Month: September 2009
K-REIT – BT
K-Reit deal comes with 5.2% guaranteed yield
Trust’s aggregate leverage to rise to 31.1% from 27.6%
K-REIT Asia’s acquisition of six floors at Prudential Tower for about $106.29 million comes with income support from the seller that will translate to a guaranteed 5.2 per cent net property yield. The acquisition, which will be funded entirely by debt, will be yield accretive to K-Reit, the trust’s manager said yesterday.
The trust’s aggregate leverage will increase from 27.6 per cent to 31.1 per cent. The purchase will also boost K-Reit’s share of Prudential Tower’s strata area from about 44 per cent to 73 per cent.
APF Property Investments, which sold the space to K-Reit under the latest deal, has agreed to provide K-Reit up to $5 million in rental income support over a five-year period. The FY2008 proforma net property income (NPI) attributable to the acquisition is $5.5 million, inclusive of the income support. If the actual NPI is less than the guaranteed NPI, the seller shall pay the difference to K-Reit’s trustee.
‘The 5.2 per cent per annum property income yield is within the market norm and would provide accretive distributable income,’ K-Reit said.
The trust is buying levels 20 to 25 of Prudential Tower. The acquisition cost works out to $1,579 per square foot based on the net lettable area of about 67,300 sq ft. K-Reit said the $106.29 million purchase price is at a 14.6 per cent discount to the $124.5 million valuation of the property by Colliers International.
The valuation, which would reflect about $1,850 psf of net lettable area, took into account the rental income support by the seller, and was done using the market comparison, investment and discounted cash flow methods. Colliers was commissioned by K-Reit’s manager.
Prudential Tower is a 30-storey office block at the corner of Church and Cecil streets on a site with about 85 years’ remaining lease.
The six floors are leased to six tenants – including Prudential Fund Management Services, Prudential Asset Management (Singapore) and Korea Exchange Bank.
BT understands the space was sold through a private treaty deal brokered by Jones Lang LaSalle.
Market watchers say the latest transaction shows improvement in sentiment in the office investment market. ‘It also provides a badly needed transaction for valuers to use as a data point in arriving at investment-grade office capital values,’ a property consultant added.
APF Property Investments is linked to the Asia Property Fund, sponsored by LaSalle Investment Management and PruPIM, which is part of Prudential UK group.
K-Reit highlighted that the provision of rental income support will limit downside risks and provide certainty of income for the next few years.
Rickmers – OCBC
Essentially behaving like a toxic asset
Swift resolutions needed. Rickmers Maritime (RMT)’s increased cash retention following the 72% QoQ cut in 2Q09 DPU is just a drop in the bucket compared to the immediate issues ahead of the trust. In order of urgency (our opinion); RMT needs to 1) resolve LTV clauses that restrict access to loan facilities for the Hanjin vessels due in next five months; 2) secure waivers for LTV covenants on existing loans; 3) arrange payment of US$40m in vessel deposits and of loans that begin amortizing soon; 4) refinance the US$130m top-facility maturing in April 2010; and 5) finance the US$711.6m Maersk vessels due in 2H2010.
What next? RMT is in negotiations with lenders on LTV covenants and also in discussions with all stakeholders on the Maersk orders. RMT does not have the resources to honour its obligations (in our opinion) but it is in the sponsor’s best interest that it does due to 1) reputation risk and 2) the sponsor’s status as an intermediary on committed acquisitions – that is, if RMT defaults, the sponsor is still obligated to purchase the ships from the yards. Possible compromises involve delaying delivery of vessels (for a price) or letting the sponsor warehouse the assets (for a price) or raising a significant amount of equity (ability to do so is questionable).
Disadvantage unitholders. Whatever the final solution, we believe it not likely to favour the unitholders. With the high level of leverage and sizeable acquisitions fixed at peak prices, we believe RMT is essentially behaving like a toxic asset. When a leveraged play unwinds, the equity tranche is the worst place to be. Unitholders are caught in a game of “heads I lose, tails you win” and we think their best option is to exit this investment.
Adjusting valuation for distress. RMT’s unit price has fallen 29% since the 2Q DPU announcement and is now trading close to our original fair value estimate of S$0.39. This estimate values RMT as a going concern, which requires many assumptions including on the trust’s ability to successfully raise US$550m at S$0.53. We expect a high level of price volatility in the next few months and a going concern approach may not reflect the risks inherent in this investment. Our new fair value of S$0.16 is based a probability-weighted valuation approach that reflects the likelihood and consequences of a distressed scenario. Note also we now estimate no distributions are paid in 2H09 and FY10. Maintain SELL.
REITs – CIMB
Equity raising: Round 2 on the cards?
• Almost S$4bn of cash calls YTD. Since Jan 09, a number of SREITs have made cash calls amounting close to S$4bn, mostly to pare down maturing debt.
• Equity raising expected to continue, driven by acquisitions… Frasers Centrepoint Trust, PLife REIT, and CapitaMall Trust are most likely to make acquisitions in the next 12 months, in our estimation. We expect FCT and CMT to resort to equity raising as debt headroom is unlikely to be sufficient, in view of the sizeable potential pipeline. CMT could potentially raise more than S$1bn, assuming Sun Hung Kai also divests its 50% stake in Ion Orchard to CMT. In the medium term, we also expect Suntec REIT to acquire Suntec Convention Centre, potentially financed by a cash call.
• … and potential asset devaluation. The recent devaluation of Singapore Land Tower to about S$1,842psf is expected to put pressure on CCT to write down its two key office assets, 6 Battery Road and One George Street, with significantly higher valuations of above S$2,200psf. CCT would need to raise more than S$200m in equity to stay safely within the 40% asset leverage level if asset values fall by more than 20%.
• Mid-sized REITs preferred; PLife has lease risk of equity raising. We prefer mid-sized REITs with strong balance sheets such as FCT and PLife REIT. However, our top pick in the SREIT space for potential near-term acquisitions with the least risk of equity raising would be PLife REIT, as debt headroom of more than S$300m remains sizeable. Our target price of S$1.31 and forward yields of 7.2% have yet to account for potential acquisitions.