Author: tfwee
REITs – BT
Reits still a good bet but issues remain
REAL estate investment trusts (Reits) are still a good bet for the most part, but issues remain that must be cleared up, said panellists at a roundtable yesterday.
For one, a reform in the debt maturity profile for Reits is needed, said JPMorgan analyst Christopher Gee. The roundtable on Reits and the future of real estate finance in Asia was organised by Singapore Management University’s (SMU) Centre for Asset Securitisation in Asia.
Some Asian Reits pursued an aggressive acquisition strategy during the boom period of 2006-2007 as the low cost of financing tempted them to buy quality assets despite compressed entry yields, said Mr Gee.
This pushed Reits (including many in Singapore) to borrow and increase their gearings to high levels in order to make their acquisitions. They could have been ‘gearing up’ with the intention of raising equity later, he said.
However, the current financial crisis has affected many plans.
By and large, all of the debt used by the Reits is in the form of bullet repayment loans (where the payment for the entire loan and sometimes the interest as well is due only at the end of the loan term) or bonds, which can be ‘lethal’ if debt rollover coincides with financial market stress, said Mr Gee.
JPMorgan’s estimates show that for Singapore-listed Reits, 37 per cent and 41 per cent of total debt outstanding will be maturing in 2011 and 2012 respectively.
‘What if the current recovery is a W-shaped recovery and debt capital markets come under stress at that point in time?’ Mr Gee asked.
Instead, he said, Reits should consider a ‘through-the-cycle’ (TTC) investment hurdle to justify an acquisition.
For one S-Reit, for example, a TTC analysis of the weighted-average cost of capital would have highlighted the end of value accretive acquisitions after early 2007.
The Reit should have then lowered its gearing levels at that point in time by taking advantage of cheap equity cost, Mr Gee said. Instead, the Reit (Mapletree Logistics Trust) continued making acquisitions well into 2008.
Another concern that was raised was that in a downturn, good asset managers are essential for a Reit to do well. However, most Reit managers today started managing their trusts at a time when the asset market was booming. So they are still untested, the panellists said.
But Reits are still considered attractive investments as they are transparent and pay out the bulk of their income as dividends to unitholders, said Michael Smith, head of Asia real estate investment banking at Goldman Sachs.
REITs – Phillip
We compile the recently concluded quarterly financial results for the SREITs and did a comparative study to understand the trend in the underlying sectors.
Observations
For the office sector, y-y revenue showed greater improvement than q-q revenue because of positive rental revision of leases that were renewed over the period. The 13.2% q-q improvement in Frasers Commercial Trust was due to contribution from a new property and also favourable exchange rate movement. Office leases typically have lease period of 1-3 years and leases that were renewed in the recent period came from a low base previously, thereby there is still some degree of positive reversion. The URA rental index has come down 26.6% from its peak in 2Q2008. Although the office sector is still showing signs of weakness, rate of decline has slowed down. On the other hand, vacancy rate has also crept up to 12.2%.
The retail sector showed a similar trend as the office sector, except for smaller variability in the revenue, which suggests more resiliency than the latter. Anecdotal evidence from the results of Fraser Centrepoint Trust and CapitaMall Trust indicated that suburban malls perform better than downtown malls. Fraser Centrepoint Trust, which has assets located in the heartland areas, showed better y-y and q-q improvement compared to CapitaMall Trust, which has a greater presence of its portfolio located at the core downtown area. Suntec REIT results were partly affected by its office portfolio, which contributed 46% to revenue. The rental index for retail sector has remained relatively stable compared to the office and industrial sectors, with a decrease of 7.6% from its peak. Vacancy rate is at an all-time low of 6%.
Except for Mapletree Logistic Trust which had a 10.4% increase in y-y revenue that was boosted by contributions from acquisitions, the industrial sector shows little variability in core rental revenue both on a y-y and q-q basis. Occupancy rate for the listed REITs has also maintained at a high level of close to full occupancy. The stable revenue is premise on the typical longer lease terms of industrial properties and also the step-up component built into the leases. The URA rental index shows that 3Q2009 reading has came off 16.8% from its peak in 3Q2008 while vacancy rate is approximately 8%.
The hospitality sector shows great contrast between the y-y and q-q revenue. This is likely to be expected as hospitality properties such as hotels and service apartments have very short-term contracts with their tenants and are very dependent on the economic cycles. We can observe that q-q revenue has shown positive improvement compared to the decline observed for y-y revenue, indicating that the worst period for the sector is probably over. Tourist arrivals and hotel occupancy also saw their first month of positive y-y increase for this year in September. The healthcare sector has stayed defensive and is not subjected to the cyclicality of the economy.
