Month: September 2009
FSL – OCBC
LTV covenant clouds dissipate
Secures covenant waiver. FSL Trust has secured a two-year waiver for the loan-to-market value covenant in its credit facility. The waiver, subject to documentation, will extend until the end of 2Q11. During this period, the minimum coverage ratio of the charter-free fair market value of the trust’s portfolio over its outstanding indebtedness will be reduced from 145% to 100%. In return, FSLT must repay US$8m per quarter during the two-year period (or US$64m in total). The trust has already prepaid US$12m voluntarily. Margins over US$ LIBOR also increase by between 50 and 70 basis points (bps) during the period. The margin increase is reduced to a 25-bp hike after the waiver period.
Re-affirms DPU guidance. The manager estimates that the additional interest expense during the waiver period averages US$0.7m per quarter. The manager re-affirmed its DPU guidance of 1.5 US cents per quarter. We estimate this works out to a payout of less than 50% of cash earnings. We note there might be some one-off expenses (both cash and non-cash in nature) in 3Q09 as FSLT is likely to re-align its interest hedges to reflect the new amortization schedule.
T&Cs as expected with some positives. The conditions and pricing were in line with our expectations. We were expecting US$35m annual payment (versus US$32m actual). We were off by about 5 bps in our cost of debt
assumptions. The positive surprise was the lower margin increase postwaiver period (we were not so optimistic). The new minimum coverage ratio is fair in our view, especially with outstanding indebtedness falling as quarterly loan repayments are made. The ‘official’ current fair market value of the portfolio was not disclosed.
Remains our top sector pick. A major overhang has eased, taking pressure off the manager and the stock. Industry concerns remain but we like the new, more sustainable payout model and FSLT’s diversified vessel mix. We reiterate that unitholders should constrain their expectations regarding DPU growth; with the new payout model, a significant DPU increase would require acquisitions (and fresh equity) in our view. Note this is a revolving credit facility, so FSLT has the option to tap into the undrawn amount as it grows with each periodic repayment. Our discounted FCFE value is up from S$0.84 to S$0.86, incorporating actual waiver terms. Our fair value estimate edges up a cent to S$0.77, reflecting an “industry uncertainty” discount of 10%. Maintain BUY.
REITs – BT
Reits bank on placement, rights issues for now
BANKS may have loosened their purse strings but many real estate investment trusts (Reits) here are sticking to rights issues or private placements for funds – despite their dilutive effects.
Since June, another five Reits have conducted such exercises to raise more than $1.23 billion. Investors were not too pleased in some cases and sold out, driving unit prices down. Why would some Reits rather incur the wrath of unitholders than turn to banks?
For Reits looking to trim gearing, there are few other fund raising options. While credit conditions have certainly improved, ‘leverage’ remains a dirty word and many would prefer to repay debt than to refinance or borrow more. Frasers Commercial Trust was one which made a cash call in June for this.
‘Peer pressure’ keeps Reits particularly disciplined. With many paring down debt in the last few months, those with relatively higher leverage ratios would start drawing the wrong kind of attention from watchful analysts and investors. Just two out of 13 Reits have gearing levels exceeding 40 per cent, a CIMB report this week shows.
While refinancing may have become easier, there is no saying if credit might tighten again. Banks are still exposed to the recession – the default rate on commercial mortgages held by US banks, for instance, more than doubled in the second quarter from a year ago.
Rolling over debt in unstable times means that refinancing fears can haunt again and again. A DBS Vickers report last week found that Reits have just $1.89 billion of debt maturing next year. But this will surge to $3.28 billion and $4.28 billion in 2011 and 2012 respectively. So cutting debt still seems the prudent thing for many Reits to do.
Even Reits willing to borrow more from banks may not have much room to do so. Some analysts are expecting further asset value writedowns – particularly for commercial property. If this happens, gearing for affected Reits (determined by comparing debt with assets) will rise with or without an increase in borrowings.
In fact, CIMB believes that asset devaluation could trigger more equity raising by Reits. The cash would reduce debt, counter the effect of lower asset values and keep gearing stable.
Reits looking to buy assets but are not keen to raise debt will also value funds from rights issues and private placements. Starhill Reit raised $337.3 million recently not just to reduce debt, but also to capitalise on acquisition and asset enhancement opportunities.
CIMB further suggests in its report that Frasers Centrepoint Trust, CapitaMall Trust and Suntec Reit could also expand their portfolios and issue cash calls.
It helps that the stock market has surged, allowing Reits to issue new units at better prices. Fortune Reit, for example, announced a HK$1.9 billion (S$353.2 million) rights issue last week with new units going at HK$2.29 apiece – a large discount from the last traded price of HK$4.10 then. The rights issue price would have been much lower if the exercise had happened at the end of last year, when units traded at just HK$1.99.
Banks may be more willing to lend, but many Reits will want to keep their hands in unitholders’ pockets until economic skies are clear again.
FSL – BT
FSL Trust secures 2-year loan-covenant waiver
But interest margin raised 50 to 70basis points during waiver period
SHIPPING trust First Ship Lease Trust (FSLT) has announced some relief amid the sector’s finance woes by securing a two-year waiver from the loan-to-value covenant for its credit facility, although it comes at a higher price of a 50 to 70 basis point increase in the interest margin for the duration of the waiver period.
During the waiver period, which will extend until the end of the second quarter in 2011, the minimum coverage ratio of the charter-free fair market value of FSLT’s vessel portfolio over its outstanding indebtedness will be cut from 145 per cent to 100 per cent.
