Month: May 2011
Retail REITs – OCBC
Limited near term catalysts; Maintain NEUTRAL
Mixed retail sales data. Singapore Retail sales in Mar 2011, excluding motor vehicles, were up 7% YoY but down 1.3% MoM. The yearly sales increase was partly the result of escalating inflation. At constant price, retail sales were, nonetheless, up 4.6% YoY but down 2.4% MoM. Compared to Mar 2010 and adjusted for inflation, only the food & beverages, wearing apparel & footwear and furniture & household equipment segments recorded growth of more than 7%. The largest drop, however, came from supermarkets and optical goods & books which declined approx. 2%.
Rental rates mixed as well. According to CBRE, the retail leasing market also gave mixed signals in 1Q11, with major leasing deals concluded (Abercrombie & Fitch at Knightbridge, Cold Stone Creamery at Orchard Building) as well as the exit of some anchor tenants (such as ALT at Heeren) along Orchard Road. Monthly rents for prime Orchard Road averaged $30.10 psf/month in 1Q11, dropping 0.5% QoQ. Suburban rents remained at $29.10 psf/month, unchanged from the previous quarter. On average, the gap between prime Orchard and suburban rents continues to narrow, amounting to S$1.00 this quarter compared to S$4.10 a year ago. It is likely that prime retail rents along Orchard Road will continue to slide in the near term as recent completions along Orchard Road have not been digested and rental re-negotiations at some of these malls are impending. For example, more than 20 retailers at shopping mall 313@Somerset have banded together recently to petition for lower rents after struggling to attract customers. We also heard on the street that business for tenants in older malls such as Orchard Plaza, Far East Plaza, Heeren and Midpoint Orchard continue to deteriorate, dropping by some 30%-50% ever since the newer malls opened.
Supply Issues. According to our estimates, there is approximately 1.9m sq ft of mall space in the 2011-2012 pipeline. The retail sector continues to grapple with supplyside issues, brought on by the massive injection of new retail space in 2009-10. Some of the tourism expenditure is also diverted to the casinos and more consumers are shopping online, particularly among the younger group. The appreciating SGD will also affect tourist spending and motivate more Singaporeans to shop overseas. In fact, Knight Frank has forecasted that prime Orchards rents are likely to remain flat while suburban rents are likely to see only upside of about 2% – 3% this year. Landlords face an increasingly uphill task ahead to maintain attractive rentals, not only to retain but also to enhance the tenant mix. With limited near term catalysts, we think Singapore-based Retail REITs are likely to trade range bound. Maintain NEUTRAL on the overall sector.
Perennial – BT
Perennial China revives IPO, seeks $843m
Distribution yields are forecast by the trust to be up to 5.3% for 2011 and up to 5.5% for 2012
PERENNIAL China Retail Trust (PCRT) revived its stalled initial public offering yesterday, but on a slightly smaller scale – the business trust now aims to raise up to $843 million, down from the $1.1 billion it planned to raise in March.
This means that estimated yields are higher this time round. The trust is now forecasting annualised distribution yields of up to 5.3 per cent for 2011 and up to 5.5 per cent for 2012. Previously, PCRT projected yields of around 3 per cent for both 2011 and 2012.
Sponsor Perennial Real Estate, which is headed by former CapitaLand Retail chief Pua Seck Guan, had initially planned to launch the trust in March.
But the offering was delayed following international roadshows, with the trust citing volatile market conditions. PCRT was to have offered 1.09 billion units priced at $1 per unit. This would have raised about $1.1 billion in gross proceeds to be used mostly for the acquisition of five properties in China.
Mr Pua said then that the PCRT deal will be tweaked to current market conditions and brought to market as soon as possible.
BT understands that the revised offering is expected to be better received by cornerstone and other institutional investors. Among other things, Perennial was able to get discounts of between 3 per cent and 12 per cent off the prices of some properties it will acquire, sources said.
‘The new and higher projected annualised distribution yields are closer to that of most Singapore-listed Reits (real estate investment trusts) which will make PCRT more attractive to investors,’ said an analyst.
Perennial explained in February that PCRT’s estimated yields were lower than comparable Reits’ or business trusts’ mainly because there will be only one completed and leased-out property at the time of listing.
The rest are in pre-leasing stage or under development. The trust instead offers attractive total returns (yield plus net asset value growth).
‘(There is the) potential to quadruple asset base on cost of acquisitions alone,’ said a term sheet sent to potential investors, which was seen by BT.
In addition to the initial portfolio of five properties, PCRT has firm options to acquire 50 per cent of at least one million square metres of gross floor area each in high speed rail-linked developments in Chengdu and Xian.
In the revised prospectus submitted to the Monetary Authority of Singapore yesterday, PCRT said that it will now offer up to 1.09 billion units priced at 70-76 cents each.
It will sell up to 577.8 million units to institutional investors and the public, and another up to 516.7 million units to cornerstone investors such as Nan Fung Group, Asdew Acquisitions, AEW, Shanghai Summit, CBRE, Henderson Global Investors and Prudential.