Conclusion
On the overall, we believe the rental market for the office market could be bottoming and should begin to recover in the second half of 2010, premised by our observations in earlier reports that the rental index tends to drop by approximately 30% from its peak over a peak-trough cycle. The retail sector appears to be holding up quite well and as the population is decentralizing to the suburban areas, there will be demand
for retail spaces in these areas. We believe the rental index for industrial sector could still face a downward trend, however occupancy should be well-supported. The hospitality sector namely the tourism industry has already shown signs of turning around and should continue to pick up as the economy improves further.
In conclusion we have a bullish view on the hospitality, healthcare and retail sectors, neutral on the office sector and bearish on the industrial sector.
A-REIT – OCBC
An undeniable leader in industrial space
Strong asset portfolio. Ascendas REIT (A-REIT) is Singapore’s first and largest business space and industrial REIT, with a portfolio of 90 properties and book value of about S$4.7 billion. The key strength of A-REIT lies in its strong asset portfolio. We like A-REIT for its balance exposure to different groups of industrial properties, balance mix of single and multi-tenanted properties and diversified base of quality tenants.
Growth via property development. A-REIT’s expertise and engagement in industrial property development can also enhance shareholder value and further strengthen its asset portfolio. With just one ongoing development project at the moment, this leaves A-REIT with significant headroom of S$280.6m for new development projects.
Limited impact from negative rental reversions. Even though some of AREIT’s assets could face negative rental reversions going forward, we believe that the impact on its portfolio as a whole would not be significant because the NLA of expiring leases is small compared to the total NLA of A-REIT’s portfolio and the average existing rents of these expiring leases are not significantly higher than current market rents.
Gearing level remains comfortable. Its balance sheet has been strengthened after two fund raising exercises this year. A-REIT successfully lowered its gearing level to 30.5% at the end of Sep 2009. The current gearing ratio provides a comfortable buffer from management’s target gearing ratio of 40%.
DPU to fall due to placement dilution. We expect A-REIT to deliver DPU of 12.86 S-cents for FY09/10. This is 15.3% lower than the FY08/09 DPU due to the dilution impact from the two placement exercises in 2009. For FY10/11, we expect DPU to remain steady and turn in marginal growth of 0.3% YoY to 12.9 S-cents. These translate to DPU yields of 6.84% and 6.86% for FY09/10 and FY10/11, respectively.
Re-initiate A-REIT with HOLD; fair value estimate of S$1.76. We derive a fair value estimate of S$1.76 for A-REIT, which is pegged at par to our RNAV estimate. We like A-REIT for its stable dividend yield, diversified tenant base, long term leases and property development capability. Nevertheless, we reinitiate coverage on A-REIT with a HOLD rating on valuation ground. We advise investors to accumulate A-REIT at more attractive price levels around the range of S$1.60 to S$1.70.
MI-REIT – TODAY
Recapitalisation plan approved
Approval came after gruelling face-off between unitholders and company managers
After a gruelling three-and-a-half-hour long meeting, unitholders of MacarthurCook Industrial (MI) Reit eventually approved the controversial plan to raise $217.1 million needed to recapitalise the Reit yesterday.
However, this came amid a heated exchange that took place between disgruntled unitholders and managers of MI Reit at an extraordinary general meeting (EGM) at Marina Mandarin Hotel. The tense exchanges also reached a point when unitholders even demanded a vote recount.
MI Reit unitholders queued up 30 minutes in advance to get into the EGM, and top on their minds were five resolutions which would allow the trust to raise $217.1 million to refinance its existing debt and buy properties in Singapore.
Failing which, the Reit was at risk of being liquidated when its debt obligations mature at the end of the year.
Controversy erupted last week, when Cambridge Industrial Trust (CIT) – which controls nearly 10 per cent of MI Reit – said it would block the recapitalisation plan.
Some unitholders were also not happy with MI Reit’s plan to raise capital through the issuance of new units to certain institutional investors which, at 28 cents a piece, represent a hefty 70.2-per-cent discount to the Reit’s net asset value of 94 cents.
The investors for the recapitalisation plan are AMP Capital Holdings, present sponsor AIMS Financial Group and other “cornerstone” investors.
It was a full house at the EGM with more than 250 investors present.
MI Reit’s chief executive Nick McGrath started the session with a 40 minute-long presentation to convince unitholders that the management’s plans are in their best interest and the only way to save the Reit.
Still, more than six unitholders stood up and mainly lambasted the board for its failure to secure a less dilutive deal for unitholders.
Investors were also not happy with MI Reit’s agreement to purchase properties from AMP, which are priced at “full market valuation”. One unitholder described this as a case of “left pocket putting in money and right pocket taking out more money from us”.
Others wanted to know why the management could not arrange for a more orderly sale of its assets since June to fund its debts, when the property market was already improving and the Reit had also secured a six-month extension for its debts then.
