Category: KepREIT
KREIT – BT
K-Reit feeling effects of financial crunch
K-REIT Asia is going to find it a bit tough to raise the money it needs. The real estate investment trust (Reit) is looking to raise up to $700 million in a rights issue, in part to repay some of the $942 million bridging loan it took from Keppel Corp when it purchased its one-third stake in One Raffles Quay last year. The trust indicated in a recent circular to shareholders that it intends to price the new units at up to 20 per cent discount to the market price. However, K-Reit is seeking to issue only 420 million new shares. The limit is in place to ensure that at least 10 per cent of the total issued units are held by the public after the rights issue.
Keppel Corp and sponsor Keppel Land, who together own 72.7 per cent of K-Reit, have both given irrevocable undertakings to take up their respective allocations of the rights units. Both companies will also make applications for excess rights units that are not subscribed – essentially underwriting the fund-raising exercise. The 420 million share cap ensures that in the worst-case scenario where no other shareholder subscribes to the rights units, KepCorp and KepLand will still end up with less than 90 per cent – allowing K-Reit to avoid delisting.
While the circular helps to allay some concerns in the market with regard to potential delisting and consolidation by parent KepLand, there is a shortfall between how much the trust is hoping to raise (up to $700 million) and how much it could actually raise from a rights issue of 420 million shares.
In the circular, K-Reit used $1.20 (20 per cent off the market price of $1.50) for illustrative purpose. Assuming a rights issue of three new units for every two existing units, K-Reit will be issuing 372.1 million rights units and raising about $446.5 million in gross proceeds. K-Reit will come close to raising $700 million only in the highly unlikely scenario that it issues 413.5 million rights units on a five-for-three basis at $1.68 apiece, which will give it gross proceeds of $694.6 million.
For this to happen, the prevailing market price will have to be $2.10 – assuming a rights issue price which is at a 20 per cent discount to the market price.
K-Reit’s stock closed at $1.47 last Thursday, the last day of trading before the extended weekend break. Analysts believe that it is unlikely that the stock price will cross the $2.00 mark over the next few months amid a generally sluggish market. K-Reit said in its circular that the entire exercise is expected to be completed no later than mid-May.
Looking at the expected shortfall between what the Reit hopes to raise and what it probably could raise, it wouldn’t be wrong to assume that K-Reit might have to look at additional sources of funding. However, it is unclear what K-Reit plans to do if the rights issue falls short of the amount it needs. K-Reit said in its circular that, given current market conditions, a rights issue is the ‘most appropriate’ method of raising equity.
Raising funds from other sources will undoubtedly be hard in a squeezed credit market. Industry players have pointed out that the two upcoming integrated resorts (IRs) have mopped up much of the credit available in the market, making it much harder for smaller players to get loans and refinance debt. Also interesting is the fact that K-Reit seems to be looking to parent companies KepCorp and KepLand to tide it over the current financial crunch. If minority shareholders choose not to take up their rights units, KepCorp and KepLand are ready to step in, even though this might mean that K-Reit could suffer from poor liquidity and low trading volumes in the future.
Buying up all unwanted units will also raise KepLand’s stake in K-Reit. KepLand has said it intends to go asset light by divesting all its investment properties. By increasing its stake in the Reit, it is doing the opposite. Perhaps then it is time for KepLand to reconsider plans to keep K-Reit listed; going private will probably allow K-Reit to raise funds more easily in a tight credit market.
As for K-Reit, the rights issue will lower its gearing from the present 53.9 per cent (which is approaching the maximum allowable limit of 60 per cent) to 32.7 per cent – assuming the trust issues 372.1 million rights units at $1.20 each. But raising funds for future acquisitions may continue to be a problem if the Reit has to go back to the market once again.
Office REITs – UOBKH
Leveraging on positive rental reversion
Blessed are the office landlords. Rentals for prime office space within Raffles Place and Marina Centre has shoot up from S$8.60 in 1Q07 to S$15.00psf pm in 4Q07. Rentals for Grade A office space is even higher at S$17.15psf pm in 4Q07 (source: CB Richard Ellis). Rentals surged as tenants chased after limited pockets of vacant space within the Central Business District. There is strong demand from financial institutions (wealth management, hedge funds, insurers and commercial banks) and oil & gas companies. Average occupancy for Grade A office space at Raffles Place, Shenton Way and Marina/City Hall micro-markets reach unprecedented levels of 99%, 97.5% and 99.6% respectively (source: Colliers International).
