Author: tfwee
CMT – CIMB
On the road
CMT roadshow to KL
We brought CMT to Kuala Lumpur for a non-deal road show last week. Investors’ top concerns were the retail outlook in Singapore, the performance of CMT’s portfolio, and management’s acquisition and asset enhancement plans.
Defining “suburban mall” by location and positioning. Investors expressed concern over upcoming retail supply, particularly in central Singapore. Management pointed out that CMT’s portfolio resilience stems from its primarily suburban assets. The definition of “suburban” should not refer only to physical locations but malls’ positioning i.e. a suburban mall should offer a good selection of mass-appeal and necessity-based retail produces and services including cinemas, supermarkets, music schools and food courts. Plaza Singapura is a centrally located mall which management considers suburban in its positioning for residents in the districts of River Valley, Orchard Road and Mount Sophia. Repeat visits within the week are expected for CMT’s suburban malls due to their proximity to MRT stations and necessity-based offerings as opposed to destination-based malls in the primarily shopping belt. Thus, management does not consider Plaza Singapura to be competing directly with the three new malls that will be opening along Orchard Road over 2009-10. Non-suburban properties in CMT’s stable are limited to four assets: Atrium@Orchard, Raffles City, Funan DigitaLife Mall and Bugis Junction.
Traffic count at Tampines Mall stronger at opening of Tampines One. Despite the strong draw of new-to-market brands such as Uniqlo and Cache Cache Paris at competing mall Tampines One that opened in April, traffic count at Tampines Mall has not been worse off. In fact, within the first week of Tampines One’s opening, traffic at Tampines Mall increased 15% due to its larger number of food outlets and car-park lots.
Confident of renewing leases expiring in 2H09. There are 550 leases accounting for 21.5% of gross rental income which will be expiring in 2009. Almost half will come from IMM Building and Plaza Singapura. Leases due in IMM Building are mainly from offices and warehouses, and management is confident of renewing these leases or securing new tenants as passing rents are below market rates. We estimate current passing gross monthly rents for IMM offices at S$2.91 psf and warehouses at S$1.45 psf.
As for Plaza Singapura, the bulk of the space is taken up by hypermart, Carrefour, whose current lease was secured at the rental lows of 2003. We estimate current gross monthly passing rent for Carrefour at S$5.35 psf. Management is confident that competing malls in the Orchard area will not be able offer the same size at current passing rents. Moreover, if existing tenants decide not to renew, rates from new tenants are highly likely to surpass their rental levels.
Why rights issue? Management explained that although refinancing options are available to CMT, banks are only willing to lend up to three years, representing shortterm solutions. Stretching the current debt for another 2-3 years would result in a new expiry in 2011 or 2012 when significant debt would also be due. (This assumes that convertible bondholders will redeem at the 2011 option date.) Taking the rights issue path would allow CMT to pay down some debt and reduce its gearing. Following its rights issue and assuming immediate pay-down of debt due in 2009, asset leverage should come down to 29.2% from 43.1%. CMT’s long-term leverage will be about 35%.
Organic growth via asset enhancement. Management guides for flat DPU of 8.4cts for 2009-10 as increased contributions from newly enhanced Raffles City and Lot One could be diluted by reduced gross turnover rents and possibly flat reversions. Management intends to commence asset enhancement work at Jurong Entertainment Centre (JEC) at the end of 2009 and Atrium@Orchard at the end of 2010. Capex for both is estimated at S$300m. Prior to commencement, the following will have to be fulfilled: 1) leasing pre-commitments of 50%; 2) construction costs fixed; and 3) financing secured.
Leasing pre-commitments at JEC have been secured from the previous cinema operator, a supermarket as well as a food court. Leases for these anchors will range from three to 10 years. The decision to postpone asset enhancement work at JEC although operations have ceased since Nov 08 was based on expectations of declining construction costs by 2H09, when Singapore’s two Integrated Resorts will be close to completion. For Atrium @ Orchard, management expects approval from the relevant authorities to take another 12-18 months.
Acquisitions. Clients also wanted to find out management’s acquisition plans, particularly for Ion Orchard (jointly owned by sponsor CapitaLand and Sun Hung Kai). Management indicated that a stabilised yield from Ion Orchard will be needed before acquisition, and new malls typically take one year to achieve that. Hence, a more realistic time to acquire Ion Orchard would be after 2H10.
