Month: November 2011
PCRT – BT
Parkson and Perennial China announce first results since IPO
TWO companies listed this year have announced their financial results.
Department store operator Parkson Retail Asia reported revenue of $106.6 million for the first quarter ended Sept 30, up 19.6 per cent from the last corresponding quarter. Net profit stood at $13.2 million for the quarter, up 29.1 per cent over the same quarter last year.
Parkson began its share trading on Nov 3 after concluding its initial public offering (IPO) on Nov 1. Its offer shares were priced at 94 cents each. It recently opened two malls in Indonesia and one in Kuala Lumpur, Malaysia.
Parkson Retail Asia is a unit of Malaysia’s Parkson Holdings Bhd. Parkson closed at $1.20 yesterday, down 1.5 cents.
Another company, Perennial China Retail Trust (PCRT) had a net loss of $719,000 for the period from June 9 (its listing date) to Sept 30.
The business trust is a developer of retail space in China.
Its initial property portfolio with five properties is worth $1.1 billion.
In a filing to the SGX yesterday, PCRT said that its amount available for distribution to unitholders for the period from its listing to Sept 30 was $6.3 million – $4 million lower than it had forecast. It attributed the shortfall to a three-month delay in the opening of its Shenyang Longemont shopping mall, which took longer than expected to get its fire safety permit from the authorities.
PCRT announced last week that it intends to acquire a 50 per cent stake in Chengdu Longemont Shopping Mall Development from the Shanghai Summit Group for 2.28 billion yuan (S$462.3 million).
Its operating assets now comprise the Shenyang Red Star Macalline Furniture Mall and Shenyang Longemont Shopping Mall.
Its Foshan Yicui Shijia and Chengdu Qingyang Guanghua shopping malls are under development.
With the Chengdu development, PCRT’s asset size is expected to increase to $1.7 billion.
Perennial China Retail Trust closed at 45.5 cents yesterday, up one cent.
K-REIT – BT
K-Reit gains nod to buy Ocean Financial Centre, despite dissent
K-REIT Asia’s plan to buy 87.5 per cent of Ocean Financial Centre (OFC), and raise $976 million through a rights issue to fund part of the cost, was approved by shareholders yesterday – but not without plenty of dissent.
Numerous shareholders took to the floor at a two-hour-long extraordinary general meeting (EGM) at Marina Bay Sands to challenge the rationale behind the deal and the rights issue.
K-Reit on Oct 17 said that it will pay some $1.57 billion to buy parent company Keppel Land’s entire stake in the OFC office building. Excluding rental support from KepLand, the estimated sale price of OFC works out to $2,380 per square foot.
Shareholders questioned the price and timing of the deal.
‘My issue is with the timing of the deal,’ said the representative of an institutional investor. ‘We are paying a price that is at a historic high, at the time when the economy is slowing down. Why can’t K-Reit wait half a year or one year, and then buy something else or even this property at a cheaper price?’
Likewise, a retail investor also said that the price was hefty for a 99-year-leasehold project.
The prime Grade A office building in Raffles Place has a tenure of 999 years with 850 years remaining on the lease. But KepLand is selling its stake with only a 99-year lease.
K-Reit’s management team defended the price. Chief executive Ng Hsueh Ling noted that the building is new (it was completed only in April 2011) and won’t need upgrading work for some time.
Chairman Tsui Kai Chong also noted that the price was arrived at on a ‘willing buyer, willing seller basis’.
‘Our father organisation, Keppel Land, is only willing to sell it (OFC) to us for 99 years,’ he said.
Mano Sabnani, chief executive of Rafflesia Holdings, then noted that K-Reit is paying its manager (which is owned by KepLand) an acquisition fee – even though it is buying the asset from its parent company and no ‘finding’ was involved as OFC was ‘right there’.
Prof Tsui said that he will bring this up at the ‘family talk’, drawing some laughter from the audience.
Shareholders also pointed out that this marks K-Reit’s third rights issue since 2008.
‘When people invest in Reits, they expect certain things . . . (such as) stable dividends and that there won’t be frequent cash calls,’ said an investor.
He wondered if K-Reit should have undertaken a placement exercise instead.
In response, Prof Tsui said that the office trust chose to go with a rights issue to avoid diluting existing shareholders’ stakes, which a private placement would have done.
‘Moving forward, when we are larger, our fund-raising might become easier, then perhaps we will look at placements,’ he said.
But despite the dissent, both resolutions – to buy the OFC stake and for the rights issue – were passed. A motion by the representative of the institutional investor to vote by poll (when shareholders’ votes are allocated based on their holdings) failed, and an overwhelming majority passed both resolutions with a show of hands.
KepLand, which held its own EGM earlier in the day to ask for shareholders’ permission to sell its OFC stake, also gained approval.
