Month: March 2009
FCT – BT
Moody’s confirms FCT’s Baa1 rating; outlook negative
MOODY’S Investors Service yesterday confirmed the Baa1 corporate family rating of Frasers Centrepoint Trust (FCT). The outlook for the rating is negative.
This concludes the review for possible downgrade initiated on Oct 20, 2008, said Moody’s.
‘The rating confirmation reflects FCT’s good franchise value and relatively stable income stream supported by its well-located suburban retail assets. In Moody’s opinion, these assets are at the lower end of the asset risk spectrum as they mainly provide tenants with non-discretionary household items,’ said Kathleen Lee, a Moody’s vice-president/senior analyst and lead analyst for the trust.
‘The confirmation also factors in the trust’s manageable debt maturities and with banks with good relationships with its sponsor, Fraser Centrepoint Ltd (‘FCL’), to facilitate gradual conversion of its short-term debts to term and/or committed banking facilities, which will support its ongoing capital expenditure needs,’ noted Ms Lee. ‘FCT’s conservative financial policy also generates good credit metrics relative to its peers,’ she added. A reflection of this is the debt/Ebitda of six to seven times.
The outlook for the rating is negative reflecting the trust’s asset concentration exposing it to the weak economic environment and property market conditions in Singapore. Furthermore, these conditions render uncertainties in the level of tenant occupation and achieved rentals at Northpoint upon completion of the renovation works expected by Q2 2009.
A return to a stable outlook is unlikely at this stage given the inherent weaknesses in the trust’s operating profile and its limited financial flexibility amid the weak operating environment. Conversely, the ratings could face downward pressure if progress is not made in securing committed medium-term bank facilities to fund the trust’s ongoing capital expenditure over the next few months, and/or should headroom in its unitholders’ funds covenant fall away due to material asset impairments or worse-than-expected rental or occupancy conditions.
Mapletree – BT
By KALPANA RASHIWALA
Mapletree Logistics Trust Management Ltd (MLTML), the manager as manager of Mapletree Logistics Trust said on March 16 that it has no plans for any equity fund raising exercise.
MLTML also clarified that MapletreeLog is not the subject of the various media articles over the weekend which reported on Mapletree Industrial Trust (MIT), a private trust which owns a portfolio of ex-JTC factories and is managed by a different management team from MLTML. The articles had reported on MIT saying it could not afford to give its tenants the rental rebates they wanted.
MapletreeLog is a Real Estate Investment Trust listed on Singapore Exchange with a pan-Asia portfolio of warehousing and logistics facilities.
‘The manager also wishes to reiterate that as per MapletreeLog’s distribution policy stated in the prospectus dated 18 July 2005, it will distribute at least 90 per cent of its taxable income to unitholders. MapletreeLog’s distribution policy remains unchanged,’ MLTML added.
FCT – BT
By ANGELA TAN
Moody’s Investors Service on Monday confirmed the Baa1 corporate family rating of Frasers Centrepoint Trust (‘FCT’).
The outlook for the rating is negative.
This concludes the review for possible downgrade initiated on October 20, 2008.
‘The rating confirmation reflects FCT’s good franchise value and relatively stable income stream supported by its well-located suburban retail assets. In Moody’s opinion, these assets are at the lower end of the asset risk spectrum as they mainly provide tenants with non-discretionary household items,’ says Kathleen Lee, a Moody’s VP/Senior Analyst and lead analyst for the trust.
‘The confirmation also factors in the trust’s manageable debt maturities and with banks with good relationships with its sponsor, Fraser Centrepoint Ltd (‘FCL’), to facilitate gradual conversion of its short-term debts to term and/or committed banking facilities, which will support its ongoing capital expenditure needs,’ says Lee.
‘FCT’s conservative financial policy also generates good credit metrics relative to its peers — – as reflected by Debt/EBITDA of 6x -7x and EDBITA/Interest coverage of 3.4x -4.5x,’ she adds.
The outlook for the rating is negative reflecting the trust’s asset concentration exposing it to the weak economic environment and property market conditions in Singapore. Furthermore, these conditions render uncertainties in the level of tenant occupation and achieved rentals at Northpoint upon completion of the renovation works expected by 2Q2009.
A return to a stable outlook is unlikely at this stage given the inherent weaknesses in the trust’s operating profile and its limited financial flexibility amid the weak operating environment.
Conversely, the ratings could face downward pressure if progress is not made in securing committed medium-term bank facilities to fund the trust’s ongoing capital expenditure over the next few months, and/or should headroom in its unitholders’ funds covenant fall away due to material asset impairments or worse than expected rental or occupancy conditions.
In addition, the rating could be lowered if financial metrics weaken such that the trust’s Debt/EBITDA increases above 6.5x and interest coverage falls below 4x.
The last rating action with regard to FCT was taken on December 1, 2008, when its Baa1 rating was placed on review for possible downgrade.
