q08. Excluding fair value losses on interest rate swaps of US$3.6m, net profit would have been US$4.1m. This appears to be ahead of our 2008 net profit of US$14.0m on what appears to be lower-than-expected depreciation of US$2.5m (1Q07: US$3.2m). Net profit for the remaining quarters of 2008 should register higher earnings due to the impact of four new containerships. Our earnings forecasts do not take into account gains/losses on interest rate swap contracts. These gains/losses are non-cash items and fluctuate from quarter to quarter depending on interest rate movements. Such gains/losses have no impact on PST’s distributable profit and cash.
However, PST has declared a DPU of 0.97 US cts, 6.7% lower than 1Q07’s 1.04 US cts. Income available for distribution was US$3.3m (1Q07: US$3.4m) after retaining US$0.5m for working capital. PST has lowered its payout to 90% from 100% because it believes it is prudent to set aside cash to provide for future working capital and to support long-term strategic development of the trust. We are maintaining our earnings and DPU forecasts.
The four new ships to be delivered in 2008 will expand PST’s portfolio of vessels by 50% to 12 from its initial fleet of eight ships. In total, the four new vessels are expected to raise PST’s total contracted revenue p.a. by 79% to US$61.9m. We maintain our target price of US$0.50 for PST, based on a fair value 2009 net yield of 9.5%. Maintain BUY.
FrasersCT – UOBKH
4QFY08: Rental reversion higher than anticipated
Strong rental reversion at Causeway Point. Frasers Centrepoint Trust (FCT) reported gross revenue of S$21.6m in 2QFY08, an increase of 10.3% yoy. Revenue contribution from its largest mall Causeway Point gained 11% yoy to S$14.6m benefitting from strong rental reversion and higher turnover rent. 20,816sf of retail space at Causeway Point representing 5% of total net lettable area (NLA) was renewed at 16% above preceding rental rates in 2QFY08. Revenue contribution from Anchorpoint doubled to S$1.6m after completion of asset enhancement initiative (AEI). Revenue contribution from Northpoint, however, dropped 3% yoy to S$5.4m. Occupancy at Northpoint declined from 100% in FY07 to 83.8% in 2QFY08 with anchor stores Cold Storage and Harvey Norman closed due to current AEI. Management has increased the number of leases with turnover rents from 16% in 2QFY07 to 62% in 2QFY08. Turnover rents currently accounts for 7% of total revenue.
Net property income increased 7.7% yoy to S$14.4m in 2QFY08 while distributable income grew 16.8% yoy to S$12m. FCT announced DPU of 1.75 cents for 2QFY08, an increase of 4.8% yoy. Management has again retained 10% of distributable income for distribution in 2HFY08.
Ready pipeline of acquisitions. FCT has a ready pipeline of acquisitions that will double NLA to more than 1.2m sf when fully completed. It has entered into a put and call option agreement with sponsor Frasers Centrepoint Limited for the purchase of Northpoint 2 at between S$139.5m to S$170.5m. Northpoint 2 is 70% completed and is expected to obtain temporary occupation permit by Aug 08. 68% of NLA has been committed and Northpoint 2 is on schedule to be injected into FCT in 1QFY09. We expect YewTee Point and Bedok Mall with NLA of 80,000sf each to be injected in 3QFY09 and 2QFY11 respectively. We estimate the three new malls to contribute 28.6% of total revenue in FY12.
Northpoint: short-term pain for long-term gain. FCT commenced S$30m major AEI at Northpoint, which will last from Jan 08 to Jun 09. Gross floor area will be transferred from the fourth floor to Level one to three, which provides higher rental yield. The AEI will integrate Northpoint with Northpoint 2 to create an enlarged shopping mall with total NLA of 232,000sf. Management expects average rental for Northpoint to increase from S$11.00psf pm to S$12.91 after the revamp, thus increasing net property income from Northpoint by 27% to S$17.6m/year. Unfortunately, contributions from Northpoint will be affected from 3QFY08 to 3QFY09 with lower average occupancy of 82%.