Supply of office space is expected to remain constrained in 2008. Only 959,000sf of new office space will come on stream, the majority in fringe suburban locations. According to CB Richard Ellis, rentals for Grade A office space could average S$19.00psf pm by end-2008, a further increase of 10.8%.
New supply well taken up. The strength of the leasing market can be seen from healthy take ups at Marina Bay Financial Centre (MBFC). Phase 1 with 1.6m sf and Phase 2 with 1.3m sf of office space will be completed in 2010 and 2012. Both phases are more than 50% pre-committed by major financial institutions. Standard Chartered has signed a 12-year lease for 508,300sf at MBFC Phase 1 with option to extend for another eight years. DBS Bank has signed a 12-year lease for 700,000sf occupying 22 floors at MBFC Phase 2.
Capital values supported by keen foreign interest. Investors’ interest in office properties remains strong, especially from foreign funds. Foreign investors accounted for the majority of large transactions in 2H 2007. Capital value for prime office space in Raffles Place is estimated at 3,100psf, an increase of 6.9% qoq and 106.7% yoy (source: CB Richard Ellis).
Office REITs – OVER WEIGHT. We favour the office market due to positive rental reversion and limited supply coming on stream in 2008 and 2009.
CapitaCommercial Trust (BUY/S$1.90/Target: S$2.45). CCT is well positioned to benefit from positive rental reversion as 56.9% of its leases for office space are up for renewal in 2008 and 2009, when supply coming on stream is fairly limited. It will redevelop Market Street Car Park into a premium Grade A office tower with estimated net lettable area of 680,000sf. CCT’s gearing is low at 24% in Dec 07 and has secured funding for refinancing of short-term borrowings and the acquisition of Wilkie Edge.
K-REIT Asia (BUY/S$1.47/Target: S$1.96). K-REIT Asia has proposed a renounceable rights issue of up to 420m units priced at a discount of up to 20% to the prevailing market price. Keppel Corporation and sponsor Keppel Land own 72.7% of K-REIT in aggregate and have given irrevocable undertaking to take up their respective allocations of rights units. We believe the stock is oversold. Our target price for K-REIT is S$1.96 assuming 372.1m new units were issued at S$1.20 each in a 3-for-2 rights issue.
Suntec REIT (BUY/S$1.40/Target: S$2.10). Suntec REIT will benefit from improved connectivity to Suntec City due to the Esplanade and Promenade MRT stations when the new Circle line is ready in 2010. It has acquired 14,677sf of state land for construction of new extension at Park Mall, which increases gross floor area by 67,810sf or 17.7% to 451,727sf.
Suntec REIT has issued 5-year S$250m convertible bonds, convertible into cash or new units. The conversion price is initially S$1.968/unit. The bonds bear interest rate of 3.25% and yield to maturity of 4.25%. Suntec REIT intends to settle the bonds in cash on conversion to minimise dilution. We have factored in the higher cost of debt in our forecast and lowered our target price from S$2.18 to S$2.10.
KREIT – UOBKH
Penalised by illogical sell down
K-REIT Asia’s stock price has corrected 53.1% from S$2.94 to S$1.38 since announcing the proposed acquisition of One Raffles Quay (ORQ) on 30 Jul 07. The correction was due K-REIT’s high gearing post acquisition of ORQ and a freeze in the credit market.
Acquisition of One Raffles Quay. K-REIT completed the acquisition of onethird stake in ORQ from Keppel Land for S$941.5m on 10 Dec 07. The maiden acquisition more than double K-REIT’s portfolio size from S$0.8b to S$1.8b and increased net lettable area for office space from 0.8m sf to 1.2m sf. The acquisition strengthened K-REIT’s positioning as an office-focused commercial REIT. The acquisition was funded by a bridging loan of S$942m from Kephinance Investment, a subsidiary of Keppel Corporation. The acquisition raised K-REIT’s gearing to 57.3% at Dec 07.
Proposing a rights issue. K-REIT Asia has proposed a renounceable rights issue of up to 420m units. The rights units will be priced at a discount of up to 20% to prevailing market price. Keppel Corporation and sponsor Keppel Land own 72.7% of K-REIT in aggregate. Both Keppel Corporation and Keppel Land has given irrevocable undertaking to take up their respective allocations of rights units. Both companies will also make excess applications for excess rights units which are not subscribed. The limit of 420m rights units was put in place to ensure at least 10% of total number of issued units is held by the public after the rights issue.
