Author: tfwee
SREIT – CIMB
Feedback from investors
We held meetings with 58 investors during an 8-day roadshow to the UK, Europe, Singapore and Kuala Lumpur in November. Themes discussed included REITs’ refinancing issues, the implications of breaching the 60% gearing limit as well as the degree of occupancy and rental declines that could be expected in a downturn.
While most REITs seem able to maintain general debt covenants with their bankers with safe gearing levels of under 45% (vs. the regulatory 60% limit) and interest cover exceeding 3x, short-term refinancing looks daunting for a number of them. From the refinancing deals announced over October-November, we conclude that REITs with strong sponsors, particularly government-linked sponsors, low leverage and quality portfolios are more likely to secure bank loans, which are the preferred refinancing option.
While some sceptical investors felt that there was more room for rents and occupancy to fall, most agreed that REITs have been oversold and even if yields deteriorate moderately from here, the REITs remain highly attractive, by any measure.
Our top pick #1: CCT
Will it get cheaper? Most clients agreed that at 0.2x P/BV, falling rents and occupancy levels have been priced in and yields of 18% certainly look attractive. We contend that CCT’s low average rent base (under S$8psf/month), long leases, rental caps for some of its leases, rental support from CapitaLand for One George Street and a master lease structure with the hotel operator RC Hotels within Raffles City would provide buffers despite falling office spot rents and occupancy levels. Investors’ apprehensions about a falling topline were somewhat assuaged. However, refinancing issues remain the main worry and three possibilities were discussed:
(1) Bank loans secured but at a high cost. Refinancing via bank loans is the most preferred solution for CCT at this point. On 28 Nov, Reuters reported that CCT verbally mandated four banks (Bank of Tokyo-Mitsubishi UFJ, DBS Bank, Standard Chartered Bank and UOB) to handle a S$580m 3-year bullet refinancing deal, which is equivalent to its short-term debt coming due in Mar 09. Interest cost, which was reported at 250bp above LIBOR, is in line with the 3-year cost of debt in Singapore (we earlier estimated at 200-300bp above SIBOR or SOR). However some investors are concerned that the indicative rate is significantly higher than CCT’s portfolio property yield, which is below 4%. Even though the cost of debt has yet to be finalised, we have assumed a cost of debt of 5% for CCT in 2009. Most investors conceded that an increase in cost of debt would still be preferable to a dilutive rights issue. We are of the view that banks remain willing to extend credit to CCT, given its quality portfolio and strong sponsor CapitaLand (CAPL SP, S$2.49, Underperform, target price S$2.30). A direct bank loan remains the most possible and positive outcome for CCT.
(2) Bank loans not secured; rights issue forced. More sceptical clients were worried that CCT may resort to a rights issue if bank loans cannot be secured, causing dilution for existing unitholders. Additionally, if take-up is poor, sponsor CapitaLand could end up absorbing the bulk of the issue, resulting in a highly illiquid REIT. This would be negative for both CCT and the REIT sector. We are of the view that this option would be given low priority, and that bank financing would eventually be made available to CCT. Before deciding on a rights issue, a loan from the parent might be an alternative, and would be received more positively than rights.
(3) Convertible bonds redeemed at put date. Short-term financing woes aside, Singapore-based investors were particularly concerned that CCT’s S$370m convertible bond due to mature in 2013 would be redeemed earlier at its put date in May 2011. This would cause a spike in CCT’s debt profile in 2011 and increase its allin cost of debt.
Our top pick #2: PLife
Positive on existing model, negative on Novena. While investors like the downside protection of PLife with a CPI-pegged revenue base and interest locked in for three years, they are apprehensive about the Novena hospital site, which is currently under development by the sponsor Parkway Holdings (PWAY SP, S$1.11, Outperform, target price S$2.45). It is widely anticipated that the completed development would be injected into PLife upon completion. The 17,266 sq m site was acquired by PWAY in Feb 08 for S$1.25bn or S$1,600/sf/gross plot ratio under the Government Land Sales programme. The acquisition price of the land was more than double the secondhighest bid of S$695/psf/gross plot ratio. We assured investors that while PLife has the first right of refusal to the sponsor’s assets put up for sale, it is not obliged to acquire assets that are not accretive. Additionally, any related party transaction that crosses 5% of the NAV threshold will require unitholders’ approval, and the related party (PWAY in this case) will have to abstain from voting. Completion of the hospital is expected in 2011.
