Month: February 2010
CMT – OCBC
Acquiring Clarke Quay for S$268m
Acquiring Clarke Quay for S$268m. Yesterday, CapitaMall Trust (CMT) announced that it has entered into a sale and purchase agreement with CapitaMalls Asia (CMA) to acquire Clarke Quay for S$268m. The 99-year leasehold property has a net lettable area (NLA) of 294,610 sq ft and committed occupancy of 94.9%. The purchase price of S$268m is based on the most recent valuation that was done on 3 Feb by Knight Frank, which works out to be S$910psf on NLA. We expect CMT to fund this acquisition using debt, which will increase its gearing from 30.5% to 33.1%. The acquisition is still subjected to the approval of CMT’s unitholders.
Acquisition benefits CMT, strategically and financially. Strategically, Clarke Quay helps to diversify CMT’s portfolio of non-discretionary spending focused retail malls by increasing its exposure to discretionary spending segment (leisure and entertainment) of the consumer market. Leisure and entertainment spending had been resilient in 2009 and this was evident in the 3.5% YoY growth in gross turnover of CMT’s tenants in the leisure and entertainment business. Being one of the favourite nightspots in Singapore, Clarke Quay also offers the added potential to capture the expected increase in tourism in Singapore. Financially, the acquisition is yield accretive to CMT’s unitholders, given its relatively higher NPI yield of 5.9% compared to the existing NPI yield of 4.9% of its portfolio.
Sufficient room to grow this mature asset. We see potential for CMT to grow the future rental income of Clarke Quay by securing new tenants to raise occupancy rate and also from positive rent reversions coming from expiring leases secured at below market rent after the repositioning of Clarke Quay in 2006. The increase in tourism and tourist spending could also drive rents higher going forward. The existing valuation of Clarke Quay is relatively undemanding in comparison to the average valuation of CMT’s existing asset portfolio (S$1,767psf on NLA). With its higher NPI yield and growth potential, we see potential for future growth in valuation, which would increase CMT’s NAV.
Fair value raised to S$1.93; Upgrade to BUY. Factoring in the acquisition, we are now raising our FY10 and FY11 DPU yield to 5.5% (previously 5.2%) and 5.7% (previously 5.4%) respectively. Our fair value has also been raised to S$1.93 (previously S$1.83). Recent market correction has made valuation attractive again and with a projected total return of 14.6%, we are now upgrading CMT from HOLD to BUY.
CMT – CIMB
Acquiring Clarke Quay
CMT buys Clarke Quay for S$268m
Maintain Neutral. CMT has entered into a sale and purchase agreement to acquire Clarke Quay from its parent CapitaMalls Asia (CMA) for S$268m (or S$910psf of net lettable area). Based on the estimated property yield of 5.9%, and full debt funding, we expect DPU to increase by 2% on full-year contributions in FY11-12. While this would be an accretive acquisition, the impact on DPU would not be very material, in our estimation. Maintain Neutral, albeit with a higher DDM-based target price of S$1.91 (from S$1.88, discount rate 8.1%) after factoring in the acquisition.
Accretive deal to be fully funded by debt
Accretive deal. The net property yield of 5.9% based on FY09 net property income of S$15.8m and the purchase price of S$268m would be accretive vs. CMT’s portfolio NPI yield of 5.4%. Clarke Quay has been priced at book value with a cap rate of 6%. This is comparable to cap rates used for CMT’s suburban malls, at 5.5-6.6%; and similar to the 5.9% for the closest CMT mall in the vicinity, Funan DigitaLife Mall. CMT intends to fund the acquisition fully with debt, and expect cost of debt to be roughly the same as its blended interest cost of 3.5% as at Dec 09. We expect full-year revenue contribution to add 2% to DPU. Clarke Quay will increase CMT’s portfolio by 2.7% from S$7.4bn to S$7.6bn.
Positive rental reversions likely. We estimate the net rent of Clarke Quay at S$4.70psf, which appears low considering its refurbished state compared with average suburban-mall rents which are in the teens. We believe this could be attributed to some long leases (such as to LifeBrandz which was reported to have taken a 6+6-year lease from 2006), and possibly discounted rent as traffic count in Clarke Quay before its refurbishment in 2006 had been poor. As such, we believe that rental reversions would be positive for Clarke Quay going forward.
Sufficient funding sources. CMT has sufficient funding sources which include bank facilities and a S$2.5bn MTN programme in place. As recent as Jan 10, S$100m of 5-year notes were issued at 3.288%, below CMT’s average cost of debt of 3.5%. We believe that cost of debt for this acquisition should not vary very much from these levels. Asset leverage should rise to 33% after the acquisition, still unstretched.
Unitholders’ approval required. As this is an interested-party transaction, an EGM would be held to seek unitholders’ approval. We expect this to be held some time in April, and estimate completion of the deal in July.