Reiterate BUY. We have revised our forecast and valuation for K-REIT based on the following assumptions:
- 372.1m new units were issued at S$1.20 each in a 3-for-2 rights issue,
- net proceeds of S$445.5m utilised to partially repay bridging loan from Kephinance Investment,
- the balance bridging loan of S$496.5m is refinanced at interest cost of 3.5%, and
- the rights issue is completed on 1 Jul 08.
K-REIT provides FY08 distribution yield of 8.29%, a huge spread of 6.25% over 10-year Singapore government bond yield at 2.04%. Our target price is S$1.96 based on 2-stage dividend discount model. The rights issue will reduce book NAV from S$3.78 to S$2.16 per share, which is still much higher than current market price. We also estimate that gearing will be reduced to 34.7% after completion of the rights issue.
SREITs – BT
MacarthurCook, Cambridge and Allco seen as potential takeover targets
CAMBRIDGE Industrial Trust, MacarthurCook Industrial Reit and Allco Commercial Reit are among potential takeover targets among Singapore real estate investment trusts (S-Reits), says Goldman Sachs in a report this week.
‘We believe that Reits with relatively smaller market caps, fragmented shareholdings or larger shareholders which may be open to exiting their stakes, and relatively high yields compared with sector peers are likely takeover targets,’ the report authored by analyst Leslie Yee said.
The current S-Reit climate, with disparity in distribution yields at which Reits in the same asset class are currently trading on the stock market, provides fertile ground for merger and acquisition (M&A) activities, the bank contends.
‘Hypothetically, a Reit trading at a lower yield that acquires a Reit trading at a higher yield, would be making an accretive acquisition, if the acquirer trades at the same yield post-acquisition,’ it added.
It may be easier for S-Reits to grow by acquiring other Reits as the traditional method of growing – through the acquisition of physical assets – has become more difficult. This is because the slump in S-Reit prices on the stock market has raised their distribution yields, making it harder for them to make yield-accretive acquisitions of properties.
Goldman Sachs said other factors that have brought forward M&A as a theme for the S-Reit space include the prices of certain Reits trading below net asset value, increasing openness of management teams discussing the possibility of M&A, and trade sales.
In mid-February, Macquarie MEAG Prime Reit’s (MMP Reit’s) manager announced a strategic review to enhance value for unitholders following the receipt of unsolicited bids made to Macquarie Real Estate, which holds a 26 per cent interest in MMP Reit.
‘We think this strategic review can lead among others to an outright sale of the Reit or sale of underlying assets on a piecemeal basis. There are precedents among the Australian Reits of acquisitions of entire Reits and piecemeal divestments of their properties. We see either of these actions as among the many ways in which Reits trading below book value can help realise book value,’ Goldman said.
‘We believe that MMP Reit’s efforts could cause shareholders of other Reits trading below NAV to seriously consider how best to unlock value. We note that Reits in mature markets like Australia divest assets on a piecemeal basis to optimise their portfolio, and we do not rule out S-Reits divesting individual assets to reconfigure their portfolios or even pay special dividends,’ it added.
‘Besides Reits’ takeovers, another possibility is the takeover of Reit managers. We note ARA Asset Management has stated it is keen to acquire other Reit managers,’ the report said.
The M&A theme will be positive for S-Reits. For large-cap Reits which trade at relatively low yields, M&A will create another avenue for growth. For smaller Reits trading at relatively high yields, investors should be able to cash in on premiums paid to buy out their respective Reits. ‘We expect the focusing of M&A as a theme by investors to result in narrowing of discounts to RNAV,’ Goldman said.
It also recommends investors to be ‘overweight’ on S-Reits given the defensive nature of these instruments and their relatively high distribution yields.
‘Based on our stress tests, we are comfortable that downside risk to our revised 12-month target prices is capped at about 14 per cent on bear case scenarios which we do not expect to materialise. In a flight to quality environment, we favour well-managed big-cap names, with debt capacity to fund acquisition growth, and which trade at discount to RNAV and show strong near-term organic growth.’
Goldman has upgraded office landlord CapitaCommercial Trust from ‘neutral’ to ‘buy’ and added it to its Conviction List of top ‘buy’ calls. It has also upgraded Ascendas Reit from ‘sell’ to ‘neutral’. The bank also has ‘buy’ recommendations for CDL Hospitality Trusts, K-Reit Asia and Suntec Reit. It has downgraded CapitaMall Trust from ‘buy’ to ‘neutral’, and MMP Reit from ‘neutral’ to ‘sell’.