FSLT will also make quarterly loan repayments of US$8 million during this period, which will progressively reduce its outstanding loan balance and lower its refinancing risk at the respective loan maturities in 2012 and 2014. To date, FSLT has already voluntarily pre-paid US$12 million of its loans.
‘We are very pleased to secure this arrangement with our lenders, which addresses a key concern for investors in relation to any potential LTV covenant breach,’ said FSLT trustee-manager FSL Trust Management CEO Philip Clausius. ‘With our voluntary pre-payments and now agreed amortisation on these loans, we have established a clear framework for FSLT’s balance sheet going forward. We are now able to affirm with confidence our quarterly DPU guidance of 1.5 US cents from Q3 FY2009 onwards,’ he added.
Based on FSLT’s closing price of 60 Singapore cents yesterday, this represents a prospective annualised yield of approximately 14 per cent.
In connection with the waiver arrangement, however, all loan tranches under FSLT’s credit facility will bear a higher interest margin of 1.7 per cent over the three-month US dollar Libor on the outstanding loan amount during the waiver period. The margin increase will be reduced to 25 basis points after the expiry of the waiver period.
The extra interest expense arising from the higher interest margin during the waiver period averages US$700,000 per quarter and will not affect FSLT’s DPU guidance of 1.5 US cents per quarter.
As the credit facility is revolving in nature, FSLT will be able to re-draw on the committed but undrawn portion of its credit facility after the waiver period.
FSLT’s current portfolio comprises 23 vessels which are all leased on long-term bareboat charters. These are all fully financed and there is no committed capital expenditure or requirement for additional funding.
FSLT also reiterated that it has been receiving prompt lease rental payments from its lessees and there has been no request by any of its lessees to re-negotiate lease terms.
REITs – OCBC
Opportunities for yield arbitrage
Yield divergence. S-REITs have re-rated strongly YTD on the risk rally but the gains haven’t been equally distributed. We are seeing some interesting pockets of yield divergence. Using consensus estimates, Suntec REIT is trading at a 300 points yield premium to CapitaCommercial Trust (CCT) despite support from its retail portfolio and fairly similar gearing. Similarly, consensus DPU estimates for Suntec and K-REIT are identical over FY09-10, but Suntec still trades at a significant yield premium. Part of the premium, in our view, is driven by expectations of an equity issue. Meanwhile, CDL Hospitality Trusts is trading at a 260 basis points premium to Ascott Residence Trust (ART). Gearing and geography may play a part here.
Outlook driven? There is also some notable yield divergence between sectors. Pure foreign plays (excluding Saizen and First REIT) are trading at an average consensus yield of 8.8% versus the office REITs at an average of 10.1%. This is an interesting discrepancy that is overriding the typical country risk premium that is awarded to some of those names. Industrial and office REIT yields are at par on average, but average price to book is 0.7x for the industrials versus 0.5x for the office owners.
Arbitrage opportunity. Economic data is still really sideways, in our view – there is some recovery and bottoming out thanks to stimulus efforts but private sector and consumer activity is still a question mark. As such, we don’t expect much capital appreciation for the sector ex major news flow. We do expect opportunities for yield arbitrage as the divergence corrects, especially as clarity increases on the office outlook.
Rights issues, repackaged. Recent activity in the sector includes equity issues (A-REIT, round two); acquisitions (Suntec and K-REIT); and a combination of both (Fortune REIT). Things don’t change as much as branding does: managers will toss around buzz words including “position of strength” and “acquisition opportunities” but the end result will be the same: further equity issues. This is not always a bad thing, in our opinion, as either avenues of growth open up or gearing is lowered (still desirable). We expect more activity as: 1) managers exploit significant re-rating; 2)laggard REITs start de-leveraging; and 3) managers resort to inorganic options to propel the next leg of DPU growth, or even to sustain DPU. We identify Suntec, Mapletree Logistics Trust and Frasers Centrepoint Trust as likely candidates for an equity/acquisition two-for-one in the next six months. Maintain NEUTRAL; top picks are CCT and ART.
K-REIT – DBS
Deepens hold on Pru Tower
• Buys 67300sf at Prudential Tower at 15% below valuation
• Strengthen strategic hold but muted earnings impact
• Maintain Hold with TP of $0.99
Strengthens strategic hold. K-reit has enlarged its ownership of Prudential Tower to 73% of the total strata space with the purchase of 67300sf NLA for $106.3m or $1579psf. This price is fair given it is 15% below market valuation of $1850psf and 24% sub the Dec 08 book value of $2066psf for its existing space. The deal will be totally debt funded, thus lifting K-reit’s current gearing from 27.6% to 31.1%.
But muted near term earnings impact. The deal comes with up to a total $5m of net income support for 5 years after completion of the transaction. Based on the proforma FY08 net income of $5.5m (inclusive of support), NPI yield is estimated at 5.2% yield. While downside risk is protected by the income support structure, earnings accretion from this purchase is marginal given that the NPI yield of 5.2% (based on $5.5m proforma FY08 net income inclusive of support) is marginally better than the present implied yield of 5.15%.
Maintain Hold. Deceleration in the pace of office rental decline and increasing dealflows in the office sector indicate some stabilization in the sector. However, transaction yields of >5% are still on the higher end of the historical band of 4.2-6%, highlighting the still cautious outlook within this segment. This deal will benefit Kreit in the long run when the office market recovers. In the near term, downside risk is small as is immediate additional earnings impact. Thus, maintain Hold with TP of $0.99.