Month: March 2010
StarHill Gbl – Daiwa
Addition by subtraction
2 rating maintained – still trades at unjustified discount, in our view
• We maintain our 2 (Outperform) rating for Starhill Global because investor concerns about the sponsor and the pending acquisition of retail assets in Malaysia have created one of the rare value opportunities in the S-REIT market for this year, in our opinion. Starhill Global trades at an unjustified (in our opinion) 32% discount to its December 2009 NAV of S$0.82.
Attractive to us even without the proposed acquisitions
• As a measure of prudence, we have disgorged the estimated DPU contribution from the proposed acquisition of the sponsor's retail assets in Malaysia, Starhill Gallery and Lot 10, for RM1,030m, after an absence of concrete news on the deal since its announcement on 18 November 2009. Even after revising down our FY10-12 DPU forecasts by 11.7-14.6%, Starhill Global's DPU yield of 7.1-7.6% is well above those of the SREIT sector and its peers in the retail-property segment. If Starhill Global fails to acquire the assets, for whatever reason, we would not necessarily view it as a bad outcome.
A more rigorous target price of S$0.65
• Our six-month target price of S$0.65 is based on parity to our RNG valuation (a finite-life Gordon Growth model), in which we have discounted the expected income stream from its Singapore properties only at an effective cap rate of 5.89%. We have valued the overseas properties at their December 2009 net asset values, and have assumed that any acquisitions in 2010 would add no value to the overall portfolio.
REITs – CIMB
Diversifying funding sources
• Maintain Neutral. SREITs recently raised more than S$900m from capital markets at lower interest rates and longer tenures than a year ago. The opening up of capital markets should be very positive for the REIT sector, particularly as debts maturing in 2011-12 remain chunky. Nonetheless, we continue to perceive risks in the medium term if investors' appetite for bonds and notes does not grow more significantly, or if demand for higher yields intensifies in 2H10. We have not adjusted our interest-rate assumptions for REITs that have announced their refinancing as the quantum of issuance remains rather small and/or is significantly hedged. We maintain our financial estimates, target prices and Neutral position on the sector. Large-cap REITs (AREIT, CMT, CCT) are still relatively expensive and lack near-term catalysts. CDL-HT remains our sector top pick for its low gearing and on the back of our positive outlook for the hospitality industry
• Lower interest rates and longer tenures. Cost of debt has declined 100-150bp from a year ago for 3-year debt. Additionally, almost 90% of the issuances had tenures of 5-7 years, much longer than the standard three years which were available to the sector in the same period.
• Relief for chunky debt maturing this year and funding for acquisitions. The opening up of capital markets should be very positive for the REIT sector in providing a alternative funding source for refinancing and acquisitions. If capital markets remain open, debt maturity profiles for the whole sector could be termed out gradually. REITs seeking to acquire more assets would also have an alternative funding source.
• Medium term refinancing risk still exists. Nonetheless, we continue to perceive risks in the medium term if investors' appetite for bonds and notes does not grow more significantly, or if demand for higher yields intensifies in 2H10.
Rickmers – OCBC
Uncertainty driving volatility
Vessel secures new employment. Rickmers Maritime (RMT) announced that its vessel – Kaethe C. Rickmers (formerly Maersk Djibouti) – has secured employment with South American liner CSAV. The agreement is for a one-year charter at US$8,288/day, and also gives CSAV the option to renew the charter for another 12 months at US$23,888/day (averaging to a two-year daily rate of US$16,088). We note that the vessel was earlier earning US$22,708/day with Maersk. The US$8,288 rate is below our estimate of US$10,000/day – but it is a far better alternative to not securing any employment at all (which had seemed a likely possibility a few weeks ago). We note that CSAV is a current charterer of Pacific Shipping Trust; the liner has made great strides in resolving its own financial difficulties.
Implications of the April maturity of the US$130m loan facility. RMT had US$110.7m in cash as of 31 Dec but the question is if the remaining seven lenders will be willing to release that cash to only three lenders, considering the outstanding capital commitment of US$918.6m and the very likely breached loan-to-value covenants on the existing US$773.8m loans. The key determinant of the outcome is how close the banks and the sponsor are to reaching an overall agreement (which is in approximately month 12 of discussions). We re-iterate that it is not in the sponsor's best interest for RMT to default as the sponsor will end up footing the bill for the new ships (which are perhaps worth about half of what they cost). The lenders are probably not keen to see a default situation either (especially if they also lend to the sponsor). The likely outcome is that the burden will eventually be passed to RMT's unitholders through dilution via fresh equity.
Uncertainty driving volatility – witness the 25.6% unit price decline in the last two days on what can hardly be called 'new news' . Some investors may be waiting to see if there is a positive or even neutral resolution of the April loan maturity (and hoping that this would translate to a positive market reaction). But they should be mindful that the underlying problem does not go away – and any solution is likely to come at the expense of unitholders (unless the order book disappears completely, which is highly unlikely). In what is essentially a dragged-out and uncertain situation, we do not find offering a rating on RMT productive – as such we are SUSPENDING COVERAGE of the trust.
