Author: tfwee
AllCo – Phillip
A Fresh Start
Allco Commercial REIT (Allco) announced that Fraser Centrepoint Limited (FCL) has bought over Allco Finance Group’s (AFG) stake of 17.7% in the REIT and also 100% of the REIT manager Allco (Singapore) Limited for a total consideration of S$180 million. The sale is expected to complete by 6 August 2008. Allco will be renamed Frasers Commercial Trust upon completion.
Under the agreement, FCL will acquire the units at a price of $0.83. This represents a discount of 42.3% from the NAV of $1.44.
This latest acquisition of Allco manifests the M&A story surrounding the REIT sector. We have at least seen some form of management changes among the smaller independent REITs. The rationale behind FCL’s move lies in its intention to establish a commercial REIT of its own. By acquiring Allco, FCL saved itself the trouble of going through the time consuming route of an IPO.
After the acquisition by FCL, Allco will have a sponsor who has a ready supply of properties to inject into the REIT. Currently FCL owns and manages two Grade A office towers – Alexandra Point and Valley Point, and a high-tech industrial park – Alexandra Technopark. These properties value at S$710 million will form the expansion pipeline for the REIT.
Following the sale, Allco’s income support agreement with Allco Finance Group Limited (AFGL) for Central Park will be terminated. As per the announcement on 6 May 2008, there is a potential claim of A$6.4 million for the period from 1 Jan 2008 to 29 Mar 2009.
In addition, Allco recorded valuation loses from its Cosmo Plaza and Centrelink Headquarters properties after valuations were done on 30 Jun 2008. Currently Allco has a property portfolio size of S$1.9 billion.
Strategic review. Following the acquisition by FCL, there is no formal announcement on the intended divestment of the Australian assets. This is dependent on the strategic direction of FCL. However looking at the Centrelink Headquarters revaluation, the divestment may net proceeds 10% lower than originally intended.
A quick recap on Allco debt profile. Allco has S$70 million of debt maturing in Nov 2008, which will be repaid with the redemption proceeds from AWPF. Another S$550 million is expiring in Dec 2009 and another S$268 million of Yen denominated debt in 2012. With the Fraser and Neave Group as the sponsor now, we believe this would strengthen Allco financial credibility.
Allco’s current gearing is 47.3%. Following the full redemption of AWPF and assuming all 3 proposed properties injected into the REIT are fully funded by debt, gearing would increase to 57.9%.
Analysis. We view some synergistic benefits to the acquisition by FCL, however there are also some issues that linger in our minds. First up, Allco gain a reputable sponsor that could act as a catalyst to close up the gap between the trading price and NAV. Under the agreement, FCL will pay S$104 million to acquire 17.7% stake from AFG and $76 million to acquire 100% of the manager. The manager currently holds 1.48% (10,491,300) of the outstanding units. There is a termination fee of $20 million if the manger is removed from its capacity. Therefore we reckon the implicit price paid by FCL to gain a controlling stake is actually $1.17 per unit, assuming FCL’s purchase price of the manager includes this termination fee. This would then represent an 18.7% discount from the NAV.
One of the uncertainties associated with non-developer sponsored REITs and independent REITs is the lack of acquisition opportunities. With FCL as the sponsor, there is more visibility to the expansion pipeline now. Secondly, we feel Allco will be in a better financial standing when it comes to funding negotiations. It will also have more funding options being part of the Fraser and Neave Group.
With this initial announcement of acquisition, there are a few doubts that we would like to seek clarity. The foremost question would be the future direction of the REIT. Allco started out as a commercial REIT focusing on the office sector. With the purchase of Keypoint building, it added retail spaces to its portfolio. And recently, it gained provisional permission from URA to develop a hotel tower at the China Square property. So we are seeing a shift in investment policy of the REIT. Secondly, it would be the probability of the divestment of the Australian properties.
Valuation and reccomendation. For our valuation, we took the conservative stance of impairing the potential A$6.4 miilion income support from AFGL. We also apply stringent parameters in our valuation model to reflect the bad market condition. Our revised valuation gives us a FY08F DPU of 6.41 cents. We lowered our fair value from $1.05 to $0.86. We believe Allco is a long term value play and keep our buy recommendation at the current price.
Risks to our valuation. The macro risk affecting Allco is the sustained economic slowdown leading to a drop in rental revenue. Poor credit environment couple with rising interest rates will increase the borrowing cost and interest expense. Current gearing of Allco is 47.3%. Concern exists over the leverage if Allco is to acquire using debt. Therefore in our view, Allco will need to raise equity at some point in time or divest the Australian properties to lower gearing.