Sources said that roadshows for the IPO started yesterday and will continue until May 25. The trust is expected to be listed on June 8.
Perennial – BT
Perennial launches S’pore IPO to raise up to S$843m
SINGAPORE – Perennial China Retail Trust, which owns shopping mall assets in China, on Thursday launched an initial public offering to raise as much as S$843 million (US$679.6 million).
The trust, managed by a firm controlled by former CapitaLand retail chief Pua Seck Guan, is selling 563.6-577.8 million units at S$0.70-S$0.76 apiece, according to a prospectus filed with the Monetary Authority of Singapore.
The trust has already signed agreements to sell 504.7 million to 516.7 million units to a group of cornerstone investors including AEW Capital, Henderson Global Investors and Prudential Asset Management.
Perennial said the units will start trading on June 8 but did not indicate when it will price the IPO.
DBS, Goldman Sachs, Standard Chartered and Citigroup are joint global coordinators and bookrunners.
Perennial originally planned to raise about S$1.1 billion from the IPO but reduced the offer size due to weak market conditions.
According to a note from one of the bookrunners, Perennial has priced its units at a 46-50 per cent discount to net asset value. — REUTERS
FCOT – OCBC
Divestment of the Australian Wholesale Property Fund (AWPF)
Divestment of all units in AWPF: Frasers Commercial Trust (FCOT) announced on 12 May that it has completed the sale of all 39,758,513 ordinary units in Australian Wholesale Property Fund (AWPF) to National Nominees Ltd for an aggregate consideration of AUD22.2m (equivalent to S$29.11m). Including transaction costs, the net proceeds worked out to about AUD22.04m (S$28.9m). Prior to completion of the divestment, FCOT had a 39% indirect interest in AWPF and as at 31 March, the carrying value of the investment amounted to AUD24.94, (S$32.52m). The divestment is in line with the manager’s objective to reshape the portfolio of FCOT as the investment in AWPF is considered non-core. Taking into consideration that AWPF has not paid any distributions since Mar 2008, the Manager is of the view that the divestment is in the interest of unitholders as the net proceeds from the divestment will be utilised to reduce debt liabilities.
Positive on Divestment. Despite the divestment loss of S$3.62m, we view this transaction positively. AWPF was inherited from FCOT’s predecessor, Allco Commercial REIT (acquired prior to the financial crisis). Its book value on FCOT’s balance sheet has also dropped from a high of $75.1m in 4Q07 to a low of S$26.1m in 3Q09. We do not see much upside potential for the solely New South Wales assets, and have always reiterated that the capital could be recycled for better income maximizing purposes such as debt pare-down or yield accretive refurbishments. According to our estimates, this successful divestment will lower FCOT’s aggregate leverage from 37.8% as of 31 Mar to 37%. It will also provide FCOT with additional debt headroom of S$101.8m before surpassing the 40% gearing mark. The impact on FY11 DPU is, however, marginal with this divestment.
Looming Dent on Japan Assets. Our primary concern now rests with its Japan exposure1 . As of 31 Mar, FCOT’s Japan assets account for 9.6% of its gross revenue and 7.92% of its overall NPI. We noted that 100% of the leases for Azabu building in Tokyo and 65.5% for Galleria Otemae in Osaka will expire by FY12. We remain wary of the prospects in Japan, as office rentals are unlikely to see further uplift following Japan’s recent natural disasters. Furthermore, some occupiers have postponed or are reassessing their office strategies, which will likely delay the market recovery. DTZ has also forecasted Grade A office rents for Tokyo to decline further, only showing growth in 2013. Maintain BUY with a reduced fair value of S$0.87 (prev: S$0.89).
FCOT – DBSV
Focusing on Core Assets
FCOT announced that they will be divesting the units in Australian Wholesale Property Fund (AWPF) for AUD22.2m (S$29.11m). Recall AWPF was inherited from the previous ALLCO portfolio, which comprises a 39% indirect interest in an Australian registered investment scheme. Basically this fund has been a drag on earnings and valuations post the financial crisis. The fund had stopped paying dividend since March 2008 and valuation has dropped from a high of AUD$59.2 m (S$75.1m) in 2007 to AUD$24.9 (S$32.52m) as at end-2Q11.
We view this move positively as firstly, the group would immediately get rid of this drag on earnings. We do not see that this Australian fund will have much upside in the medium term. Secondly, we believe utilising the proceeds from the divestment to partially pare down an existing AUD150m term loan will lower gearing and there will likely be some interest savings which should lift bottomline marginally. Based on our numbers, post divestment gearing will drop slightly from 39.2% to 37.8% and DPU in FY 2011/12 will increase slightly by <1%. We continue to like FCOT with the manager taking proactive steps to reshape their portfolio by divesting non-performing assets including Cosmo Plaza earlier this year. We believe there are still opportunities for the group to enhance their DPU through asset enhancements and more capital management exercises.
Maintain BUY with an unchanged TP of $1.05.