Valuation and recommendation
Maintain Underperform at S$0.87 for now. We came away from the roadshow with more clarity on management’s growth strategy. CMT has a post-rights adjusted P/BV of 0.83x and a forward yield of 6.8%. We maintain our Underperform rating and DDMbased target price of S$0.87 (discount 9.7%) for now. We are reviewing our estimates for a potential upgrade.
Office REITs – UOBKH
Office REITs – Outstripping Improvement In Fundamentals
The Federal Reserve extended the TALF programme to commercial mortgage-backed securities (CMBS) starting 1 Jun 09, hence the optimism and rally for S-REITs. However, we believe the rally in the past two weeks for office REITs has already factored in the improvement in fundamentals.
Office rentals still falling but at a slower pace. Due to the ongoing financial crisis, rentals for prime office space corrected 6.8% in 4Q08 and 30.0% in 1Q09 to S$10.50psf pm after hitting a peak of S$16.10psf in 3Q08. The Raffles Place micromarket registered the steepest fall of 17.9% in 4Q08 and 28.5% in 1Q09 to S$10.50psf pm. Our survey of office REITs indicates that office rentals have fallen by a slower 5-10% so far in 2Q09 due to an improvement in market sentiment.
Deals starting to flow. There are more transactions in the secondary market for strata office space recently. Capital value for Suntec City Office Towers has rebounded 10.8% to S$1,781psf ytd. Capital value for International Plaza has similarly rebounded by 9.2% to S$1,100psf. Unlike in previous recessions, there has been no distress or fire sale in the office market during the current recession. As such, cap rates have been stable.
Revaluation results in higher gearing. We remain concerned about the correction in office rentals due to new supply coming on stream. A total of 8.3m sf of office space will be completed from 2Q09 to 2013, representing 11.5% of total stock. A markdown in the value of investment properties on revaluation will result in higher gearing and potential rights issues.
Maintain OVERWEIGHT for REITs. Current yield spread is 3.61%, higher than the historical average of 2.97%. We expect yield spread to contract further as credit markets normalise. Refinancing risk has abated with the potential reopening of the CMBS market. We prefer switching to laggard retail and industrial REITs. BUY Frasers Centrepoint Trust and Ascendas REIT. Our only BUY for office REITs is K-REIT Asia.
Link : Table
LMIR – BT
LMIR Trust gets loan conditions extended
Loan facility also reduced to $125m and tenure cut from five to four years
THE manager of Lippo-Mapletree Indonesia Retail Trust (LMIR Trust), which last year obtained a $350 million term loan facility to finance the trust’s purchase of Sun Plaza in Indonesia’s Medan, has secured a deadline extension to meet the lender’s security assignment requirement.
Under the original facility agreement in March last year, the trust manager, Lippo-Mapletree Indonesia Retail Trust Management, was required to procure the consent of certain Indonesian counterparties for a number of build, operate and transfer (BOT) agreements to assign the rights of the manager to the lender, Deutsche Bank, Singapore Branch, as security for the loan.
But there has been a delay in getting consent from these counterparties for some of the malls. The trust manager has been negotiating with the lender to extend the deadline of obtaining the relevant consents to Dec 31, 2009.
This was disclosed in LMIR Trust’s 2008 annual report.
Last Friday, the manager entered into an amendment and restatement agreement with the lender. The lender has agreed to, among other things, extend the deadline to Dec 31, 2009, for an extension fee of $1.5 million to be paid by LMIR Trust.
The loan tenure of the facility has been reduced from five years to four years, with effect from March 31, 2008, the trust manager said yesterday.
It added that ‘following the cancellation of an unutilised portion of the term loan, the loan facility has been reduced to $125 million’.
The other key terms of the loan remain the same. The all-in cost of funds will be about 7.2 per cent per annum for the remainder of the three-year loan tenure.
A separate announcement said that the chief financial officer of the trust manager, Rudi Chuan Hwee Hiow, has stepped down with effect from yesterday ‘to pursue personal interests’.
He is replaced by Shane Hagan, 42, who has many years of experience in financial management of publicly-listed property entities. From 2003 to 2007, for example, Mr Hagan was CFO of the management company of Ascendas Reit.
Alan Wong Peng How has also been appointed as investment manager. He has earlier held positions with MacarthurCook Industrial Reit, Mapletree Investments Pte Ltd and Ascendas Pte Limited.
