Month: May 2008
CMT – UOBKH
On An Acquisition Spree
CapitaMall Trust (CMT) has entered into a sale and purchase agreement with the Singapore government to acquire The Atrium@Orchard at S$839.8m, or S$2,249psf. The Atrium comprises two Grade A office towers of seven and 10 storeys with ground floor retail space. It is zoned as a commercial development. It is located above the Dhoby Ghaut MRT interchange station and adjacent to Plaza Singapura, which is part of CMT’s portfolio. Dhoby Ghaut MRT station is served by the North South Line, North East Line and Circle Line (ready in 2010). The acquisition is expected to be completed by end-Aug 08.
High gearing a concern. CMT has grown its asset size from S$6.0b to S$6.9b via this acquisition and has revised its local target asset size from S$8b to S$9b by 2010. Gearing has increased from 35.3% to 45.0%. Management appears eager to move on to acquire Clarke Quay (NLA: 262,230sf) and Orchard Ion (NLA: 660,000sf). CapitaLand is likely to monetise its investment in Orchard Ion once it is able to demonstrate stability of rental income. The injection of the two abovementioned assets will likely put a strain on CMT’s financial resources as the aggregate price tag exceeds S$3b.
We have revised our 2009 DPU forecast by 5.1% to 16.5 cents. We have factored in contribution from The Atrium as an office building and the impact of positive rental reversion. We are unable to assess the impact of asset enhancement initiative as management did not provide guidance on construction costs. The conversion of office space into retail space may require government approval.
CMT provides 2009 distribution yield of 4.71%. We have fine-tuned our dividend discount model to reflect the risk of more fund-raising exercises for the pipeline of acquisitions when both the equity and debt markets are fairly weak. Our new fair price is S$3.72. Downgrade from BUY to HOLD due to limited upside. Our entry price is S$3.10, which provides upside of 20%.
CMT – BT
CapitaMall Trust bags Atrium for $839.8m
It will strengthen its retail presence by integrating Atrium, Plaza Singapura
CapitaMall Trust (CMT) yesterday emerged the winner to clinch the Atrium@Orchard with a purchase price of $839.8 million or $2,249 per square foot (psf) of net lettable area (NLA) from the Singapore Land Authority.
This has raised the value of its assets to $6.9 billion and prompted the trust manager to revise its local targeted portfolio size from $8 billion to $9 billion by 2010.
This acquisition confirms an earlier BT report which pointed out CMT as one of the two final contenders for the Atrium and estimated the price of the sale to be $2,200-2,300 psf of NLA.
CMT is set to strengthen its retail presence at the premier Orchard shopping belt, given its plans to create more than 100,000 sq ft of prime retail lettable area at the Atrium.
Situated next to one of CMT’s existing properties, Plaza Singapura, Atrium comprises two Grade A office towers of seven and 10 storeys and some ground floor retail space.
CMT said that it plans to integrate Atrium with Plaza Singapura to create a combined 170 m of prime retail frontage along the Orchard Road strip to create duplex flagship stores and over 900,000 sq ft of net lettable space.
By decanting and converting lower yielding spaces at the Atrium and changing the use of gross floor area, the retail net lettable area on levels 1 and 2 of the property is expected to grow from the current 16,092 sq ft to 100,590 sq ft.
Pua Seck Guan, CEO of CMT, said in a briefing yesterday that the retail enhancement works at Atrium is expected to take place within the next three years.
‘With the improved integrated asset plan and the enhanced direct connectivity from the Dhoby Ghaut MRT interchange station to Level 3 of Plaza Singapura, the values of both assets are expected to increase,’ he added.
He noted that the grade A office space at the Atrium is currently under-rented, which provides opportunities for value creation. The current office rentals are locked in at an average $5.87 per square foot per month (psfpm), resulting in an initial property yield of about 2.1 per cent.
Using the recent renewal of an office lease at Atrium at $13 psfpm as a gauge, Mr Pua said that there is room for average office rental to double to $10-12 psfpm by 2010-2011, even after taking into account rental cap conditions in certain anchor tenants’ leases.
Assuming that all the office leases are being renewed at $10 psfpm today, the estimated property yield today will be about 4.5 per cent, Mr Pua said.
The majority of the leases – some 89 per cent of the total committed NLA – will be up for renewal in 2009 and 2010. Only 7.9 per cent of the total committed NLA is due for renewal this year.
The acquisition of the Atrium, brokered by CB Richard Ellis, is expected to be completed by end-August. The total acquisition costs, including other fees and expenses, will work out to $850 million.