K-Reit shares lost one cent to close at $1.015 yesterday, while Keppel Land shed seven cents to close at $2.66.
PCRT – DBSV
Execution on track
• Site visit reaffirms our view that execution is on track at Shenyang Longemont Mall
• Chengdu Qingyang in final stages of design, recent acquisition of 50% of Chengdu Longemont Mall likely earnings and NAV accretive
• Maintain Buy, TP $0.83
Site visit to Chengdu and Shenyang. Our site visit to Chengdu and Shenyang reaffirmed our view that execution is on track. Shenyang Longemont Shopping Mall (SLM) has opened in July and is currently about 60% occupied (70% committed). Including leases pending receipt and under negotiations, commitment would have been a higher 83%. SLM is well laid out with thematic zones to attract shoppers conveniently as well as offer destination attractions such as indoor theme parks and ice staking rink. Daily shopper traffic average 40,000 while the Golden Week saw a 90,000 throughput. The Mall has currently secured an average daily rent of RMB3.28psm and is on track to achieve a targeted daily rent of RMB4.28psm.
Deepens exposure in Chengdu. The group is in the final stages of design for the Chengdu Qingyang mall. Located in the west of Chengdu, it will cater to a wide existing catchment of resident and working population of 641,000 (and growing) when completed in 2Q14. Meanwhile, recent purchase of a 50% stake in the Chengdu Longemont Mall, which connects directly to the operational Chengdu East High Speed Rail station will enable the group to benefit from accelerated growth footfalls when fully ramped up. More importantly, the purchase will likely to be earnings and NAV accretive as it will be debt funded and have favourable payment terms that is back-end loaded. As such, gearing will only rise in stages to 27% in FY12.
Maintain Buy, TP $0.83. At the current share price, investors are essentially valuing the Shenyang portfolio (excluding Chengdu Qingyang and Foshan) at below replacement cost or getting the Shenyang furniture and shopping mall, with the office component thrown in for free. Our TP of $0.83 is based on the present value of the initial portfolio when fully operational by FY14 and have not included any accretion from the recent Chengdu Longemont acquisition. As the group continues to execute and convert the development component of its portfolio into an income generating portfolio, thereby reducing execution risks, we believe share price should narrow the gap to RNAV. Our TP offers significant upside.
REITs – News
Office, industrial Reits face rental squeeze
About 933,000 sq m of gross floor area of office space is in the pipeline from GLS sites awarded this year
IN current volatile times, real estate investment trusts (Reits) have emerged as favourites for defensive plays. But analysts caution that investors should still be highly selective with Reits, as not all will be equally resilient to economic shocks.
In particular, rents might be an area of concern for office and industrial Reits, analysts say.
According to URA statistics, about 933,000 square metres of gross floor area (GFA) of office space is in the pipeline, with more to come, from the Government Land Sales (GLS) sites awarded this year.
With 62 per cent of the space, or 574,000 sq m currently under construction, this could add stress to rents.
Median office rental rates rose by 9 per cent in the third quarter, to $9.49 psf per month. Occupancy rate for prime offices improved 2.7 per cent quarter on quarter.
In October, K-Reit Asia announced that it was purchasing an 87.5 per cent interest in Ocean Financial Centre from its parent company, Keppel Land – for a period of 99 years – for $1.57 billion.
Following the announcement, Moody’s Investors Service changed its outlook on K-Reit’s ‘Baa3’ corporate family rating to positive from stable. Standard & Poor’s Ratings Services (S&P) has initiated coverage with a ‘BBB’ long-term corporate credit rating and a ‘stable’ outlook.
DBS Group Research too was largely positive on the deal, which values the asset at $2,600 per square foot, inclusive of income support. ‘Although timing was a little unexpected, we see this deal as a strategic long term positive for K-Reit with the ability to deepen its presence in the prime CBD area, upgrade its portfolio quality and ensure strong and stable income stream for unitholders through long leases and bluechip tenant base.’
Separately, Suntec Reit issued two announcements in quick succession, following its third-quarter earnings announcement, which saw distribution per unit of 2.533 cents, up 1.2 per cent year on year.
The first, its divestment of Chijmes for $177 million, was well-received by analysts. DBS Group Research noted that the divestment was a ‘small but nice surprise’, given that ‘while the property performance has been consistent, in our view it may not be a good fit to Suntec Reit’s current portfolio’.
News of the $410 million asset enhancement initiative (AEI) – $230 million for Suntec City Mall and $180 million for Suntec Convention Centre – on the other hand, met with mixed reactions.
While some analysts said that the AEI was necessary to keep Suntec City relevant, others argued that the resultant gearing might be too high. According to Standard Chartered, the Reit’s gearing could rise to some 42 per cent upon completion of the project, although it qualified that this was likely to be mitigated by the gradual nature of the expenditure.
