Author: tfwee
AREIT – CIMB
Fully valued
• Maintain Neutral. The outlook for the industrial market remains poor. Occupancy of AREIT’s sale-and-leaseback buildings is likely to hold at 100%, while that of its multi-tenanted buildings is likely to decline due to downsizing by tenants. However, we expect the fall in occupancy to be moderated by modest rental reversions for the Business & Science Parks and Hi-Tech segments due to a significant gap between passing rents and market rents; as well as development projects completed last year and this year. A-REIT remains one of the most diversified industrial REITs by segment and number of tenants.
• Declining office rents diminish attraction of business park/hi-tech space. More than 50% of A-REIT’s assets by value are business park/hi-tech space. With office rents falling sharply in the last six months, the rental gap between business park/hitech space and prime office space has narrowed sharply, diminishing the attraction of these industrial segments to office users. Although we do not expect an exodus of office users from business park/hi-tech space, we anticipate that asking rents and new take-up will be under pressure.
• DDM-derived target price raised to S$1.68 (from S$1.63). We maintain our estimates but use a lower discount rate of 8.5% (from 8.7%) based on a lower riskfree rate of 4.8% applied across our REIT universe. P/BV for AREIT has risen to 1.0x vs. the sector average of 0.6x, making it the most expensive REIT. At current levels, we believe AREIT is fully valued.
FCOT – DBS
Emerging from the ashes
• All in one recapitalization package to solve financing woes
• ATP deal a stabilizing factor
• Look beyond near term DPU dilution to underlying implied distressed valuation pricing
• HOLD with TP $0.12
All in one. FCOT is proposing a recapitalization package involving a S$213.9m 3-for-1 rights issue to largely pare debt, refinancing up to S$675m loans and acquisition of Alexandra Technopark to be funded using convertible perpetual preferred units and backed by a 5-year master lease agreement. The end result of a much lower gearing of 38.5% and an improved interest cover of 2.7x, both which are well within covenant limits, would put the reit on a much stronger financial footing.
Purchase of ATP a stabilizing factor. Furthermore, the acquisition of Alexandra Technopark is earnings accretive and will result in greater income stability and lower forex exposure for FCOT. The reit’s portfolio will be more Singapore-centric with 59% of assets situated locally while strong underlying master leases will mean that 74% and 65% of gross rental income at the start of FY11 and FY12 are secured, leading to better income visibility.
Near term DPU dilution but stock valuations already pricing in implied distressed prices. We estimate FCOT’s FY09-10F DPU to be diluted by 35- 64% to 2.2cts and 1.2cts and book NAV lowered 60% to $0.26. We believe investors should look beyond the near term DPU dilution to the underlying value of the reit. The TERP of $0.131, calculated based on the last closing price on the date of announcement, is at 0.50x P/adjusted book NAV and implies distressed valuation pricing to the underlying asset value. Our TP of $0.12 is based on discounting income from existing properties, which are supported by inbuilt organic rental growth structures and adjusted for the rights issue but before CPPU conversion. In the longer run, potential rationalization of the Japanese properties and value enhancement possibilities of the Singapore assets due to their proximity to new MRT stations of the upcoming Circle Line would create further value within the portfolio.
CCT – OCBC
Rights issue completed
Rights issue completed. CapitaCommercial Trust (CCT) had recently completed its Rights issue with 1.4b new units listed last Friday, bringing the total number of outstanding units to 2.8b. The Rights issue was well accepted, with a subscription rate of 135.4% of the total units available under the Rights issue. With the completion of the Rights issue, CCT’s gearing will decline from 43.1% to 30.7%, after the repayment of borrowings using the proceeds.
Slower rate of decline in office rental but cautiousness is warranted. According to Jones Lang LaSalle, average prime Grade A office rental declined 11% QoQ to S$9.50 psf per month in 2Q09 and the decline had decelerated in comparison to the 28% QoQ decline in 1Q09. Despite the positive news, our fundamental view of a worsening office market going forward remains unchanged. The slower rate of decline also came after a steep decline in rental in 1Q09. The office market in Singapore will continue to be plagued by the huge oncoming supply of new office space (13.9m sq ft in the pipeline) and shadow space that will continue to put downward pressure on office rental.
Current gearing sufficient to withstand devaluation through downturn. At a post-Rights gearing of 30.7% after the recent revaluation of its properties, CCT can withstand a further S$1,995.6m or 31.8% decline in the valuation of its properties before it reaches the upper bound of its comfortable gearing range of 30%-45% and this is also more than the S$1,581.5m or 26.2% decline in valuation (based on latest valuation report) that we have factored in our RNAV computation. We believe that this provides a sufficient buffer for CCT to tide over the asset devaluation during this downturn without the need to tap on the equity market again.
