Author: tfwee
Rickmers – OCBC
Essentially behaving like a toxic asset
Swift resolutions needed. Rickmers Maritime (RMT)’s increased cash retention following the 72% QoQ cut in 2Q09 DPU is just a drop in the bucket compared to the immediate issues ahead of the trust. In order of urgency (our opinion); RMT needs to 1) resolve LTV clauses that restrict access to loan facilities for the Hanjin vessels due in next five months; 2) secure waivers for LTV covenants on existing loans; 3) arrange payment of US$40m in vessel deposits and of loans that begin amortizing soon; 4) refinance the US$130m top-facility maturing in April 2010; and 5) finance the US$711.6m Maersk vessels due in 2H2010.
What next? RMT is in negotiations with lenders on LTV covenants and also in discussions with all stakeholders on the Maersk orders. RMT does not have the resources to honour its obligations (in our opinion) but it is in the sponsor’s best interest that it does due to 1) reputation risk and 2) the sponsor’s status as an intermediary on committed acquisitions – that is, if RMT defaults, the sponsor is still obligated to purchase the ships from the yards. Possible compromises involve delaying delivery of vessels (for a price) or letting the sponsor warehouse the assets (for a price) or raising a significant amount of equity (ability to do so is questionable).
Disadvantage unitholders. Whatever the final solution, we believe it not likely to favour the unitholders. With the high level of leverage and sizeable acquisitions fixed at peak prices, we believe RMT is essentially behaving like a toxic asset. When a leveraged play unwinds, the equity tranche is the worst place to be. Unitholders are caught in a game of “heads I lose, tails you win” and we think their best option is to exit this investment.
Adjusting valuation for distress. RMT’s unit price has fallen 29% since the 2Q DPU announcement and is now trading close to our original fair value estimate of S$0.39. This estimate values RMT as a going concern, which requires many assumptions including on the trust’s ability to successfully raise US$550m at S$0.53. We expect a high level of price volatility in the next few months and a going concern approach may not reflect the risks inherent in this investment. Our new fair value of S$0.16 is based a probability-weighted valuation approach that reflects the likelihood and consequences of a distressed scenario. Note also we now estimate no distributions are paid in 2H09 and FY10. Maintain SELL.
REITs – CIMB
Equity raising: Round 2 on the cards?
• Almost S$4bn of cash calls YTD. Since Jan 09, a number of SREITs have made cash calls amounting close to S$4bn, mostly to pare down maturing debt.
• Equity raising expected to continue, driven by acquisitions… Frasers Centrepoint Trust, PLife REIT, and CapitaMall Trust are most likely to make acquisitions in the next 12 months, in our estimation. We expect FCT and CMT to resort to equity raising as debt headroom is unlikely to be sufficient, in view of the sizeable potential pipeline. CMT could potentially raise more than S$1bn, assuming Sun Hung Kai also divests its 50% stake in Ion Orchard to CMT. In the medium term, we also expect Suntec REIT to acquire Suntec Convention Centre, potentially financed by a cash call.
• … and potential asset devaluation. The recent devaluation of Singapore Land Tower to about S$1,842psf is expected to put pressure on CCT to write down its two key office assets, 6 Battery Road and One George Street, with significantly higher valuations of above S$2,200psf. CCT would need to raise more than S$200m in equity to stay safely within the 40% asset leverage level if asset values fall by more than 20%.
• Mid-sized REITs preferred; PLife has lease risk of equity raising. We prefer mid-sized REITs with strong balance sheets such as FCT and PLife REIT. However, our top pick in the SREIT space for potential near-term acquisitions with the least risk of equity raising would be PLife REIT, as debt headroom of more than S$300m remains sizeable. Our target price of S$1.31 and forward yields of 7.2% have yet to account for potential acquisitions.
LMIR – OCBC
Highlights from malls visit
‘Tis the season to spend. We visited seven of LMIR Trust’s retail malls in Greater Jakarta and Bandung earlier this week and found a healthy, vibrant portfolio carrying on despite a weak retail sector. Both LMIR and retailers are gearing up for a seasonal up-tick in spending during the Ramadan fasting month. Spending typically spikes two weeks before Idul Fitri, when Indonesian companies pay out a mandatory employee bonus of one-month salary (Tunjangan Hari Raya). The manager also seemed optimistic about the Christmas spending season. Our 2H09 DPU estimate is 2.75 S cents, up 3.4% HoH.
Casual leasing back in play. A tight retailer budget for advertising & promotions activities had dampened casual leasing demand in 1H09. Such prudence was very much lacking during our visit. The overwhelming majority of the malls’ atriums and corridors were well populated with island kiosks, exhibitions and sales as retailers positioned themselves for the festive season. Operational control has also tightened with LMIR dealing directly with casual tenants or demanding up-front payments from wholesalers.