Where’s the growth? Investors also queried about PLife’s growth avenues. Management earlier indicated that the company still has capacity to grow via acquisitions given a low leverage of under 20% and access to more than S$350m of funds. While investors remained open to further acquisitions, they also hoped that management will be cautious and secure truly accretive deals.
Tenant concentration risk. Some investors pointed out that PLife is highly dependent on its sponsor, PWAY, as its major tenant/operator, contributing about 80% of its gross revenue. We draw comfort that PWAY, the leading integrated healthcare provider in Asia, had remained profitable throughout the last two recessions, in 1998 and 2002. Furthermore, PWAY was among the earliest to recover, boosted by pent-up demand during the recessions. We also expect PWAY’s enlarged regional network to cushion its revenue in the coming recession. In PWAY’s
Singapore hospitals, higher-paying patients from new venues such as Russia and the Middle East have increased, resulting in an overall improvement in revenue.
Wish list for the sector
Securing refinancing that is not detrimental to unitholders. Top of the wish list is the ability to secure refinancing that would be non-detrimental to unitholders. Several investors were concerned that REITs would have to resort to: 1) dilutive rights issues; 2) distressed sales of assets to repay debt; or 3) the declaration of bankruptcy / liquidation, should banks be unwilling to extend credit at reasonable costs.
Truly accretive acquisitions. Also top of the list are truly DPU-accretive future acquisitions, untainted by financial engineering. While a number of acquisitions had “proven” accretive due to the spread between property yields and low borrowing costs, the credit crunch throws up the possibility that spreads may not be sustainable if refinancing is not available or obtained at much higher costs.
REITs in favour. Long funds remain fundamentally focused on asset quality, prudent REIT managers and more resilient property segments. REITs with a core Singaporebased portfolio are also preferred. FCT, A-REIT and PLife are three of the more preferred stocks. Strong interest was also expressed in CCT which remains the cheapest stock under our coverage at 0.2x P/BV, although doubts about refinancing were equally strong. Despite the hostile macro environment for the hospitality industry, some investors were beginning to show interest in CDLHT, citing its low asset leverage and prudent management.
Link – Table
FrasersCT – BT
Moody’s Investors Service has on Monday downgraded the Fraser Centrepoint Trust’s (‘FCT’) corporate family rating from A3 to Baa1.
The rating remains on review for possible downgrade.
‘The downgrade reflects Moody’s views that FCT is unlikely to grow in the next two years to a scale and diversity that is consistent with its previous rating’, says Kathleen Lee, Moody’s lead analyst for the trust.
‘Consequently, FCT’s relatively small size and asset concentration risk whereby Causeway Point contributes a significant 71% of net profit from its portfolio of 3 retail assets do not support a continuation of its previous rating when compared to similarly rated peers in the REITsector’, adds Lee.
The rating remains on review for downgrade given the use of uncommitted drawn banking facilities to fund capital expenditure. While the amount is relatively small – and with banks with good relationships with FCT — Moody’s believes the continued use of such facilities is a source of weakness especially as the bank lending environment continues to tighten.
Moody’s notes that FCT has reported sustainable income streams, supported by its good quality, well-located and seasoned suburban retail malls which enjoys relatively high entry barriers and is more resilient to economic downturns as tenants mainly provide daily necessities.
The rating review will focus on FCT’s plans to secure committed bank facilities or find alternate mitigating measures to address the weakness of the existing uncommitted facilities and to fund ongoing capital expenditure.