Cache Logistics Trust – BT
New Reit hoping to raise $400m
Cache Logistics Trust prospectus says 474.2m units will be offered at 84-88 cents each
CACHE Logistics Trust has lodged its listing prospectus with the Monetary Authority of Singapore, revealing that the new Reit hopes to raise about $400 million through its IPO.
According to the prospectus, Cache is offering 474.2 million units at 84 to 88 cents each.
A distribution yield in the range of 8.82-9.08 per cent has been forecast for 2011, depending on the issue price.
Cache is managed by ARA-CWT Trust Management (ACT) which is 60 per cent owned by ARA Asset Management Ltd and 40 per cent by CWT Ltd.
Daniel Cerf, formerly deputy chief executive of K-Reit Asia Management is ACT’s CEO. Mr Cerf, a licensed architect in the US, was previously general manager of special duties at Keppel Land.
Lim How Teck, who recently resigned as non-executive independent director of AIMS AMP Capital Industrial Reit Management, is ACT’s chairman and non-executive director.
Cache is a Singapore-based Reit and will principally invest in logistics properties in the Asia-Pacific as well as real estate-related assets.
Its initial portfolio of properties consists of six logistics warehouse properties in Singapore with an aggregate gross floor area (GFA) of 3.86 million square feet and a value of about $730 million.
The properties are CWT Commodity Hub, CWT Cold Hub, Schenker Megahub, C&P Changi Districentre, Hi-Speed Logistics Centre and C&P Changi Districentre. The properties are part of a sale and leaseback agreement entered by Cache with CWT and C&P Holdings respectively.
According to the prospectus, the initial portfolio is 94.1 per cent occupied by and contracted to 262 end-users comprising domestic and international companies.
The largest end-user accounts for 16.1 per cent of the total GFA of the initial portfolio. The top five end-users together account for 56.5 per cent of the occupied GFA.
CWT and C&P Holdings are the master lessees for these properties. Of the occupied GFA, 79.1 per cent is occupied by direct counterparties of the master lessees being third-party logistics service providers and third-party end-users.
The remaining 20.9 per cent of the occupied GFA is contracted from the master lessees by CWT related entities, which has in turn been fully contracted for use by third-party end-users.
C&P Holdings is a significant shareholder of CWT with a stake of 35.9 per cent.
The master lease agreements provide for lease durations ranging from five to 10 years and a weighted average lease expiry of 6.4 years, with locked-in annual rental escalations and a triple net lease structure for the first five years of the initial contracted lease term.
CWT and C&P has granted right of first refusal to Cache, providing the Reit with access to future acquisition opportunities. As at Dec 31, 2009, there are 11 properties totalling 2.3 million sq ft of GFA currently owned by CWT in Singapore, China and Vietnam and two income-producing properties totalling over 723,651 sq ft of GFA currently owned by C&P in Singapore of which Cache has first right of refusal.
Shipping Trusts – OCBC
US peer looks for asset value recovery over 2-3 Years
Highlights from SSW's FY09 conference call. Seaspan Corp [SSW, NOT RATED], a container-focused US-listed comparable of the Singapore-listed shipping trusts reported FY09 earnings earlier this week. Basic 4Q09 EPS of US$0.22 was three cents below consensus. SSW discussed its newbuild order book – 23 vessels will be delivered over the next three years, costing roughly US$1.8b total. SSW has been addressing the financing need on several fronts: 1) reduced dividends; 2) a US$200m preferential share issuance; 3) debt facilities. We note that while SSW is not constrained by loan-to-value covenants on existing loans, access to the roughly US$270m remaining from a US$1.3b credit facility is restricted because of market value covenants. SSW has other committed debt available, however. Management estimates further equity needs of US$180-240m over a period of 18 months.
SSW optimistic on a 2-3 year horizon. SSW's management noted that line majors have done a good job managing effective supply. A primary contributor is slow-steaming – SSW said that, the number of vessels required on the Asia-Europe trade has increased from eight to 10 or nine to 11. SSW very frankly said the recent demand side pick-up was due largely to inventory re-stocking, and that the market would "normalize once the stocking is finished" and as more supply was added. It said that the current "abnormal" market would trend down but 2010 would still be much better than "2009 and even 2H08". Management was more optimistic on a longer time horizon saying rates could "reach the level of average historical amount over the next two to three years [and asset values would follow]".
Sector view intact, prefer PST. Pacific Shipping Trust, a pure container play, is not struggling with capex commitments or debt issues with no loan-to-market value covenants on its loan documents. On the flipside, it has a fairly concentrated charterer base of two, its sponsor Pacific International Lines and South American liner CSAV, which had last year requested for rate renegotiations (ongoing issue). As a result, we continue to rate PST as a HOLD. A key risk for FSL Trust, in our opinion, is that LTV covenant concerns may drive the manager to raise expensive unsecured debt. Rickmers Maritime, the other pure container play, is facing high capex commitments and LTV covenant issues as well. A positive resolution of its US$130m April loan maturity could be a turning point for the sector. The outlook for the broader ship finance industry remains uncertain, and we stay NEUTRAL on the sector.