Suntec – OCBC
Focus on cash calls and cash flows
New office asset value reality is already priced in. The Business Times reported on Friday that the entire 32nd floor of Suntec City Tower 1 has been sold for about S$1300 per square foot of strata area. This is about 40% lower than previous strata floor transactions completed about seven months ago (above the S$2000 psf level). We believe this new deal is important as it gives an indication of the current market value for office space. However, Suntec REIT’s current market value already reflects an implied asset value of S$885 psf for Suntec City Office (our estimate) – or a 32% discount to this latest transaction. Our valuation prices Suntec City Office at about S$1106 psf.
Potential risk of cash call. In our opinion, the refinancing of the S$825m in debt due this year is less of a problem than the potential need for an equity issue. In 4Q CY08, Suntec REIT saw property values fall 7% against its 3Q CY08 revaluation. We believe cap rates used by independent valuers still do not fully reflect downward trends in S-REIT capital values. For example, we understand that Suntec City Office was valued at S$1900 psf, or 46% higher than this latest transaction. This scepticism towards the accuracy of these valuations is creating downward pressure on share prices – Suntec’s current share price of S$0.505 is at a 75% discount to reported NAV. As capital values fall, we estimate that Suntec could eventually need up to S$480m in fresh equity to maintain gearing at 40% levels. In the current environment, rights issues may need to be underwritten in order to succeed. As a non-sponsored REIT, any rights issue by Suntec could require the backing of investment banks or sub-underwriting arrangements with substantial shareholders.
Focus on cash flows. There are inherent strengths in Suntec’s portfolio and we continue to believe in the merit of our BUY call on Suntec. The biggest concern today is how deeply earnings – and consequently distributions – will be affected by deteriorating economic conditions. We have adjusted our earnings and valuation assumptions, with a fairly conservative assessment of rents and occupancy levels. Our new DPU estimates for FY09-10 are 6-10% below consensus. This still translates to reasonable distribution yields of 18.6% and 16.1% in FY09F and FY10F respectively. Our SOTP value for Suntec falls 10% to S$0.95. Maintaining the 15% discount to SOTP, our fair value estimate falls from S$0.90 to S$0.80.
REITs – BT
Scrip dividends violate Reits’ basic characteristics
THE authorities recently rejected the request of some real estate investment trust (Reit) managers to reduce the minimum payout ratio to unitholders while still being allowed to enjoy tax concessions.
Spelling out the government’s stand a few weeks ago, Senior Minister of State for Finance and Transport Lim Hwee Hua said: ‘The key characteristics of Reits as a stable, high-payout, pass-through vehicle are important considerations for investors and, hence, must be preserved.’
‘Ministry of Finance and Monetary Authority of Singapore have deliberated this issue and have decided that the minimum payout ratio would not be changed,’ she added.
Under current guidelines, Reits have to distribute to unitholders at least 90 per cent of their distributable income, in order to enjoy tax transparency, which means exemption from paying corporate tax at the Reit/vehicle, on the portion of income they distribute.
Reit managers have urged the government for a rule change as they deemed it conservative to retain cash in view of the very difficult credit market conditions. The worry is that they may not be able to get refinancing, and even if they could the costs may be exorbitant.
‘While we appreciate the refinancing difficulties faced by Reits, there are, at present, no strong grounds to justify a special tax treatment for Reits that is not made available to other entities,’ said Mrs Lim.
She noted that a few Singapore Reits have already managed to secure refinancing either through bank loans, loans from sponsors or recapitalisation, albeit at a higher cost. ‘It is unrealistic for S-Reits to expect to have continued access to cheap and easy credit during this recession,’ Mrs Lim commented.
While the authorities have made their stand clear on the minimum ‘payout’, the fact is there is another way within the confines of existing rules for Reits to conserve cash and yet still be entitled to the tax concessions: distribute scrip dividend instead of cash dividend.
By distributing scrip-only dividend, that is investors get additional units in the Reits instead of cash, these trusts are able to retain cash without altering their payout policies. Hence they are not in breach of their 90 per cent payout rule in order to be entitled to the tax concessions. Indeed, one Reit has already proposed doing that, and it is said that others are considering it as well.
Saizen Reit announced earlier this year that its board has proposed the adoption of a scrip-only dividend scheme. ‘Such scheme, if adopted, provides flexibility for Saizen Reit to pay out dividends in the form of units in future,’ it said. But it added that the payment of dividends in the form of units will be a temporary measure to conserve cash during this uncertain period. ‘Saizen Reit will resume its dividend payment in the form of cash once the loan refinancing issues are resolved,’ it assured unitholders.
Of course, distribution of scrip-only dividend is tantamount to a Reit not distributing its income at all. Hence, if adopted by many, it would mean that Reits’ key characteristics of being ‘a stable, high-payout, pass-through vehicle’ may no longer be met.
From the standpoint of unitholders, yes, they can sell the additional units received in the market to raise cash. But they will have to incur transaction costs. Furthermore, there is no telling what the market price will be in today’s environment. On the flip side, unitholders also don’t want to see the Reits collapse because of their inability to refinance their loans. That would not be in their interest at all.
In any case, the proposal of the scrip-dividend payout is still subject to approval by the Singapore Exchange (SGX). Given its inconsistency with the Ministry of Finance’s stand on preserving the key characteristics of Reits, it would be surprising if indeed SGX gives the go-ahead for the proposal to be implemented.