Month: December 2008
Cambridge – BT
SINGAPORE – Cambridge Industrial Trust, which owns 43 warehouses and factories in Singapore, said on Thursday that chief executive Ang Poh Seong had quit with immediate effect and that he will be replaced by Chris Calvert.
Mr Ang’s departure was not related to any differences of opinion with its board of directors, the firm said in a statement to the stock exchange, but it did not say why he was leaving.
Mr Calvert, 38, is an Australian citizen who was previously CEO of a firm called Blaxland Funds (Asia).
Cambridge Reit shares fell 2.4 per cent on Thursday and have lost more than 60 per cent of their value in the last three months as the Singapore economy slipped into recession. — REUTERS
CMT – OCBC
Uncertainties over refinancing and rental rate outlook
Refinancing is still our focus for 2009. Going into 2009, refinancing of borrowings will remain the overhanging concern for CMT. CMT had not done any refinancing in 3Q08 but management assured that there is sufficient cash and bank facilities to refinance its borrowings due in December 08 (S$187.5m) and May 09 (S$80m). While previously we had assumed that part of the borrowings be refinanced by the medium term notes (MTN) programme, there is now little investor appetite for MTN, meaning that CMT would not be able to draw down its untapped MTN facility for refinancing.
Credit rating could be at risk. Recent spate of downgrading of S-REITs’ credit ratings reflects the cautious stance that rating agencies had taken on S-REITs and has also raised further concerns on their credit health. In May, rating agency Moody’s confirmed CMT’s A2 rating but revised its outlook to negative due to its weakened financial profile following the acquisition of Atrium@Orchard. We believe that the risk of credit rating downgrade is higher now given the current tight credit market and slowing retail rental rates. A downgrade could potentially raise CMT’s cost of refinancing and affect its future distributions.
Cutting back our retail rental expectations. In light of the worsening economic and job outlook, consumer spending could continue to slow down in 2009. As such, we are now taking a more conservative stance in our retail rental rate expectations and adjust our rental forecast from 0% to -5% per annum for FY09 and FY10.
Fair value lowered to S$1.94. We remain optimistic that CMT should be able to refinance its near term borrowings, given its portfolio of quality assets, track record of good access to the debt market and backing of a strong sponsor, CapitaLand. However, to reflect the tight credit market conditions, we are now factoring a higher increase in borrowing costs for FY09, from our previous forecast of +60bp to +100bp now. Also factoring in our new retail rental rate expectations, our FY09 DPU forecast has been cut by 6.8%, from 16.2 S-cents to 15.1 S-cents. We are also ascribing a 15% discount (no discount ascribed previously) to our RNAV forecast in light of the challenging condition in the retail market. As such, our fair value of CMT has now been lowered from S$2.57 to S$1.94. As upside to share price is still 35.7%, we maintain our BUY rating on CMT.
SREIT – CIMB
Feedback from investors
We held meetings with 58 investors during an 8-day roadshow to the UK, Europe, Singapore and Kuala Lumpur in November. Themes discussed included REITs’ refinancing issues, the implications of breaching the 60% gearing limit as well as the degree of occupancy and rental declines that could be expected in a downturn.
While most REITs seem able to maintain general debt covenants with their bankers with safe gearing levels of under 45% (vs. the regulatory 60% limit) and interest cover exceeding 3x, short-term refinancing looks daunting for a number of them. From the refinancing deals announced over October-November, we conclude that REITs with strong sponsors, particularly government-linked sponsors, low leverage and quality portfolios are more likely to secure bank loans, which are the preferred refinancing option.
While some sceptical investors felt that there was more room for rents and occupancy to fall, most agreed that REITs have been oversold and even if yields deteriorate moderately from here, the REITs remain highly attractive, by any measure.
Our top pick #1: CCT
Will it get cheaper? Most clients agreed that at 0.2x P/BV, falling rents and occupancy levels have been priced in and yields of 18% certainly look attractive. We contend that CCT’s low average rent base (under S$8psf/month), long leases, rental caps for some of its leases, rental support from CapitaLand for One George Street and a master lease structure with the hotel operator RC Hotels within Raffles City would provide buffers despite falling office spot rents and occupancy levels. Investors’ apprehensions about a falling topline were somewhat assuaged. However, refinancing issues remain the main worry and three possibilities were discussed:
(1) Bank loans secured but at a high cost. Refinancing via bank loans is the most preferred solution for CCT at this point. On 28 Nov, Reuters reported that CCT verbally mandated four banks (Bank of Tokyo-Mitsubishi UFJ, DBS Bank, Standard Chartered Bank and UOB) to handle a S$580m 3-year bullet refinancing deal, which is equivalent to its short-term debt coming due in Mar 09. Interest cost, which was reported at 250bp above LIBOR, is in line with the 3-year cost of debt in Singapore (we earlier estimated at 200-300bp above SIBOR or SOR). However some investors are concerned that the indicative rate is significantly higher than CCT’s portfolio property yield, which is below 4%. Even though the cost of debt has yet to be finalised, we have assumed a cost of debt of 5% for CCT in 2009. Most investors conceded that an increase in cost of debt would still be preferable to a dilutive rights issue. We are of the view that banks remain willing to extend credit to CCT, given its quality portfolio and strong sponsor CapitaLand (CAPL SP, S$2.49, Underperform, target price S$2.30). A direct bank loan remains the most possible and positive outcome for CCT.