More on Clarke Quay
Clarke Quay is an integrated food & beverage, entertainment and lifestyle riverfront development. Located along the Singapore River, near Singapore’s CBD, Clarke Quay is within walking distance of the Clarkee Quay MRT station. Major tenants include Luminox Pte Ltd (wholly-owned subsidiary of LifeBrandz), Shanghai Dolly and The Pump Room. Clarke Quay underwent an extensive 2-year revamp costing S$85m which was completed in Dec 06. CapitaLand reported a 50% increase in visitor traffic after the revamp in its press release dated 26 Dec 06.
Valuation and recommendation
Positive deal for CMT. We believe this is an accretive deal at a reasonable price. An anticipated increase in visitor arrivals to Singapore this year as its two integrated resorts open should have positive spillover for centrally located tourist attractions and entertainment spots such as Clarke Quay. Hence, upward rental reversions are likely for this asset.
However, impact on DPU is marginal. We include the purchase of this asset and have not changed our cost of debt assumption of 3.7%, further assuming 50% contribution from the asset in FY10. Our DPU estimate dips by 1% for FY10 as interest expense increases with debt, but rises by 2% for FY11-12 as full contribution kicks in. Our DDM-based target price rises accordingly to S$1.91 from S$1.88 (discount rate 8.1%). While this is an accretive acquisition, the impact on DPU should be immaterial, in our estimation. Maintain Neutral.
CMT – BT
CMT buys Clarke Quay for $268m
Seller CapitaMalls Asia says right time to monetise property as it has stabilised
CAPITAMALL Trust (CMT) has agreed to buy Clarke Quay from parent company CapitaMalls Asia for $268 million in cash, the two companies said yesterday.
The purchase will increase CMT’s asset size to $7.6 billion, from $7.4 billion as at end-2009.
Both CMT and CapitaMalls Asia are units of CapitaLand, Singapore’s largest property group by market capitalisation.
CapitaMalls Asia was created after CapitaLand spun off and listed its retail arm late last year. CMT, Singapore’s largest real estate investment trust, was sponsored by CapitaLand and listed in 2002.
CapitaLand carried out several major asset enhancements of Clarke Quay between 2004 and 2006 to reposition it as a one-stop entertainment and lifestyle hub. It also refreshed Clarke Quay’s tenancy mix to ensure that it remains a vibrant lifestyle destination. Visitor traffic has doubled to nearly one million monthly today from about 500,000 visitors before the asset enhancement.
‘The acquisition of Clarke Quay complements CMT’s current portfolio of mainly suburban malls catering for necessity shopping,’ said Simon Ho, chief executive of the trust’s manager. ‘It increases the number of properties that we have catering for discretionary consumer spending and will enable us to ride on the long-term remaking of Singapore as Asia’s leading convention, exhibition, leisure destination and services centre.’
CMT’s portfolio now consists of 14 retail properties including Tampines Mall, Plaza Singapura and Raffles City Singapore.
Mr Ho added that when the repositioning of Clarke Quay was completed in December 2006, it did not yet have an established track record of operations and some leases were committed below market rent. There is therefore potential for rental upside when leases become due for renewal in the next few years, he said.
On its part, CapitaMalls Asia is monetising Clarke Quay to recycle capital for new investment opportunities.
‘This is the right time to monetise Clarke Quay as the property has stabilised,’ said Lim Beng Chee, chief executive of CapitaMalls Asia. ‘There is growth potential in Clarke Quay which is best realised through our stake in CMT going forward, after CMT has acquired the property from us.’
CapitaMalls Asia has an interest of about 29.9 per cent in CMT. It also fully owns CMT’s manager.
The price represents a 2.3 per cent premium over the valuation of $262 million as at end-2009, as well as a 5.9 per cent yield on Clarke Quay’s net property income of $15.8 million in 2009.
The transaction, which is conditional upon CMT unitholders’ approval, is expected to be completed by July 2010.
CMT said that based on its closing price of $1.73 on Feb 8, 2010, CMT’s distribution yield is 5.1 per cent and the implied property yield is 4.9 per cent. As such, the transaction is expected to be yield-accretive.
The trust added that it has sufficient financial flexibility and capacity to fund this transaction. Assuming the transaction is fully funded by debt, CMT’s gearing would be 33.1 per cent – still within its target range of 30-35 per cent.
CapitaMalls Asia lost 2 cents to close at $2.22 yesterday while CMT gained 4 cents to close at $1.77.
AIMSAMPIReit – Phillip
A New Name, A Fresh Start
• 3Q10 revenue of $12.6 million, net property income of $9.9 million, distributable income available to unitholders of $5.4 million.