CMT will fund it with the issuance of $650 million worth of convertible bonds and the balance from the $395 million proceeds from its medium term notes programme that it has issued.
Moody’s yesterday affirmed CapitaMall’s ‘A2’ rating but changed the outlook to negative, citing the increase in gearing ratio to 45 per cent from 35 per cent and other execution risks related to the redevelopment of Atrium.
But Mr Pua said that he is confident that the gearing ratio will come down soon.
The five-year convertible bonds (CBs) due 2013, which is fully underwritten by Goldman Sachs, has a coupon rate of one per cent, a yield to maturity of 2-3 per cent per annum and a conversion premium of 20-35 per cent over the share price. Even if the CBs are fully converted, the funding provides yield accretion on a stabilised basis, CMT said.
Yesterday, CMT was trading at $3.51, 12 cents lower than Wednesday’s close before its units were halted, pending the announcement.
SREIT – BT
S’pore Reits face credit ratings pressure: Moody’s
They are affected by tighter conditions for borrowing
SINGAPORE’S real estate investment trusts’ (Reits) credit ratings will face pressure in the next 12 to 18 months because of their rising difficulty in raising funds from debt and equity markets, according to Moody’s Investors Service.
Moody’s has cut or put on review for possible downgrade the ratings of Allco Commercial Real Estate Investment Trust, Macquarie MEAG Prime Reit and CapitaCommercial Trust in the first quarter to reflect growing risk to the debt of the trusts.
‘Tighter conditions for borrowing has adversely affected both the availability and price of credit at a time when a number of Singapore Reits face imminent refinancing needs,’ Moody’s analysts led by Singapore- based Kathleen Lee write in a report.
‘In addition, the depressed unit prices of many trusts have reduced the attractiveness of equity funding.’
Unit prices of Singapore’s Reits have slumped to trade at 15 per cent to 30 per cent of their net- asset values, according to the rating assessor. Mapletree Logistics Trust, which owns industrial buildings, called off a plan to raise as much as $500 million through a rights offer in January because of volatile market conditions.
Singapore’s Reits are also paying more to get bank loans or sell bonds as the commercial mortgage- backed securities market remains shut.
In the first quarter, banks in Singapore raised interest spread by between 0.5 and one percentage point for short-term or refinancing loans, Moody’s said.
‘Many Singapore Reits are relying more heavily than in the past on bank lending,’ the analysts write.
‘Previously, some Singapore Reits had not spent sufficient time cultivating strong bank relationships because, in the past, they had enjoyed easy access to equity and commercial mortgage-backed securities funding.’
CapitaMall Trust and CapitaCommercial, both managed by CapitaLand Ltd, South-east Asia’s biggest developer, have sold six bond deals this year, raising a total of $1 billion at yields ranging from 2.8 per cent and 3.2 per cent, data compiled by Bloomberg show.
Suntec Real Estate Investment Trust, controlled by Hong Kong billionaire Li Ka-shing, raised $270 million from a five-year convertible bond sale in February, paying a 4.25 per cent yield, compared with its average financing cost of 3.1 per cent in 2007, Moody’s said.
Smaller Reits are becoming increasingly likely to be acquired by their bigger rivals in the remainder of the year because of limited access to funding, according to Moody’s.
‘Such a consolidation would leave a sector with the bigger entities having greater financial capacity to expand abroad,’ the analysts say. — Bloomberg
MI-REIT – BT
MI-Reit sees organic growth driving returns
Fresh acquisitions limited in a weak capital market
A SERIES of acquisitions boosted fourth-quarter results for MacarthurCook Industrial Reit (MI-Reit), but weak capital market conditions will limit fresh opportunities in the short term.
MI-Reit purchased nine properties in FY2008, five of them in Q4 alone.
‘Since MI-Reit’s listing in April 2007 we have successfully executed our strategy to grow MI-Reit through yield-accretive acquisitions,’ said acting CEO of MacarthurCook Investment Managers Craig Dunstan.
Rental contributions from the acquisitions translated to distributable income of $5.8 million for Q4 ended March 31, 2008 – 19.9 per cent higher than the forecast $4.8 million.
Going forward though, MI-Reit expects economic growth in Asia to moderate, and says organic growth may soon become the bigger driver of returns.
On the trust’s outlook for FY2009, Mr Dunstan said: ‘We will focus on optimising yield from MI-Reit’s existing portfolio through active asset management.’
He added that ‘we expect to resume our active acquisition growth strategy once capital market conditions improve’.