(2) Bank loans not secured; rights issue forced. More sceptical clients were worried that CCT may resort to a rights issue if bank loans cannot be secured, causing dilution for existing unitholders. Additionally, if take-up is poor, sponsor CapitaLand could end up absorbing the bulk of the issue, resulting in a highly illiquid REIT. This would be negative for both CCT and the REIT sector. We are of the view that this option would be given low priority, and that bank financing would eventually be made available to CCT. Before deciding on a rights issue, a loan from the parent might be an alternative, and would be received more positively than rights.
(3) Convertible bonds redeemed at put date. Short-term financing woes aside, Singapore-based investors were particularly concerned that CCT’s S$370m convertible bond due to mature in 2013 would be redeemed earlier at its put date in May 2011. This would cause a spike in CCT’s debt profile in 2011 and increase its allin cost of debt.
Our top pick #2: PLife
Positive on existing model, negative on Novena. While investors like the downside protection of PLife with a CPI-pegged revenue base and interest locked in for three years, they are apprehensive about the Novena hospital site, which is currently under development by the sponsor Parkway Holdings (PWAY SP, S$1.11, Outperform, target price S$2.45). It is widely anticipated that the completed development would be injected into PLife upon completion. The 17,266 sq m site was acquired by PWAY in Feb 08 for S$1.25bn or S$1,600/sf/gross plot ratio under the Government Land Sales programme. The acquisition price of the land was more than double the secondhighest bid of S$695/psf/gross plot ratio. We assured investors that while PLife has the first right of refusal to the sponsor’s assets put up for sale, it is not obliged to acquire assets that are not accretive. Additionally, any related party transaction that crosses 5% of the NAV threshold will require unitholders’ approval, and the related party (PWAY in this case) will have to abstain from voting. Completion of the hospital is expected in 2011.
Where’s the growth? Investors also queried about PLife’s growth avenues. Management earlier indicated that the company still has capacity to grow via acquisitions given a low leverage of under 20% and access to more than S$350m of funds. While investors remained open to further acquisitions, they also hoped that management will be cautious and secure truly accretive deals.
Tenant concentration risk. Some investors pointed out that PLife is highly dependent on its sponsor, PWAY, as its major tenant/operator, contributing about 80% of its gross revenue. We draw comfort that PWAY, the leading integrated healthcare provider in Asia, had remained profitable throughout the last two recessions, in 1998 and 2002. Furthermore, PWAY was among the earliest to recover, boosted by pent-up demand during the recessions. We also expect PWAY’s enlarged regional network to cushion its revenue in the coming recession. In PWAY’s
Singapore hospitals, higher-paying patients from new venues such as Russia and the Middle East have increased, resulting in an overall improvement in revenue.
Wish list for the sector
Securing refinancing that is not detrimental to unitholders. Top of the wish list is the ability to secure refinancing that would be non-detrimental to unitholders. Several investors were concerned that REITs would have to resort to: 1) dilutive rights issues; 2) distressed sales of assets to repay debt; or 3) the declaration of bankruptcy / liquidation, should banks be unwilling to extend credit at reasonable costs.
Truly accretive acquisitions. Also top of the list are truly DPU-accretive future acquisitions, untainted by financial engineering. While a number of acquisitions had “proven” accretive due to the spread between property yields and low borrowing costs, the credit crunch throws up the possibility that spreads may not be sustainable if refinancing is not available or obtained at much higher costs.
REITs in favour. Long funds remain fundamentally focused on asset quality, prudent REIT managers and more resilient property segments. REITs with a core Singaporebased portfolio are also preferred. FCT, A-REIT and PLife are three of the more preferred stocks. Strong interest was also expressed in CCT which remains the cheapest stock under our coverage at 0.2x P/BV, although doubts about refinancing were equally strong. Despite the hostile macro environment for the hospitality industry, some investors were beginning to show interest in CDLHT, citing its low asset leverage and prudent management.
Link – Table
FrasersCT – BT
Moody’s Investors Service has on Monday downgraded the Fraser Centrepoint Trust’s (‘FCT’) corporate family rating from A3 to Baa1.
The rating remains on review for possible downgrade.
‘The downgrade reflects Moody’s views that FCT is unlikely to grow in the next two years to a scale and diversity that is consistent with its previous rating’, says Kathleen Lee, Moody’s lead analyst for the trust.
‘Consequently, FCT’s relatively small size and asset concentration risk whereby Causeway Point contributes a significant 71% of net profit from its portfolio of 3 retail assets do not support a continuation of its previous rating when compared to similarly rated peers in the REITsector’, adds Lee.
The rating remains on review for downgrade given the use of uncommitted drawn banking facilities to fund capital expenditure. While the amount is relatively small – and with banks with good relationships with FCT — Moody’s believes the continued use of such facilities is a source of weakness especially as the bank lending environment continues to tighten.
Moody’s notes that FCT has reported sustainable income streams, supported by its good quality, well-located and seasoned suburban retail malls which enjoys relatively high entry barriers and is more resilient to economic downturns as tenants mainly provide daily necessities.
The rating review will focus on FCT’s plans to secure committed bank facilities or find alternate mitigating measures to address the weakness of the existing uncommitted facilities and to fund ongoing capital expenditure.
The last rating action was on 20 October, 2008 when the ratings of FCT were placed under review for possible downgrade.
FCT is a Singapore-based real estate investment trust with particular focus on retail properties in Singapore. The trust is sponsored by Frasers Centrepoint Ltd, the wholly owned property arm of F&N group, one of Singapore’s leading shopping centre operators and developers.