• Total asset value of $565.9 million, gearing at 28.9%
• Fair value maintained at $0.22, recommendation upgrade from sell to hold
A new name, a fresh start
AIMS AMP Capital Industrial REIT (previously known as MacarthurCook Industrial REIT) recorded 3Q10 revenue of $12.6 million (-3.3% y-y, +6.2% q-q), net property income of $9.9 million (+5.3% y-y, +9.1% q-q) and distributable income available to unitholders of $5.4 million (-14.0% y-y, +4.0% q-q). The lower y-y revenue was due to the lower recovery of property tax and land rent, which is reimbursable by tenants. However net property income showed increment for both y-y and q-q mainly due to the one-month revenue contribution from the 1A IBP property. For 3Q10, AIMS declared a special distribution prior to the issuance of placement units of 0.95 cents for the period from 1 Oct 2009 to 23 Nov 2009, and a distribution of 0.1868 cents for the period from 24 Nov 2009 to 31 Dec 2009.
Portfolio asset value as at 31 Dec 2009 was $565.9 million. Additionally, the acquisition of the 4 properties from AMP Capital was completed on 11 Jan 2010. The property portfolio achieves an occupancy rate of 99.0%.
We are expecting AIMSAMP REIT to report better growth in the next quarter from the full quarter contributions of the newly acquired properties
Capital management
AIMSAMP REIT is definitely in much better financial shape now, after the tough recapitalization exercise last year. AIMSAMP REIT has total debt of $190.2 million, out of which $175 million is denominated in SGD and due in 2012. The remaining $15 million is JPY loan, which AIMSAMP REIT has already secured the credit facility to refinance it. Gearing is at 28.9%, which is an improvement from the pre-recapitalization gearing of 44.7%.
Our concerns
We are definitely more optimistic of the REIT now, with an improved balance sheet and also properties that are providing good yields. We also see some good quality investors in the REIT. Our two main concerns now are
1. portfolio acquisition growth is constrained by the gearing limit of 35%
2. high interest cost that dampens distribution
One of the covenants in the refinancing facility is that AIMSAMP REIT will be subjected to a higher interest margin by 100 basis points if its gearing is subsequently increased to above 35%. Currently it is paying an interest margin of 3.5% on $175 million of loan. This essentially limits AIMS expansion plan to take on more loans and investors would also be adverse to equity funding after the recent dilution. Our second concern follows from the first point. Together with the interest margin, the total interest rate on the loan is 5.4%. If gearing breaches the 35% mark, interest rate would increase by another 1%. During a discussion with management, one of the strategies is the repositioning of the properties. Divesting assets and using the proceeds to pare down debt and subsequently taking on new loans with lower interest cost is one of the ways to add value to unitholders.
Forecasts
We are forecasting 4Q10E DPU to be 0.36cents, bringing full year FY10E DPU to be 4.95 cents. Subsequently, we forecast FY11E DPU to be 2.01 cents, which translate to a yield of 9.3%, incorporating the full year contribution from the acquired properties but without assuming further acquisitions. In our view, it would be a big plus if management is able to execute its plan to lighten its interest expenses. On the other hand, collecting an annual yield of 9% sounds fine to us too. We are maintaining our fair value of $0.22 and upgrading our recommending from sell to hold.
Rickmers – OCBC
April loan maturity is the next test
DPU down 5% QoQ. Rickmers Maritime posted US$38.1m in 4Q revenue, up 29% YoY driven by vessel acquisitions and flat QoQ. RMT will distribute 0.57 US cents per unit, down 75% YoY and down 5% QoQ. Note the sponsor Rickmers Group will not defer its right to its share of the distribution as it had in 2Q09 and 3Q09. Full-year distributable income was within 4% of our estimate. RMT said it could not give forward guidance for DPU because of ongoing discussions with lenders, dragging on since 1Q09. RMT is geared at 1.96x debt-to-equity as of 31 Dec.
April loan maturity is the next test. RMT has so far been able to stave off the most immediate crisis points: the last three newbuild deliveries have been warehoused by its sponsor and a loan-to-value covenant review is on hold while discussions with stakeholders including its sponsor and ten lending banks continue. The next test, in our view, is the US$130m top up facility maturing this April, part of a total US$139.8m in loans up for repayment this year. It remains to be seen if lenders HSH Nordbank, DBS Bank and Citibank are willing to refinance the loan – tricky due to the steep fall in vessel values. We note that RMT has US$110.7m in cash as of 31 Dec, but it is unclear if the other seven banks will be willing to let these funds be utilized to pay off the maturity due to competing interests. How RMT handles this loan maturity could be a good signal of the extent of both lender and sponsor support.
We have further refined our valuation methodology. In an effort to parse market expectations, we introduce a best case valuation of RMT under a scenario where the order book ‘disappears’ at no cost to the trust or unitholders and where RMT is easily able to re-finance the top-up facility maturing in two months. We believe existing investors who are playing the waiting game are in a sense betting on this scenario but the chances of it materializing, in our opinion, are slim. While it is quite possible that RMT manages to resolve its debt and order book concerns – we continue to believe such a resolution may come at the expense of unitholders’ interests, for instance if RMT raises funds through a dilutive private placement. Maintain SELL with fair value revised up to S$0.18 from S$0.15 previously due to the methodology adjustments.