Month: October 2008
CMT – DBS
Enhancements put on hold
Story: 3Q08 revenue and NPI grew by a similar 13% yoy and 3% qoq to $129.7m and $86.9m respectively, thanks to organic growth and new contributions from Atrium. Excluding Atrium, topline would have grown 10% yoy. The group plans to distribute 97.5% of income amounting to $60.8m, translating to DPU of 3.64cts.
Point: During the quarter, leases were renewed at 9.3% higher than preceding levels. Occupancy remained at a high 99.7% while tenant retention rate averaged about 79.6% YTD vs 82.4% in 2007. CMT continues to provide good earnings visibility going forward. A portion of the 31% of portfolio rental income scheduled to be reviewed in 2009, have been locked in through pre-commitments at SSC and Lot One, where enhancement works are anticipated to complete by end 08. As a result, current locked-in revenue for 2009 exceeds 83% of 2008 annualised gross revenue. In view of the tight resource environment and high construction costs, the group
intends to put on hold AEI at JEC and FIT and Tampines office extensions. Refinancing issues are being addressed with sufficient funding capacity to meet financing needs till June 09 and plans to refinance the remaining $680m debt due Aug 09 is in progress.
Relevance: Notwithstanding CMT’s diversified and resilient portfolio of suburban malls, we have lowered our FY09 DPU forecast to 14.5cts to adjust for a slower pace of rental growth and assumed higher vacancy levels in view of the moderation in economic activities. With the deferment of redevelopment projects, we have lowered our DCF to $2.63. Our price target of $2.42 is pegged at parity to RNAV of $2.42. Maintain Hold.
CMT – OCBC
Slowing reversionary growth in 3Q08
Slowing reversionary growth. CapitaMall Trust (CMT) reported a soft set of 3Q08 results. Revenue grew 3.3% QoQ to S$129.7m and the increase was largely attributed to the contribution of S$3.3m from Atrium@Orchard. New and renewal leases contributed just S$0.8m to the quarterly increase in 3Q08. Slowing rental renewal was further evidenced from the decline in the % increase in current rental rates against preceding rental rates between 2Q08 (9.9% increase for 6m08) and 3Q08 (9.3% increase for 9m08), implying that reversionary growth had slowed QoQ. DPU of 3.64 S-cents was announced for 3Q08, translating to an annualized yield of 6.9% base on yesterday’s closing price.
Keeping watch on debt refinancing. No refinancing was done in 3Q08 but management assured that CMT has sufficient cash and bank facilities to refinance its borrowings due in December 08 (S$187.5m) and May 09 (S$80m). However, the lack of investor appetite for medium term notes (MTN) means that CMT is unlikely to be able to draw down on its untapped MTN facility for refinancing purposes unless sentiment changes for the better. While this may have raised more uncertainties on the refinancing of the S$673.7m of borrowings due in August 2009, CMT still has a buffer period of 10 months to seek refinancing.
AEIs put on hold. CMT has also announced that it will be putting on hold its asset enhancement initiatives (AEI) for Funan DigitaLife Mall, Tampines Mall and Jurong Entertainment Centre due to the high construction cost and competitive market for resources. In light of the current tight credit market condition, we see these delays as a positive move by CMT not to overstretch its financial resources and affect its credit rating at a time when its credit health and refinancing should be the priority. AEI for Atrium@Orchard still remains on track and is now waiting for approval from authorities.
Fair value lowered to S$2.57. With further evidence of slowing rental reversion, we are now cutting our rental growth to 0% for FY09 and FY10, but we maintain our view on the defensiveness of retail REITs. As such, our FY09 and FY10 DPU forecasts have been lowered to 16.2 and 17.1 Scents, respectively. Also factoring in the decline in the share price of CapitaRetail China, our fair value of CMT has been lowered from S$3.05 to S$2.57. Current share price still provides an upside of 21.8% and we maintain our BUY rating on CMT.
FSL – OCBC
Multiple layers of risk; maintain HOLD
3Q results as expected. First Ship Lease Trust (FSLT) announced that it generated US$23.7m of revenue in 3Q08, up 84.8% YoY, thanks to the acquisition of six vessels in the past year. The trust will distribute US$15.3m, or 3.05 US cents per share for 3Q08, up 9% QoQ and 36.8% YoY. This translates into an annualized distribution yield of 38%. The results were generally in line with our expectations.
Latest loan terms will impact DPU. While FSLT had so far secured debt financing on bullet repayment terms, lenders require the newest US$65m loan tranche to be amortized from Sep 2010 until the loan’s maturity in Apr 2012. We assume FSLT will have to use its cash income to pay down the loan from 2010 onwards. As FSLT is currently paying out 100% of its cash income, we estimate that DPU would fall 7.5% to 40% YoY over 2010-12 on the existing equity base and portfolio.
Loan-to-value at 175%. FSLT disclosed that the latest fair market value of its vessel portfolio as of mid-October is US$896m, or about 11% less than the original acquisition cost. This represents 175% of FSLT’s outstanding loan value of US$513m. One of the loan covenants mandates a minimum coverage of 145%. The fair market value of the current portfolio would have to fall about 20% to breach this covenant, triggering a technical default.
