Month: March 2009
REITs – OCBC
4Q CY08 report card
4Q earnings steady. S-REITs within our coverage universe generally delivered a fairly steady set of 4Q CY08 results. The results were in line with our expectations, excluding LMIR Trust. CapitaMall Trust and Suntec REIT reported similarly marginal QoQ increases in distribution income of 0.3% and 0.6%, respectively. Frasers Centrepoint Trust experienced some disruptions from asset enhancement works at one mall, but its other properties enjoyed both earnings growth and strong occupancy levels. We believe this quarter’s performance was not evidence of stability or invulnerability but more a function of timing lags. In fact, other indicators like reversionary rents – achieved office rents at Suntec City fell 11% QoQ – point to a different trend.
No big NAV shake-up yet. The same inertia played out in net asset values. Excluding FCT (year end: Sep); the other S-REITs carried out their annual property revaluations in 4Q CY08. CapitaMall Trust registered a marginal 1.9% increase in property values over its last valuation in June 2008. Suntec REIT saw property values fall 7% against its 3Q CY08 revaluation. LMIR Trust also recorded a revaluation deficit, the bulk of which was driven by the adverse SGD-IDR movement over the year. Overall, we feel cap rates used by the independent valuers still do not fully reflect the downwards trend in capital values.
LTV is more important than reported leverage. Because of this timing lag, we believe reported balance sheet figures are under-estimating leverage and over-estimating balance sheet strength. In fact, the market is currently valuing these S-REITs on an average 61% discount to reported NAV. Lenders’ appetite for loan-to-value (LTV) have fallen because of both an expectation of falling capital values and a decreased appetite and capacity for risk.
Maintain NEUTRAL view. In our view, unit prices more than reflect the realities of falling capital values and refinancing risks. We feel the focus is now on how deeply S-REIT earnings will be affected by deteriorating economic conditions – and consequently what is the ‘real’ distribution yield. Meanwhile, we continue to believe S-REITs will need to re-capitalize their balance sheets. The recent equity fund raising announcements from bluechips like Ascendas REIT (raising S$408m) and CapitaMall Trust (S$1.23b) have set the tone for the year. However, the sector is competing for limited resources – for instance, we believe rights issues would need to be underwritten in order to succeed. Once again, the strength of the sponsor (and the size of its stake) will make a difference.
Link – Table
CCT – BT
CCT gets Moody’s downgrade
Moody’s Investors Service Tuesday downgraded CapitaCommerical Trust’s (CCT) corporate family rating to Baa2 from Baa1 and the senior unsecured ratings to Baa3 from Baa2. The outlook for both ratings is negative.
‘The downgrade of CCT’s ratings reflects the company’s strained credit metrics, particularly debt to EBITDA leverage and EBITDA/interest coverage which are in excess of 10 times and around 2.5 times respectively. These metrics are anticipated to weaken further to the extent that they would not be consistent with a Baa1-rated Reit,’ said senior analyst Kathleen Lee
‘Furthermore, Moody’s expects it will be difficult for CCT to improve these metrics over the intermediate term, as its operations will likely continue to be impacted by the slowing economy and constrained capital markets, which could be further exacerbated by upcoming new office completions from 2009 onwards,’ Ms Lee added.
CMT – BT
CapitaLand, CMT need attractive buys to justify rights issues
CASH is king these days, but does any company really need to hold on to $6 billion of it?
CapitaLand, Singapore’s largest property company by market capitalisation, last month announced a fully underwritten one-for-two rights issue to raise $1.84 billion. The developer is in no way hard-up for money – CapitaLand has some $4.2 billion of cash and cash equivalents on hand. After the rights issue, it will have a whopping $6 billion in the kitty.
So was the rights issue really necessary? CapitaLand said that the exercise was ‘pre-emptive’ and that it will provide the company with greater financial capacity to pursue merger and acquisition opportunities that might arise, as well as other investment opportunities. Chief executive Liew Mun Leong also told analysts and media at a briefing on the day the rights issue was announced that there were ‘a number of proposals on the table’ that the developer was studying.
Analysts have been mostly positive on the rights issue, issuing a slew of fresh ‘buy’ calls that sent CapitaLand’s stock soaring 11.4 per cent after the announcement of the issue. And sources have since told BT that the take-up for the sharply discounted rights issue has been good so far, which means that shareholders, at least, are willing to be supportive.
But there is no denying that the rights issue is dilutive. A day after the rights announcement, Goldman Sachs lowered its 2009 and 2010 earnings per share (EPS) estimates by 37 per cent and 33 per cent, respectively, to reflect the dilutive impact.
To justify the dilution, CapitaLand has to show that it raised the money for a good reason by making some attractive buys in the not-too-distant future. The rights issue does make the company more financially secure, of course. Other than increasing its war chest to $6 billion, the issue will also reduce CapitaLand’s net gearing to 0.28 times from 0.47 times. But these factors alone are not enough to justify asking shareholders for $1.84 billion, especially at a time when investors themselves are looking to conserve capital.
The same principle applies for CapitaLand’s 29.7 per cent-owned retail trust CapitaMall Trust (CMT), which on the same day as the announcement of its parent’s rights issue said it will raise $1.23 billion in a 9-for-10 rights offer. The market, and analysts, didn’t take this – and the much larger dilution – as well as they did with CapitaLand’s issue, sending CMT’s shares down 6.2 per cent even as CapitaLand’s shares shot up.
‘While widely expected, we believe the rights issue (50 per cent of market cap) was larger and more dilutive than expected,’ said UBS Investment Research. The firm downgraded CMT’s earnings per unit and dividend per unit forecasts by 30-50 per cent post-rights, also taking into account lower net property income, higher interest costs and the repayment of convertible bonds in 2011.
CMT intends to use the bulk of the proceeds to pay off $956.2 million of debt due this year, and reduce its gearing from 43.2 per cent to 29.1 per cent. However, the repayment could have been achieved by refinancing loans, rather than asking investors to fork out another $1.23 billion.
One reason for the fund raising is that by lowering its gearing, the trust will be in a better position to raise funds in future when it needs to make an acquisition. Lim Beng Chee, chief executive of CMT’s manager, said that the trust chose to go with a rights issue rather than look for refinancing for its loans as it was looking at the ‘longer-term’.
But for both CapitaLand and CMT, those vague hints of acquisitions need to be translated into real deals to justify asking shareholders for so much money.