Tenant turnover is painful. Some retailers including three anchor tenants that we know of have vacated or downsized space at the malls. The market remains soft with retailers hesitant to invest in new stores. LMIR’s portfolio occupancy is above-market and, in our opinion, the manager has done a credible job in re-populating the space. Still, the turnover process (offer, lease negotiation, fit-out) takes time, affecting occupancy and revenue during the transition. Just fitting out a large anchor tenant can take three to four months. We noticed that the manager is using temporary leasing to support the rent gap between tenants now that A&P demand has picked up. In fact, we found retailers such as BreadTalk; Times bookstore; and Matahari eager to capitalize on the season by utilizing casual leasing while their units get fitted out.
Still compelling. We understand the malls that were part of the acquisition pipeline at IPO have completed works but occupancy levels have yet to stabilize. The manager had earlier guided that the timing or size of any acquisition would depend on availability of funding. In our view, any acquisition scenario is more realistic on a six to 12 months time horizon. If the manager employs SGD-denominated debt, we believe the likelihood of a concurrent equity issue increases due to cautious lender sentiment. Slight variance in estimates edges our fair value estimate up to S$0.51 (prev: S$0.50). Maintain BUY (16% total return).
Saizen – BT
Saizen to resume payouts in Q4 FY’10
It posts 19% fall in distributable income to 1.37 billion yen for FY2009
SAIZEN Real Estate Investment Trust (Reit), which has suspended distribution of income for the financial year ended June 30, 2009 (FY2009) to conserve cash, said that it aims to resume distribution from the last quarter of FY2010 or the first quarter of FY2011.
This comment came in its financial report for FY2009, which saw it posting a 19 per cent fall in distributable income to 1.37 billion yen (S$20.37 million).
Its net property income, however, grew 17.2 per cent to 2.9 billion yen as it recognised contributions from 166 properties for the full fiscal year. In fiscal 2008, some 65 properties were added gradually across the year.
Saizen also completed its divestment of UI Building for 274.68 million yen yesterday.
‘While the real estate transaction market is expected to remain difficult, the management team expects property operations to be stable in the coming financial year,’ the trust said in its financial statement.
It noted that property operations in the regional mass residential market that it operates in have not been adversely affected, while occupancy rate and rental reversions are expected to be stable with proactive management.
The Reit, which has suspended distribution payments since its fiscal second quarter, said that the decision to stall paying out distribution was made after careful consideration of the credit situation.
‘The board endeavours to resume distribution as soon as the financial position of Saizen Reit allows,’ it said.
It noted that the availability of financing continues to be limited, citing a Fitch Ratings report in April, which projected a surge in default rate on commercial mortgage-backed securities (CMBS). All of its 14.9 billion yen loans are funded by CMBS.
The trust will use its operational cashflow, proceeds from its $41.3 million rights issue and short-term bridging loan of 400 million yen to repay the loans of YK Kokkei, YK Shingen and YK Keizan that are due in November 2009, December 2009 and January 2010 respectively.
Thereafter, it will use its operational cashflow to repay the short-term bridging loan as soon as possible, given its high interest costs. After these repayments, cashflow from operations will be distributed to unitholders, Saizen Reit said.
It had earlier proposed to pay dividends for its second fiscal quarter in Reit units instead of cash, but abandoned the scrip-only plan after talks with the Singapore Exchange.
PST – UOBKH
Assessing PIL’s Financial Health
Pacific International Lines (Private) Limited (PIL), the parent, sponsor and major customer of Pacific Shipping Trust (PST), owns and operates a fleet of 104 vessels with total capacity of 186,994 TEU. PIL accounted for 70-80% of PST’s 2Q09 revenue.
Strong balance sheet to weather the current shipping downturn. PIL has just filed its 2008 accounts with the Registrar of Companies. End-08 net gearing was at a reasonable level of 32%, but its quick ratio of 0.9x was a tad low. Interest coverage ratio was healthy at 6.2x. Net gearing could rise to 60% with future capex of US$469.2m for 2009-2011.
Increase in debt due to consolidation of PST. PIL’s total group borrowings increased by 36% yoy to US$1.1b in 2008 primarily due to the consolidation of PST’s debt (as of end-08, PST’s total loans were US$230m). Following PST’s 3-for-4 rights issue in Sep 08 with PIL subscribed for 90% of the rights shares, PST changed from a 34.6%-owned associated company to a 59.2%-owned subsidiary of PIL.
Asset value to term loans at 1.5x. Of PIL’s US$1.1b debt, 40% is due in 2009 and the balance 60% due in 2010-2018. PIL’s US$746.5m was collaterised with assets with a net book value of US$1.14b (1.5x of the loans).
Maintain BUY on PST with target price of US$0.37. We forecast PST’s 2009 and 2010 dividend yield of 12.4% and 9.9% respectively after adjusting for the reduction in distribution payout ratio from 90% to 70%. The cash retained will be used to fund acquisitions. Accretive vessel acquisitions will likely drive a rerating of the stock. Our earnings forecasts have not imputed such acquisitions.