Multiple layers of risk. While a credit market breakdown has been averted, credit markets are still illiquid due to risk aversion arising from mass deleveraging and an imminent global recession. FSLT has a diversified portfolio with long lease terms, but it is not immune to its environment. Counterparty defaults may lead to a rate reduction or at worse, an idle ship. Asset values in turn are likely to depreciate as the industry turns. These risks are magnified by the use of leverage. If the loan-to-market value covenant is breached, lenders may demand that FSLT start using its cash income to pay down debt. Distributions could be reduced, or even cut to zero in such a scenario. We believe that recent price levels fully reflect the current risks and maintain our HOLD rating. Our fair value estimate of 43 S cents prices in a bear case scenario with a 25% fall in charter income, a 50% fall in terminal asset value and zero distributions from 2009 onwards (income is diverted to pay down debt).
FCOT, MI-REIT – BT
By EMILYN YAP
CREDIT rating agencies have turned more pessimistic on two real estate investment trusts (Reits) in Singapore: Frasers Commercial Trust (FCT) and MacarthurCook Industrial Reit (MI-Reit).
Standard & Poor’s (S&P) Ratings Services yesterday changed its CreditWatch status on BB-rated FCT from positive to developing. The revision arose from concerns over FCT’s debt of $70 million, which will be due on Nov 22.
‘FCT has yet to finalise its refinancing plans to the level of certainty we expected,’ said S&P credit analyst Wee Khim Loy.
FCT owes $70 million to the Commonwealth Bank of Australia, due next month. In addition, it owes the bank $400 million and $150 million, which will fall due in July and December 2009 respectively.
According to S&P, FCT has said it is making progress in obtaining firm commitment from a consortium of banks to refinance the debts. This is helped by the financial flexibility and satisfactory credit profile of Frasers Centrepoint Ltd (which owns 18.27 per cent of FCT) and Fraser and Neave Ltd (which owns Frasers Centrepoint).
S&P expects FCT to have firm committed refinancing arrangements ready by Oct 31. Otherwise, FCT’s rating may be placed on CreditWatch negative or lowered.
Separately, Moody’s Investors Service yesterday placed MI-Reit’s Baa3 corporate family rating on review for a possible downgrade.
With ‘dramatically changed market conditions’, MI-Reit is ‘likely to retain much greater asset and tenant concentration than is consistent with a Baa3 rating’, said Moody’s lead analyst for the trust, Kathleen Lee.
The review also recognised refinancing risks facing MI-Reit. The trust has 91 per cent of its total debt or $201 million falling due next April, which is not covered by available committed facilities.
Nonetheless, Moody’s noted that MI-Reit’s credit metrics still have reasonable headroom against its bank loan covenants. Its revenue stream is also supported by a relatively long- lease maturity profile, mitigating the effects of low asset diversification and moderate tenant concentration.
Moody’s review will focus on MI-Reit’s progress in securing committed financing for debt maturing in April next year. It will also consider management’s strategy in improving the asset portfolio and revenue streams in the next 1-2 years.
MapleTree – CIMB
Treading with care
• In line. 3Q08 DPU of 1.84cts was in line with Street and our expectations, growing 6.7% yoy, only because of a lower-than-expected number of units issued from a recent rights issue. YTD distributable profit of S$69.1m was below our expectation, at only 66% of our full-year forecast. However, this could be attributed to the lagged effect of contributions from announced acquisitions in the year. Gross revenue of S$46.0m was up 19.6% yoy, on contributions from acquisitions completed earlier.
• Completion of acquisition properties. As at 30 Sep 08, the acquisition of Northwest Logistics Park (Phases 1 & 2) and Kashiwa Centre was completed, leaving only two properties for completion in 4Q08. These are the G-force property in Malaysia and ISH Waigaoqiao property in China worth a total of S$45.8m.
• Refinancing worries over for now. MLT has refinanced about S$500m of its debt with proceeds from its rights issue. Total debt has been reduced from S$1,461m to S$1,023m with asset leverage falling to a healthy 36.9% from 56.3%. Debt maturity will not exceed 12% of its total debt over the next three years (Figure 1). MLT has also S$360m of committed working capital lines and term loans received at hand.
• Stable portfolio to provide rental resilience. As at 30 Sep 08, 64.1% of its leases had long tenures exceeding three years, and 35.9% had leases of three years or less. This combination should provide a broad and resilient rental base which is positive in the uncertain economic climate today.
• Changes in assumptions. We remove our earlier assumptions of new acquisitions of S$300m each for 2009-10 in view of the global financial uncertainties. We also remove the discount given for a share overhang from the rights issue. Additionally, we revise our assumption of 70% contribution from new acquisitions to 40% to account for the longer time lag between the announcement and actual contribution.
• Maintain Neutral; lower target price of S$0.60 (from S$0.85). After changes in our assumptions, our DPU estimates for FY08-10 decrease by 0.6-11.1%. Our DDM-derived target price (discount 9.6%) accordingly falls to S$0.60 from S$0.85. We believe that MLT’s rental resilience, healthy leverage and management’s conservatism after the rights issue will yield stable distribution to unitholders despite macroeconomic negatives. Maintain Neutral.