Former investment manager Leigh Regan will be employed by PT Lippo Karawaci Tbk as business development director and will be based in Jakarta. Mr Regan will continue to support the operating performance of LMIR Trust’s portfolio in Indonesia.
MI-REIT – Phillip
Net Property Income (NPI) for FY2009 registered an increase of 48.5% to $36.9 million. DPU for the full year is 8.925 cents.
Actual NPI is not far off from our estimates of $35.2 million. However DPU is 7.2% lower than our estimates. Fourth quarter DPU was 1.875 cents, which was 20% lower than the three preceding quarters of 2.35 cents, even though the fourth quarter DPU comprised retained distributions from first quarter through third quarter.
Asset value declined 4.5% from $555.4 million in FY2008 to $530.3 million in FY2009. In addition, MIREIT took a $20 million provision to its balance sheet as it anticipates the decline in asset value of the IBP development building it will acquire upon completion of construction in fourth quarter 2009. NAV per unit fell from $1.29 in FY2008 to $1.09 in FY2009.
MIREIT got a second extension on its debt to repay $201 million, extended to 31 Dec 2009 with an interest margin of 5%. It has another 1.5 billion JPY due on 18 Dec 2009. Furthermore it still requires funding of $91 million for the IBP building. Current gearing is 41%. If the IBP building is to be debt-funded, gearing will rise to 47%.
Although MIREIT has gotten an extension on its debt, the funding need is still present and pressing. Other than obtaining a straight bank loan, the other alternatives would be divesting assets or a equity fund raising. Selling assets in a value declining environment would not value eroding. We believe a rights issue is imminent and although highly dilutive, is the best solution to its funding needs from a long-term viewpoint. We estimate MIREIT would need to raise $100 million to fund its IBP acquisition. Gearing would also be lowered to 35%, which is a comfortable level. In our calculation, we assume a 1-for-1 rights, which would approximately doubles the issued units.
MIREIT has maintained an occupancy rate of 98.6% as at 31 March 2009. We retain our top line assumptions, however we adjusted our borrowing cost to reflect the higher margin. We adjusted down our DPU forecast for FY2010F from 8.59 cents to 8.28 cents. If MIREIT raises equity through a rights offer, DPU would be diluted to 4.24 cents. MIREIT’s share price has recovered in-line with the market, however we feel investors are still unclear of the refinancing plan and that will bog down investment sentiments in the REIT. We retain our Hold recommendation with a revised fair value of $0.39 as we lower our beta and increase cost of debt assumptions. We believe a re-rating is due for the REIT sector as most REITs had resolved their short term funding needs.
CCT – DBS
Equity overhang removed
• $828.3m 1-for-1 rights at $0.59 each
• Financial metrics strengthened, gearing of <31%
• DPU adjusted c37%, ex-rights yield of 8.7-8.2% over FY09-10
• Upgrade to Buy, post rights TP of $0.93
A long anticipated exercise. CCT has finally announced a $828.3m fully underwritten and renounceable rights exercise via a 1-for-1 issue of 1403.9m units at $0.59 each. The rights price is at a 44.3% discount to the last close of $1.06 and a 60.9% discount to the ex-rights book NAV of $1.51. Proceeds are earmarked primarily for reducing borrowings, with the balance for capex, asset enhancements and working capital. CapitaLand has undertaken to fully subscribe for its pro rata 31.4% share.
Strengthening financial metrics. Post rights issue, gearing would drop to 30.7%, which is at the lower end of their target gearing range of 30-45% through the cycle, putting the group in a good position to navigate through the challenging operating environment. More importantly, even with a further 30% depreciation of asset values from hereon, in line with our peak/trough projection, gearing would rise back to the higher end of its stated range. Financial flexibility is maximized with higher interest cover of 3.1-3.4x and together with the recent refinancing exercises, the group would have $2b of unencumbered assets and $665m of unutilized credit lines from its MTN programme.
Ex rights yield of 8.7%. FY09-10 DPU will adjust by 37% to 7.2cts and 6.8cts due to expansion in share capital offset by interest savings. Based on the TERP of $0.825, yield works out to be 8.7% and 8.2% respectively. Our DCF backed target price is revised to $0.93 or a 14% upside from TERP. With the removal of the equity overhang we believe investors would refocus on the core strength of its portfolio backed by its blue chip tenants with long leases, which makes up 50% of income. Upgrade to BUY.