Weak markets have hampered MI-Reit’s plans to issue equity.
In January it postponed a $200 million equity fund-raising exercise and said yesterday it is unlikely to revisit this plan until early next year.
As part of the strategy to extract greater value from its existing portfolio, MI-Reit has identified properties with built-up plot ratios below the maximum allowable plot ratio of up to 2.5 per cent under the Urban Redevelopment Authority’s Master Plan.
The trust said at a media briefing yesterday: ‘Returns from such additional space additions are likely to provide higher than normal property yields, as they are not subject to land costs.’
The manager of MI-Reit has also been searching for a CEO since the previous CEO, Chris Calvert, left in March.
According to Mr Dunstan, it has been challenging finding a high-quality candidate who knows how to run a Reit and knows about real estate in Asia.
Nevertheless, the temporary absence of a CEO has not evolved into a worrying issue, as MI-Reit has no plans to undertake strategic initiatives in a weak market.
HWT – CS
China Water Congress 2008 – key takeaways and implications for Singapore water companies
● We attended the second China Water Congress in Beijing last week (15-16 May). Below are key takeaways and comments from the conference. Overall, we reaffirmed our bullish view of the water demand outlook, driven by government-backed initiatives. We reiterate our OUTPERFORM ratings on HWT, AENV, and EPUR, and our NEUTRAL rating on HYF.
● Presentations by the Chinese ministries reiterated the governments focus on addressing water difficulties. Whilst there are clear opportunities, it appears to us that the existing framework is still at its infancy whilst reforms are underway.
● While the IRR is in the 8-12% range, key investment criteria in determining risk-reward also include location, size, type, etc. Owing to prior success, PPP is a preferred investment option as evident in the active participation amongst the Sing water plays.
● Whilst considerable improvement in desalination technology and on membrane has been made, China has bigger ambitions to be on par with world’s standards. Also, it targets raising its capacity to 0.8-1 mn tons/day by 2010 from today’s 0.2 mn tons/day.
We re-affirmed our bullish view on China’s water demand
We attended the second China Water Congress in Beijing last week (15-16 May). Below are key takeaways and our comments from the conference. Overall, we re-affirmed our bullish view of the water demand outlook, driven by government-backed initiatives. To re-cap, the Chinese government in the 11th Five-Year Plan (2006-10) has allocated a total of RMB1 tn to address water issues, such as supply, waste-water treatment, water reuse, sewage, and environmental protection. Among the Singapore water companies, most have significant exposure to the China water and waste-water market. We continue to believe companies with good track records in China and differentiated capabilities are well-positioned to capitalise on the strong growth potential. We reiterate our OUTPERFORM ratings on Hyflux Water Trust, Asia Environment, and Epure, and our NEUTRAL rating on Hyflux. We remain OVERWEIGHT the sector.
Water reform developments/updates
The first theme of the conference focused on the severity of water difficulties in China and water industry reforms there. The presentation made by the Ministry of Water Resources reaffirmed our positive view of the robust water outlook in China. Whilst there are clear opportunities for investment in China driven by scarcity, climate change, industrialisation, and reforms, the existing industry framework is still in its infancy, with best practices to be explored further and
leveraged across companies and countries. In addition to the mainstream areas/sectors, there were market-driven proposals on opportunities in smaller cities and in various technologies.
Investing in and financing water projects
The second theme was managing investing and financing risks, from the viewpoint of both water companies and financiers. While the internal rate of return with foreign participation is in the 8-12% range, key investment criteria in determining risk-reward also include asset location, portfolio size and type, and governmental involvement, among others. Owing to the success of public-private partnerships in Chinas energy and transport sectors using the greenfield (BOT)model, this model is generally accepted in the water sector as well. This is evident amongst the Singapore water companies, many of which have moved to participate in BOT (and brownfield – TOT) water and waste-water projects.
Forging ahead with desalination
The third theme was seawater desalination (SWD). With the governments support in developing desalination capacity and technologies, China has made considerable advances, especially in technology, since the late 1950s/early 1960s. Through the years, there seems to be an increasing emphasis on membrane-based SWD (~60% of installed capacity). Whilst playing catch-up, China aims to strengthen its technological competitiveness to be on par with world standards and to raise its installed capacity to 0.8-1 mn tons per day by 2010 from todays established capacity of about 0.2 mn tons per day. At present, there are approximately 19 desalination plants planned or under construction, including Hyfluxs 100,000 cu m/day desalination plant in Tianjin Dagang (valued at S$154 mn), which is scheduled for completion in 2009.