The last rating action was on 20 October, 2008 when the ratings of FCT were placed under review for possible downgrade.
FCT is a Singapore-based real estate investment trust with particular focus on retail properties in Singapore. The trust is sponsored by Frasers Centrepoint Ltd, the wholly owned property arm of F&N group, one of Singapore’s leading shopping centre operators and developers.
REITs – BT
Reits treading warily in market minefield
Refinancing a bigger focus; acquisitions on hold; sector shakeup possible
The latest earnings season has been a chilly one for real estate investment trusts (Reits) hit by the credit crunch and a cooling property market.
Many Reits are working to shore up confidence in their credit positions. Property acquisitions are virtually off the table while industry watchers are divided on whether consolidation within the sector is on the cards.
‘Reits are definitely paying more attention to financing,’ said DMG & Partners Securities analyst Brandon Lee. The research house estimates that the sector has at least $4.5 billion up for refinancing in 2009 alone. With credit tightening and spreads widening, the market is watching closely for signs of trouble.
According to a CIMB-GK report, borrowing spreads for Reits have risen from an average of 150 basis points (bps) to 200-300 bps for three-year loans in the last six months.
‘While average all-in cost of debt for most Reits has been contained within 4 per cent thus far . . . we expect the all-in cost for those with significant refinancing due in 2009 to rise,’ said associate vice-president of research Janice Ding.
Reits have tried to soothe market anxiety in the past few weeks by releasing more details on debt. Ascendas Reit (A-Reit), for instance, won confidence votes when it said it had secured firm commitment of $200 million to help refinance a $300 million loan due in August next year.
Suntec Reit also made it a priority to refinance a $700 million loan due in December 2009. ‘Whilst we have no major financing needs in the next 12 months, we are keenly aware of the liquidity crunch,’ said the Reit manager’s CEO Yeo See Kiat last month.
Reits also have to worry about asset devaluation as the slowing economy weighs down on rents and occupancies. Lower property values would raise gearing ratios. Frasers Commercial Trust (FCOT) booked a revaluation loss of $83.5 million in the third quarter ended Sept 30.
Reits have pushed asset acquisition plans to the bottom of the agenda. Even organic growth has slowed. Suntec Reit shelved redevelopment plans for Park Mall. CapitaMall Trust also held back enhancement plans for three malls because of high construction costs.
‘We will review new commitments carefully and will not sacrifice our liquidity,’ said the Reit manager’s chairman Hsuan Owyang last month.
Analysts advise investors to be selective. While low unit prices have boosted yields, it would help to ‘pay extra attention to (Reits’) refinancing profile, especially the quantum of short-term debt due within the next six to nine months,’ said DMG’s Mr Lee in a note. ‘We like S-Reits with strong sponsors (and) excellent track record.’
CIMB-GK’s Ms Ding added: ‘The presence of strong sponsors and government-linked sponsors is advantageous at this juncture.’
FCOT, for instance, managed to take a $70 million loan from parent company Fraser and Neave last week to repay debt. The trust is in talks to refinance the $70 million loan and all debt maturing next year. In response, Standard & Poor’s Ratings Services took FCOT off ‘CreditWatch’ status and said that the outlook is stable.
ARA Asset Management Group CEO John Lim believes that consolidation in the sector seems unlikely because Reits would be more concerned about their own refinancing and asset valuation issues.
CIMB-GK’s Ms Ding said that in today’s market, it would be difficult ‘for any single entity to have enough funds to buy over the entire (Reit) unless it’s a distressed sale’.
But an industry observer believes that consolidation could happen because the sinking tide has left some Reits looking weaker than their peers. To avoid coughing up cash, a potential acquirer can offer units in itself to the target Reit, he added.
MI-REIT – BT
MI-Reit to refinance $201m of debt by Jan
Disclosure comes after Moody’s cuts rating, with possible further downgrade
MACARTHURCOOK Industrial Reit (MI-Reit) said yesterday it aims to refinance some $201 million of debt due in April 2009 by the end of January next year.
