Author: tfwee
Cambridge – Phillip
Business As Usual
The recent MIREIT saga came to an end as all the resolutions were passed during the EGM. According to the latest regulatory fillings, Cambridge Industrial Trust (CIT) has sold down its stakes in MIREIT from 26 million units to 13.31 million units. We believe that CIT has no intention of maintaining an interest in MIREIT. A recent update with management indicates that it is business as usual and it will focus on its original plan that was outline before the saga took place.
De-leverage. CIT current gearing is 42% and has total debt of $390.1 million. Management expects year-end valuation of the portfolio assets to remain constant and therefore should not affect gearing substantially. De-leverage strategy involves divesting non-core assets as well as the implementation of Dividend Reinvestment Plan (DPR) to retain cash and pay down debt. CIT has a target gearing in the range of 30-35%. No firm implementation date has been set yet, but the DRP program is slated to commence from 1QFY10.
Asset enhancement and acquisitions. Management is in talks with tenants on possible asset enhancement initiatives, however tenants are still cautious about the recovery at this stage and nothing has been carried out yet. On the acquisition front, management has not rule out making acquisitions in the next year.
Valuation and recommendation. In our opinion, the MIREIT episode has caused slight hiccups to the initial plan of CIT, but no real derailment. The underlying portfolio is still sound with high occupancy rate and tenants are paying their rents on time. The impact on CIT besides some bad presses is the financial impact to the bottom line. According to our calculations, we estimate that CIT would have incurred a loss
of approximately $2.3 million if it completely off-loads its holdings, which has a minimal impact on NAV. We make no change to our forecasts for now and maintain a Hold recommendation.
MI-REIT – BT
AMP wants to regain trust of MI-Reit holders
Medium-term focus will be acquisition of industrial property in S’pore, Japan
THE new co-sponsor of MacarthurCook Industrial Reit (MI-Reit) yesterday said that it will focus on regaining unitholders’ trust before embarking on new acquisitions, likely industrial properties in Singapore and Japan.
Simon Vinson, head of new business initiatives and Asian property at AMP Capital Investors, said that unitholders’ concerns raised at a tumultuous general meeting recently ‘will become front and centre in the way we will operate’.
Such concerns include not consulting unitholders early enough on a controversial recapitalisation plan and the real estate investment trust’s (Reit) own governance and investment processes, Mr Vinson told BT in an interview yesterday.
The rescue plan – approved by narrow margins at the meeting on Nov 23 – was presented to unitholders less than two months before the deadline for the Reit to meet $315 million in obligations.
Angry unitholders said that the deal diluted their holdings significantly and was too favourable to the new investors. Led by Cambridge Industrial Reit (CIT), which owned a close to 10 per cent stake, the unitholders mounted a week-long campaign to oust MI-Reit’s manager but this faltered when CIT said that its plan to take over as manager was blocked by the Monetary Authority of Singapore.
Yesterday, Mr Vinson said that AMP would focus in the short term on regaining investors’ trust by better managing the Reit, before thinking of fresh acquisitions.
While the Reit is now among the lowest geared among those listed in Singapore, the travails of the past year, particularly uncertainty over whether it could raise funds to keep it afloat, have depressed unit prices and raised distribution yields.
This would make yield-accretive acquisitions difficult, Mr Vinson admitted. ‘But the management team and sponsors are capable of showing investment performance that, over time, will bring the unit price up to net asset value,’ he said.
In the medium term, AMP will explore opportunities in industrial property in both Singapore and Japan, he said.
REITs – CIMB
Big caps grow expensive
• We downgrade the SREIT sector to Neutral from Overweight on a more negative view of sector heavyweights, CMT (fund flows away to CMA), CCT (negative rental reversions), A-REIT (falling industrial occupancy) and MLT (limited organic growth). Nonetheless, we believe that share prices have more room for appreciation as the sector P/BV of 0.83x remains below its mean level of 0.92x since inception (2002) till now, even after the sharp recovery from trough levels in March.
• Acquisitions and development projects will take centre stage in 2010. We believe that easy credit conditions coupled with recapitalised balance sheets and compressing dividend yields will revive acquisitions and project development in 2010. However, these will likely be less accretive than those in pre-Lehman times due to: 1) cash calls made in 2009 by a number of sponsor-backed REITs; 2) a more conservative outlook on asset leverage by REIT managers, which would result in a smaller quantum of acquisitions, or further equity-raising for acquisitions; and 3) insignificant spreads of asset yields over dividend yields, resulting in marginally DPU-accretive deals
• Asset inflation could lead to sector re-rating. An easing credit environment is drawing more institutional buyers of properties into the market. If the competition for investment assets intensifies, asset inflation is a possibility in the medium term.
• Negative reversions could set in. Most REITs will take time to catch up with market rents and occupancy due to standard leases set in place. We expect office, industrial business park and prime retail rents and occupancy to deteriorate further later in 2010.
• Suntec REIT our top pick for 2010. Our top pick for the sector is Suntec REIT for catalysts coming from the opening of two new MRT stations at Suntec City, and the Marina Bay integrated resort. Suntec REIT’s valuation of 0.65x P/BV is below the sector average of 0.83x, and also below its closest peer CCT’s 0.75x. However, 2010 dividend yields are higher than the sector’s 7.4% and CCT’s 5.8%.
• AREIT our top short. AREIT remains the most expensive REIT in the sector at 1.2x P/BV. We believe all the positives have been priced in. Downside risk is high as the attraction of low quasi-office rents in the Business Park and Hi-Tech segments gradually diminishes with a sharp fall in office rents.