‘We continue to think that Suntec Reit could sell assets to raise equity to reduce its gearing. Strata office spaces in Suntec Office Towers could be sold, or Park Mall could be divested. If (it) manages to sell Park Mall at 20 per cent above current book value of $338 million, gearing could fall to approximately 38.5 per cent.
‘However, this could still seem high as the Reit’s gearing could rise to some 47 per cent if office capital values fall 25 per cent as we forecast.’
Over in the industrial sector, Credit Suisse warned that perception of industrial Reits’ defensiveness, due to its longer lease tenures is misplaced, citing high industrial rents, and Singapore’s high exposure to the United States and European economies.
Industrial rents have not only surpassed pre-subprime crisis peaks but are at 10-year highs, said Credit Suisse.
‘We expect flat to low single-digit growth for factory rents driven by high occupancy, and business park rents to moderate from hereon due to the oncoming supply pressure (including new supply of decentralised office space).’
Standard Chartered, in a report released mid-October, agreed with the prognosis, citing high supply and falling office rents as key contributors to falling business park rents.
‘We expect business park rents to fall from the current $3.60 psf per month to $3 psf per month by end-2012E and $2.50 psf per month by end-2013E. This implies a 30 per cent decline over the next two years, ie back to 2007-levels.’
Standard Chartered had earlier cut prime office rents forecast by 25 per cent, due to low leasing activity and expectations of slower growth in 2012. The slower demand for office space is expected to spill over to business parks, suppressing tenants’ willingness to pay for higher rents, it said.
In the retail sector, analysts were generally optimistic on Frasers Centrepoint Trust. UOB Kay Hian expects Causeway Point to be the key growth driver in 2012, seeing as how it recorded strong rental reversions of 9-22 per cent in FY11, and is on track to reach 22 per cent NPI growth post-AEI.
While the acquisition of Bedok Point diversifies FCT’s portfolio, UOB also noted that there was room for improvement, particularly in the areas of the unoccupied space in the basement, and lack of strong anchor tenants.
It maintained a ‘buy’ call, with an unchanged target price of $1.75.
PCRT – BT
PCRT to buy half stake in Chengdu mall
Acquisition costing 2.28b yuan to be fully funded by debt
MAINBOARD-LISTED Perennial China Retail Trust (PCRT) intends to acquire a 50 per cent stake in Chengdu Longemont Shopping Mall Development from the Shanghai Summit Group for some 2.28 billion yuan (S$455 million).
Based on the mall’s gross floor area (GFA) of 455,260 square metres when completed, the 50 per cent stake translates to a price of 10,000 yuan per square metre of GFA. The remaining 50 per cent stake in the mall will be held by the Summit Group.
According to PCRT, the total transaction is expected to be fully funded through debt and subject to unitholders’ approval at an extraordinary general meeting. Only 15 per cent of the total transaction consideration will be paid at the initial stage of development in 2012.
Financing of the first two payments (55 per cent in total) up to the topping-out stage will be funded from an existing loan facility and other forms of financing such as a new debt facility and through debt capital markets.
Financing for the payment of the remaining 45 per cent, which will be due when the mall commences operations and receives its building title deed, is expected to be secured on the shares of PCRT’s subsidiaries.
With the proposed financing arrangement, PCRT’s projected gearing throughout the acquisition timeline, without taking into consideration any valuation increase on its existing portfolio, is expected to remain below 60 per cent, the trust said.
In view of market volatility, a new earn-out of 226.5 million yuan was negotiated with the Summit Group, PCRT added.
The master framework agreement with the Summit Group was entered via Perennial China Retail Pte Ltd, a wholly owned subsidiary of PCRT.
PCRT, which was listed in June this year, had on March 21 secured an option from the Summit Group to acquire a 50 per cent stake in at least one million sq m GFA in the Chengdu Longemont mixed-use development.
Following the proposed acquisition, PCRT has up to June 8 2012 to acquire a 50 per cent stake in another 544,740 sq m of GFA.
The Chengdu Longemont Mall is part of the 1.7 million sq m Chengdu Longemont mixed-use development, and is situated in Chenghua District within the Third Ring Road of South-East Chengdu in Sichuan province.
With the acquisition, PCRT’s asset size is expected to increase from $1.1 billion to $1.7 billion. PCRT is also expected to benefit from the additional income stream when the mall commences operations in the third quarter of 2014.
The acquisition is expected to increase PCRT’s adjusted proforma NAV per unit of $0.99 to $1.19 based on the estimated future values of all the properties of PCRT in 2014.
PCRT’s counter yesterday hit a high of 47.5 cents, before closing at 46 cents.