Maintain BUY. Despite the weak sector outlook, we continue to like CCT for its quality office assets and strong management which is evident in the high portfolio occupancy rates, diversified tenant base and long established tenant-landlord relationship. Support from a strong sponsor – CapitaLand – also provides an added level of comfort to investors in turbulent time. Based on CCT’s current price/NAV ratio of 0.54x, the market is now factoring in a 32.4% decline in asset value, which is over-excessive in our view. Success of its Rights issue has also removed refinancing concerns going forward. We maintain our BUY rating on CCT with fair value of S$0.96.
FCOT – BT
Is what’s good for FCOT just as good for F&N?
FRASERS Commercial Trust (FCOT) last week announced a series of bold steps to recapitalise the group in a bid to address the refinancing concerns raised by investors and analysts.
But while FCOT unitholders will no doubt be following the developments with interest, shareholders of parent Fraser and Neave (F&N) should also take note as the recapitalisation exercise will affect their company directly as well.
FCOT, which has a $1.5 billion property portfolio spanning Singapore, Australia and Japan, plans to raise $213.9 million in a three-for-one rights issue.
It will also acquire Alexandra Technopark from sponsor Frasers Centrepoint (F&N’s property arm) for $342.5 million. FCOT will pay for the purchase by issuing convertible perpetual preferred units (CPPUs) – a financial instrument which to date has only been used by banks in the Singapore market.
FCOT announced as well on the same day that it has secured financing for $675 million from a consortium of lenders. The offers of finance are conditional upon the recapitalisation exercise, which now has to be approved by shareholders.
There can be little argument that the outcome of the proposed recapitalisation exercise is something to be desired. The rights issue and acquisition will see FCOT’s gearing fall from 58.3 per cent at end-Q1 2009 to 38.5 per cent.
And upon completion of the rights issue, the acquisition and issue of the CPPUs, and the refinancing exercise, FCOT will not have any debt due until 2012.
The trust’s gearing hit 58.3 per cent at the end of Q1 2009 as it booked a massive revaluation deficit. And analysts say that more write-downs are likely in the second half of 2009. If the problem is not addressed now, this could push FCOT’s gearing to well beyond 70 per cent – past the 60 per cent limit mandated by the Monetary Authority of Singapore (MAS).
While the real estate investment trust (Reit) will still technically not breach MAS guidelines (as the expected rise in gearing will be driven by the deterioration of the asset base rather than by an increase in gross borrowings), the high gearing would have made it very hard for FCOT to refinance its loans – and downright impossible to refinance at a decent interest rate. The fact that the $675 million refinancing arrangement is dependent on the recapitalisation exercise says a lot.
Less easy to swallow is the three-for-one dilution caused by the rights issue. Once the rights issue is completed, FCOT will have some three billion units in the market. The trust will consider consolidating the units in future, management said.
But FCOT unitholders can at least draw comfort from the fact that parent F&N is going all out to show support for the Reit.
Frasers Centrepoint (which has a deemed stake of 22.2 per cent in FCOT now) will take up its entire pro-rata entitlement of the rights units and is also willing to subscribe for up to 32.7 per cent of the total number of rights units.
And in addition to accepting payment for Alexandra Technopark through the CPPUs – which entitles holders to a distribution of 5.5 per cent a year from the Reit – F&N will also undertake the master lease for the 99-year leasehold property for five years and give FCOT an annual rental guarantee of $22 million, which works out to a 6.4 per cent yield.
This makes Alexandra Technopark the property with the highest yield among FCOT’s Singapore-based assets. FCOT’s Singapore properties have a yield of about 4 per cent currently.
However, what’s good for FCOT unitholders may not be so good for F&N shareholders. First, analysts say that F&N could have gotten a better price for Alexandra Technopark if it had sold the property to a third party buyer. Having said that, there are few benchmarks for comparison as there have not been many large investment transactions in Singapore’s property market so far this year.
The rental guarantee of $22 million that F&N is giving is also more than what the group will receive from all the CPPUs that it got in return for the property (less than $19 million). The company’s deputy group financial controller Hui Choon Kit said that F&N is selling the property to FCOT to support the trust and to strengthen its capital structure.
F&N bought 17.7 per cent of Allco Commercial Reit and 100 per cent of the Reit’s manager for $180 million in July 2008. The Reit was renamed Frasers Commercial Trust, and the plan was to inject Alexandra Technopark and two other properties into the portfolio. While F&N has done this now, it may not be on the terms envisaged by some of its own shareholders, and it may face questions on whether the conglomerate is supporting FCOT at the expense of its own interests.
Asked if F&N regretted buying Allco in the first place, Mr Hui admitted that ‘it has been a lot more challenging than we had anticipated’. But now, the issues have been resolved and F&N has put the Reit in a stronger position, he said. It remains to be seen if F&N shareholders buy that argument.