In defence, Mr McGrath told the media later that the Reit did continue to evaluate on the sale of its assets after June but any proceeds will be used to repay its debts of $226 million and there was still the question of its $90 million property at International Business Park that needed funding.
“An equity recapitalisation is critical to the survival of this trust,” he said.
Mr McGrath also noted that property purchases from AMP were part of a “complete suite of transactions”.
CIT chief executive Chris Calvert, who had launched an offensive against MI Reit’s recapitalisation plans since last Monday, was also present at the EGM.
In the end, unitholders voted narrowly in favour for the Reit and out of the five resolutions, two were won by a hair’s breadth.
The two resolutions, which garnered only 52.3 per cent and 52.6 per cent of total unitholder votes cast, were for the investment by AIMS and to buy properties from AMP for $68.6 million.
MI-REIT, Cambridge – BT
MI-Reit unitholders left with one hard option
CIT looks even poorer, having bet on an unwinnable gamble
NOBODY looks pretty after a fight. Two Reit managers, Cambridge Industrial Trust Management (CITM) and MacArthurCook Investment Managers (MIM), have been battling for control of MacArthurCook Industrial Reit ahead of its crucial extraordinary general meeting today.
On Friday, CITM’s bid was scuppered by the Monetary Authority of Singapore – due to potential conflicts of interest – so it seems that MIM, MI-Reit’s present manager, has won. Its controversial plan to recapitalise the Reit will probably get passed today. Unitholders have no other options now that CITM is out of the picture.
Indeed, MI-Reit’s unit price fell almost 9 per cent on the news. The Reit’s price had been supported this past week by the hope that CITM had a viable alternative. That’s because the refinancing plan is heavily stacked in favour of a group of new investors. AMP Capital Holdings, present sponsor AIMS Financial Group and other ‘cornerstone’ investors, would be getting 221 million new units at 28 cents a unit. That’s 83 per cent of existing units outstanding priced at 70 per cent off net asset value, 24 per cent off Friday’s closing price, and about 32 per cent from its traded price before the announcement. A two-for-one rights issue at 15.9 cents apiece will also follow the placement.
By any measure, that’s a lot of wealth destroyed. How much exactly? If unitholders take up their rights entitlement, in return for only halving their stake they’ll be paying 31.8 cents for every unit they now hold.
In terms of distribution, they could lose one fifth of their annual yield, according to BT calculations. Not subscribing to the rights issue could cost them 75 per cent of their present annual distribution, and 80 per cent of their stakes. No wonder existing unitholders are up in arms. MIM’s chief executive Nicholas McGrath says the discounts were necessary to raise the cash it needed – $217 million from the placement and a subsequent two-for-one rights issue plus another $215 million in loans. The Reit desperately needs emergency funds to pay off $226 million in loans and $90 million to buy a property and would have to be liquidated if the plan was rejected, Mr McGrath said. It has already survived two close encounters with death.
Unitholders, pointing to its net asset value of 94 cents a unit, say that’s not such a bad thing, really. But MIM says its $490 million portfolio would not have fetched anything close to NAV in a firesale.
Is that true? Unitholders are suspicious and blame MIM’s mismanagement, grumbling that if the Reit survives, it will continue to reap management fees. We’ll never know; perhaps to support its case MIM could have hired independent consultants to estimate a break-up value.
But it is too late now. MIM’s plan is the worst available; it is also the only one available. The new investors had the bargaining power and they have used it well for their own benefit.
CIT, if anything, comes off looking even poorer. Its appearance on the scene on Monday saw a spike in MI-Reit’s unit price. Then, it was hinting at a merger – it said its analysis valued MI-Reit at about 47.9 cents, or 1.1 CIT units, comfortably above the then market price. It also released documents suggesting that a takeover offer for MI-Reit was under serious discussion. Chris Calvert, its CEO, told reporters that consolidation of the two Reits was an option. If not a merger outright, then having it as a manager of both Reits would mean cost savings, while MI-Reit could for a time live off CIT’s debt facilities. Investors bought the story.
CIT soon had to backtrack. That bit about consolidation – that was just ‘misinterpretation’. It was quickly forced to state openly that it would not launch an offer for MI-Reit.
And on Friday, no doubt under pressure from the authorities, it had to make the humiliating admission that it couldn’t take over as manager and that it otherwise had no feasible plans for the rescue of MI-Reit.
And the worst of it was, it was totally unnecessary. CIT only bought its close to 10 per cent stake the previous week, after announcement of the share placement. It could have quietly sat out the whole saga with no loss.
The fact is, CIT has now spent $10.3 million of its unitholders’ cash on a gamble we now know it could never have won (and likely thousands more on professional fees and attack advertisements).
Its own unitholders have started grumbling – that money, over a third of the $28 million raised in a recent private placement, was for asset enhancement and working capital, not a speculative venture that was at best, ill-advised. At worst? Your conspiracy theory is as good as mine.