Author: tfwee
FCOT – Kim Eng
A Catch-22 Situation for F&N (& a possible solution)
Key points:
♦ FCOT is the cheapest REIT in the S-REIT space on P/Book basis.
♦ Implicit backing of F&N reduces re-financing risk.
♦ A potential privatization candidate for F&N, we see a possible takeout price at $0.42, implying 82% upside.
Analysis:
1) Back in July 2008, F&N bought a 17.7% stake in Allco Commercial REIT (Allco) and 100% of Allco’s REIT manager, paying an aggregate purchase price of S$180m.
2) The S$104m price tag for 17.7% in Allco translated to a price of $0.83/unit and was at a 42% discount to Allco’s Net Asset Value, valuing the whole REIT at S$588m.
3) F&N’s game-plan was to use Allco REIT as its commercial REIT vehicle and eventually inject its pipeline assets (Alexandra Point, Alexandra Technopark and Valley Point) into Allco. Allco was subsequently renamed Fraser Commercial Trust (FCOT).
4) Today, amid a full blown financial crisis, and company-specific refinancing issues, FCOT’s share price has plunged to $0.23, implying P/NAV of 0.18x and a market capitalization of $164m. Distribution yield is in excess of 20%. F&N is currently sitting on a paper loss of $75m based on the last trade price.
5) In the short term, FCOT faced the daunting task of re-financing S$460m of short termT loan. Given the implicit backing of F&N, we believe the company would be able to resolve this, abeit with a higher cost of funds.
6) F&N currently faces a challenging situation: given the huge discount to Net Asset Value (78%) and high distribution yield, any asset acquisition would not be accretive and also involve massive unit earnings dilution. The designated pipeline assets for the REIT would have to be deferred infinitely in the current environment.
7) One potential solution would be for F&N to privatize the FCOT to resolve the deadlock. Post privatisation, F&N would have greater flexibility to carry out an asset restructuring exercise, getting rid of under-performing assets and re-packaging the REIT for a future re-listing when market conditions improve. Under current market conditions, a privatization offer would be a cheap way of acquiring physical assets.
8) While we are cautious of industrial REITs in general given a supply glut in a slowing economy and potential tenancy risk, we believe FCOT’s low valuation has priced in much of the negatives and has limited downside risk at this level. We also see it as a potential M&A target.
9) Assuming a takeout price of 0.35x P/Book, that will translate to a target of $0.42, 82% upside from current level. Buy.
MI-Reit – BT
MACARTHURCOOK Industrial Reit (MI-Reit) yesterday posted net property income of $9.3 million for its second quarter ended Sept 30, 2008 – up 58 per cent from a year earlier. The improvement was largely due to rental income from nine properties MI-Reit acquired in the past financial year.
Distribution to unitholders rose 27 per cent quarter on quarter to $6.1 million in Q2. This translates to a 26 per cent increase in distribution per unit (DPU) to 2.35 cents.
Taking DPU in Q1 and Q2 into account, MI-Reit’s annualised yield is 19.2 per cent, based on its closing unit price of 49 cents on Sept 30.
‘Given the rising worries over a global recession and fears in credit markets that have intensified, our immediate priority is to actively manage MI-Reit’s assets to maintain our high tenant retention and occupancy levels,’ said Craig Dunstan, CEO and executive director of MI-Reit manager MacarthurCook Investment Managers (Asia).
All 21 properties in MI-Reit’s portfolio were fully leased at Sept 30. Only 2.7 per cent of its rental income will be subject to lease expiry in FY2009 and FY2010.
Tenant diversification improved. At Sept 30, no single tenant accounted for more than 20.3 per cent of rental income.
Deteriorating market conditions and refinancing risks facing MI-Reit led Moody’s Investors Service to place its Baa3 corporate family rating on review for a possible downgrade last month.
At Sept 30, MI-Reit had an aggregate leverage ratio of 39.6 per cent. Its medium-term target gearing is in the range of 40-45 per cent.
‘The manager is currently advanced in negotiations in relation to a new facility that will refinance an existing facility of $220.8 million due in April 2009 and also to provide funding for the settlement of Plot 4A, International Business Park in December 2009,’ said MI-Reit.
MI-Reit signed a deal for the business park in August last year. The Reit did not announce any acquisitions in Q2.
‘In the near term, organic growth in the portfolio will drive returns,’ said Mr Dunstan. ‘However, we expect to resume our active acquisition growth strategy once capital market conditions improve.’
For the rest of the financial year, the MI-Reit manager expects returns to be in line with recent performance.
Units of MI-Reit closed 0.5 cents higher at 39 cents yesterday.
PLife – CIMB
Limited downside risks
• Maintain Outperform. PLife’s exposure to the resilient healthcare sector, long lease structures of up to 15 years and built-in rent increases pegged to the CPI give greater clarity to its income streams than for the other REITs under our coverage. With refinancing secured and a surplus war chest, PLife is positioned for stable growth even in a difficult financial climate.
• Outlook for healthcare remains positive. We expect demand for healthcare to grow strongly on the back of a greying Asian population, blooming medical tourism in the region and the Singapore government’s initiatives to establish a biomedical industry.
• Unchanged DDM-derived target price of S$1.30 (discount rate 8.1%). Management had been able to secure very favourable financing terms despite the credit crunch. We continue to like PLife for its attractive forward yields of more than 10% with the least earnings risk among the S-REITs. P/BV of 0.57x is also in line with the average S-REITs’ 0.51x. Maintain Outperform.
MLT – CIMB
Ready for rough times
• Upgrade to Outperform from Neutral. MLT’s rights issue earlier this year both addressed refinancing concerns and brought down its asset leverage to a healthy 37% from 56%. We expect new demand for industrial space to ease in tandem with an expected economic downturn. Nonetheless, MLT’s long weighted average lease to expiry of five years should provide visible income streams over the medium term.
• Unchanged target price of S$0.60 (discount rate 9.6%). At our target price, MLT has potential price upside of 42.8%, vs. the potential 15% upside for the STI. We upgrade MLT to Outperform from Neutral based on valuation. We believe that MLT’s rental resilience, healthy leverage and management’s conservatism after the rights issue will yield stable distribution to unitholders despite macroeconomic negatives. Current P/BV of 0.49x and forward yields of 13.2% are in line with SREIT averages. At these levels, MLT appears significantly cheaper than its closest peer A-REIT, whose P/BV is 0.94x with forward yields of 8.8%.
FCT – CIMB
Resilient performer
• Maintain Outperform. FCT is the best proxy for suburban retail mall space in Singapore, in our assessment. During past economic downturns, rents and occupancy levels of suburban retail space were the sturdiest, attributable to a dearth of suburban retail supply and tenants catering to non-discretionary spending.
• No new additions. We recently removed our forecast of acquisitions for Northpoint 2, Yew Tee Mall and Bedok Mall, while maintaining our expectation of near-full occupancy for FCT as there is no known coming supply in the vicinity of FCT’s major malls, Causeway Point and Northpoint.
• Unchanged DDM-derived target price of S$1.13 (discount rate 9.7%). With no major refinancing risks in the next two years, we expect distribution to remain stable. Current P/BV of 0.59x is moderately above the average in the S-REIT sector, but significantly lower than peer CMT’s 0.9x. Forward yields of 10.1% are below the average S-REITs’ 13.6%.