Cambridge – BT
CIT seeks conversion to become Syariah Reit
With change, it will be the first such listed Reit here
CAMBRIDGE Industrial Trust (CIT) is seeking unitholders’ approval to convert the real estate investment trust into a Syariah-compliant Reit to capitalise on the growing wealth in the Middle East and cultivate a new investor pool when raising capital or issuing debt.
‘In the long term, the diversification and broadening of the investor pool may deliver more cost-efficient capital and provide optimal funding options for CIT’s growth plans,’ CIT’s manager, Cambridge Industrial Trust Management Ltd (CITML), said in a release to the SGX yesterday evening.
Upon conversion, CIT will become Singapore’s first publicly-listed Syariah-compliant Reit and the world’s first listed Syariah-compliant industrial Reit, CITML said.
The fundamental difference between a Syariah-compliant Reit and a conventional Reit is in ensuring that the revenue of the Syariah-compliant Reit is derived from halal or permissible activities and its funds are managed in accordance with Syariah principles, CITML noted.
CIT has a portfolio of 43 properties valued at $966.8 million. The Islamic Bank of Asia has been appointed to act as Syariah adviser for the proposed conversion. HSBC will advise on, and arrange, a Syariah-compliant financing solution for CIT to refinance its existing interest-bearing loans. A fundamental tenet of a Syariah-compliant Reit is that it should not pay or receive interest. CIT currently has $369.3 million of interest-bearing loans.
The trust’s cash and liquid assets will also have to be invested in Syariah-compliant products and CITML is reviewing the alternatives in this regard.
‘A due diligence review on the use by the tenants of the properties in the CIT property portfolio has been undertaken to ascertain whether the tenants operate permissible activities. We are pleased to advise that 98.86 per cent of the rental income received by CIT has been derived from permissible sources,’ CITML said.
After conversion of CIT to a Syariah-compliant Reit, the usage of the properties by the trust’s new tenants must be fully Syariah-compliant.
Cambridge – DBS
CIT to acquire Natural Cool Lifestyle Hub for S$55.2m; to turn Shariah Compliant
Story: Cambridge REIT ( CIT ) announced that it has entered into a put & call agreement to purchase another industrial asset, Natural Cool Lifestyle Hub located at 29 Tai Seng Avenue for S$55.2m. This asset is the first out of two assets (total S$63.8m) that CIT has lined up for future injection into its portfolio and was already highlighted in our initiation report dated 02 July 08.
Point: When completed, CIT’s portfolio will grow to 44 assets with a combined appraised asset value of c S$1.02bn. Post completion of the sale, Natural Cool Investments Holdings Ltd will lease back the asset for a period of 7 years.
We have assumed both assets to be injected into the portfolio by year end. Hence, our FY09 DPU estimate is adjusted upwards by 3% to 6.5 cts, while maintaining our FY08 forecast of 6.2cts.
Relevance: Maintain BUY on CIT with TP revised upwards to $0.92 (from S$0.88). At the current price of $0.64, CIT offers an attractive FY08-FY09 DPU yield of 9.6% and 10.2% respectively.
CIT to turn into a Shariah Compliant REIT In a separate announcement, CIT is seeking
unitholders approval to convert itself into a Shariah compliant REIT.
CIT cites the following benefits:
(a) Capitalising on the rising demand for such products in the REIT domain.
(b) Creating a new investor pool for the REIT.
We note that under Shariah law, CIT will not be able to pay or receive interest. In this regard, CIT has about $369m worth of interest bearing loans and will be seeking advise on arranging a Shariah compliant financing solution in this matter. We await management to advise further on this proposed change.
CCT – Nomura
Forum takeaways
From the Nomura Asia Equity Forum: CCT confirmed that it sees significant rental reversionary potential in the portfolio. While credit markets are tight, management expects no significant refinancing to be needed until March 2009, and is looking to agree terms by end of this year. We see inherent value in the office portfolio and retain our STRONG BUY rating on CCT.
Anchor themes
Assuming office supply will remain tight through 2008F, we expect office rents to peak during 2H08-1H09F, before entering a cyclical decline in 2010F (down 13.7%) and 2011F (down 19.0%), amid increased new supply.
Strong rental reversions are likely to underpin REIT cashflows. That said, growing concern over their ability to refinance debt have seen REITs trade below book. In such conditions investors need to focus on underlying asset values, while REITs with well-located assets should benefit from expectations of rising M&A activity.
Rental reversions, low gearing
Cambridge – Nomura
Forum takeaways
From the Nomura Asia Equity Forum: management indicated that Cambridge Industrial Trust is making significant progress in refinancing and terming out its short-term debt. Given current market conditions and an annualised DPU yield of about 10%, near-term yield-accretive acquisitive growth prospects appear muted.
Stable cashflow and capital management