REITs – BT
S-Reits’ proposal for distribution reinvestment plans positive: Fitch
FITCH Ratings says a recent proposal by some Singapore-listed real estate investment trusts (S-Reits) to introduce distribution reinvestment plans (DRPs) for unitholders is positive from a ratings standpoint.
But the ratings agency pointed out that S-Reits’ effectiveness in retaining cash remains limited.
In a new report, Fitch says that while DRPs improve credit profiles, they are not expected to lead to a positive rating migration in the S-Reit sector.
Analyst Peeyush Pallav says that participation in a DRP by a large proportion of an S-Reit’s unitholders can improve the Reit’s liquidity profile.
‘The retained cash can be utilised for debt repayments, or for meeting capital expenditure requirements, and serve as a source of additional liquidity for the S-Reit,’ he writes in the report. ‘This can be especially beneficial for S-Reits operating in property sectors with more volatile cash flows, such as hotels.’
DRPs can also be an efficient means of raising new capital for S-Reits in general, Mr Pallav reckons.
Several S-Reits included DRP provisions in their listing prospectus that allow them the flexibility to implement a DRP if need be. Such plans propose distributing quarterly dividends for an S-Reit either in the form of units, cash or in a combination of both, with the choice being up to individual unitholders.
At least two S-Reit managers have considered implementing a DRP this year – Saizen Reit and Cambridge Industrial Trust.
Saizen Reit this year proposed paying dividends for its fiscal second quarter in units instead of cash, but abandoned the plan after talks with the Singapore Exchange. But analysts believe that new Reit regulations could allow DRPs in future.
For example, a proposal for a DRP was approved at Cambridge Industrial Trust’s extraordinary general meeting on Oct 30.
However, Mr Pallav says that there are still many considerations. For one thing, DRP proposals may attract lesser participation from institutional investors that consider S-Reits to be dividend-driven investments.
Fitch also believes that the presence or absence of a DRP is not expected to be a primary rating driver, as putting the option in the hands of the investors means that they may choose not to participate in the DRP, especially when the prevailing market sentiment is negative and equity markets are unfavourable.
Separately, Moody’s Investors Service is looking to see if commercial mortgage-backed securities (CMBS) sponsored by S-Reits have enough liquidity arrangements in place to cover potential cashflow disruption in the event that an S-Reit is subjected to bankruptcy proceedings.
Depending on the type of bankruptcy proceedings to which an S-Reit is subjected to, there may be cashflow disruption, the ratings agency believes.
‘To ensure timely payment on the CMBS notes, CMBS transactions should have certain liquidity arrangements to cover the potential cash flow disruption, such that the rating of the CMBS notes’ linkage to that of the S-Reit can be minimised,’ Moody’s analyst Jerome Cheng said in a recent note.
Moody’s assessment is that at least 12 months of liquidity is needed to minimise the rating linkage. Ratings of those CMBS transactions with insufficient liquidity protection will be linked to that of the S-Reit.
Currently, Moody’s has outstanding ratings of Aaa to Aa3 on seven CMBS transactions sponsored by seven S-Reits, all with investment-grade ratings.
Right now, three of the seven outstanding Moody’s-rated transactions have no general purpose liquidity in place, while the remaining four transactions have liquidity facilities covering six to nine months of stressed debt service payments, Moody’s said.
Rickmers – BT
Rickmers incurs additional US$26,000 interest cost
This is due to a lending bank raising interest rate on a US$46.31m loan
RICKMERS Maritime said a lending bank has invoked the market disruption clause once again on a US$46.31 million loan, resulting in higher interest cost.
The bank’s move meant that an alternative interest rate higher than US$ Libor (London Inter-Bank Offered Rate) will be levied on the loan, causing an increase of about US$26,000 in interest cost for the current fixing period ending Feb 26, 2010, said the trust.
The invocation arose as US$ Libor does not accurately reflect the lender’s cost of funds, the trust’s manager explained, adding that it is ‘not a reflection of the trust’s credit worthiness’.
The last time that the clause was invoked by the same lending bank was in August.
The trustee-manager said yesterday that Rickmers has also taken a marked-to-market loss of US$3.24 million as at Sept 30 due to the ineffectiveness of cashflow hedge under International Accounting Standard 39 (IAS 39) for this loan.
Based on the current Libor rate, there will be minimal impact to the trust’s net profits for the fourth quarter of FY09 and no cash impact on the trust’s financial performance.
The trust-manager also reiterated that the lender’s move will not have an impact on the trust’s position in its ongoing discussions with banks on the waiver of value-to-loan covenants, the refinancing of a US$130 million loan facility and the funding of its existing orderbook.
As the discussions with the banks are ongoing, Rickmers did not take delivery of the vessel Hanjin Milano in September as previously intended and this has resulted in a swap arrangement – which was entered into for the pre-arranged loan – being rendered ineffective under IAS39 as the loan was not drawn down.
The floating-to-fixed interest rate swap which extends from Nov 30, 2009, to Nov 30, 2012, was earlier entered into to fix the interest cost of the loan that was to have been drawn down for the acquisition of Hanjin Milano.
As the swap arrangement now exists without a related loan, it has been rendered ineffective as a cashflow hedge and marked-to-market losses on this swap arrangement, currently estimated at US$2.63 million, will have to be taken into the trust’s profit and loss in Q409.
The final impact on Q409’s net profits will depend on the movement of US$ Libor.