MI-Reit announced the plan a day after Moody’s Investors Service downgraded the Reit’s corporate family rating to Ba2 and said it remains for a possible further downgrade.
‘The rating remains on review for downgrade primarily to reflect ongoing concerns surrounding MI-Reit’s significant refinancing risk, with 91 per cent of its total debts, or $201 million, falling due in April 2009 amid very challenging credit markets conditions,’ said Kathleen Lee, Moody’s lead analyst for the trust.
She also said the trust has an outstanding put- and-call option on plot 4A of International Business Park, which if completed by end-December 2009 on fully debt-financed terms, will result in a ‘material weakening of (the Reit’s) credit metrics’.
‘There also remains considerable uncertainty as to how this acquisition will be funded if the put option is exercised by the vendor,’ Ms Lee said.
In response, MI-Reit said yesterday it expects to finalise negotiations to refinance the bulk of its debt maturities by the end of January 2009.
And as for the new acquisition, finance will be sought via negotiations with banks, MI-Reit told BT.
The planned $91 million acquisition will lift the trust’s gearing from around 39 per cent now to about 47 per cent.
Moody’s said it also downgraded MI-Reit because it feels the Reit is not likely to meet the scale and diversity targets that were built into its original rating.
The Reit now shows high levels of asset and tenant concentration, more consistent with a Ba2 rating, Moody’s said.
MI-Reit, one of the smallest industrial Reits in Singapore, owns 21 properties worth a total of $559.9 million.
But being small does not mean the trust is riskier, MI-Reit told BT yesterday.
MI-Reit shares lost 0.5 cent to close at a one-year low of 25.5 cents yesterday. The stock has lost 76.8 per cent this year.
Hospitality – DBS
From Formula One To None
Tourist Arrivals Continue to Drop YoY: October 2008 tourism data extended the continued decline in visitor arrivals, which have been dropping yoy since June 2008. For the month, total tourist arrivals were 843,000, representing an 8.1% fall compared to the year-ago period. This brings 2008 year-to-date arrivals to around 8.4 million. With 2 months of the year remaining, visitor arrivals and spending are expected to fall short of the 2008 targets of 10.8 million and S$15.5bn respectively. If we project the similar c.8% drop yoy in tourist arrivals to November and December numbers, overall arrivals in 2008 will come in at just a touch above 10 million, and would represent the first yoy drop in annual tourist arrival numbers (from 10.3 million in 2007) since the SARS outbreak in 2003.
RevPAR Growth Hits A Roadblock: Average Room Rate (ARR) was estimated at S$241, which is an 8.4% increase over the year-ago period. The Average Occupancy Rate (AOR) for gazetted hotels was estimated at 82% in October, which was a drop of 6.8 percentage points over October 2007. RevPAR grew only by 0.1% yoy to S$199, the first month this year with flat RevPAR growth over the year-ago period.
Cautious on Sector, Banyan Tree TP Reduced: We remain CAUTIOUS on the hospitality sector. We retain our HOLD call on CDL HT (TP S$0.62), with its mid-tier to upscale hotel mix more likely to benefit from business travel downgrades, borne out by the reduction in RevPAR of around c.2% for these two segments in October 2008, compared to a c.9% drop in RevPAR for the luxury segment. We also maintain HOLD on ART (TP S$0.57) with our view that its earnings are likely to be most resilient among the hospitality plays, given longer leases and a likely increase in contract work (over permanent employment) in current uncertain markets. We retain our FULLY VALUED call on Hotel Properties (TP S$0.76), with its slate of local luxury hotels and regional luxury resorts likely to be impacted by the global economic downturn. We also maintain FULLY VALUED on Banyan Tree, and have increased the discount to its SOTP valuation of S$1.23 from 60% to 70% on account of the deteriorating political situation in Thailand, which we believe will impact tourism arrivals for some months to come. Our TP is reduced from S$0.52 to S$0.37.