LMIR – OCBC
AMPLE RESOURCES FOR GROWTH
•Added flexibility from notes issuance
•Retail sales to sustain performance
•Favourable entry point at current price
Notes from MTN programme to provide financial flexibility
Lippo Malls Indonesia Retail Trust’s (LMIRT) financial flexibility and debt maturity profile is expected to be enhanced with the proposed issuance of two fixed-rate notes under its S$750m guaranteed Euro MTN programme. The REIT announced last evening that the S$200m notes and S$50m notes will mature on 6 Jul 2015 and 6 Jul 2017 respectively, and will bear a competitive rate of 4.88% and 5.875% to its existing S$147.5m secured borrowing rate of ~4.6%. This is despite the notes being unsecured obligations of LMIRT. According to the announcement, proceeds will be utilized for corporate funding purposes, including financing acquisitions and asset enhancement works. We believe LMIRT will first use the funds on major refurbishments of Gajah Mada Plaza and Ekalokasari Plaza, as announced in its 2011 annual report.
Good performance likely to be sustained
For FY12, we are positive that LMIRT will continue to perform, given the strong domestic consumption in Indonesia. Real retail sales have consistently been raking in double-digit YoY growth since Nov 2011 (Apr 2012: 10.5%), while the current expectation is that sales will further improve in the following 3-6 months, based on the retail sales survey by Central Bank of Indonesia. This is likely to drive the shopper traffic at its malls and keep its tenant retention rate at high levels (Dec 2011: 80.0%). Already, we note that LMIRT’s portfolio occupancy as at 31 Mar was at 94.5%. This is above the industry average of 87.6%.
Maintain BUY
We continue to like LMIRT for its strong financial position (aggregate leverage at 9.2%, with no refinancing needs until 2014), growth potential and sound industry fundamentals. The unit price has fallen 10.5% from its last peak on 24 Apr in tandem with the broader market, despite the expected resilience from its underlying portfolio. This presents a favourable entry point for investors, in our view. As such, maintain BUY with unchanged fair value of S$0.43.
K-REIT – DBSV
Gaining full control of OFC
• Acquisition of another 12.39% in OFC for S$2,380 psf
• Funding will be 75% by debt and 25% by placement
• DPU boosted by c.3.0%; Maintain BUY at TP of S$1.21
Strategic long-term positive move. K-Reit announced that it is purchasing a 12.39% interest in Ocean Financial Centre (OFC) from Avan Investment Pte Ltd (AIPL) for S$261.6m. This works out to S$ S$2,380psf, netting off income support of S$24.1m which expires end-2017. Including the rental support, total consideration will be S$285.7m or c.S$2,600psf, which is in line with the 87.5% interest in Ocean Financial Centre (OFC) that the reit purchased from its sponsor in October last year. AIPL will sell the property for a period of 99 years and would have the right to acquire the interest for S$1.00 at the end of the period. Following the completion of the acquisition, K-REIT will gain full control of OFC at 99.9% interest in OFC. AIPL will hold the remaining 0.1%. The new acquisition will start contributing from 2H12.
Funding structure: Committed occupancy at OFC is currently 90.6% with underlying monthly gross rent of slightly below S$10psf. Based on the acquisition price, net yield works out at sub 4% but a higher 4.7% with the rental support. Kreit will fund the purchase with S$216m debt (75%) and S$70.2 m proceeds from a placement of 60m new units. The units were issued at $1.17 per unit, at c.15% premium to the market closing price of $1.02 per unit yesterday, and have been fully subscribed by the vendor. All-in interest rate for the debt is expected to be 2.0% -2.5%.
Maintain BUY, accretive purchase. We estimate that this acquisition will lift FY 12/13 DPU by 1.5-3.2% including the enlarged unit base and the recent tax savings. While gearing is expected to head up to 43.9% post acquisition on a see through basis – higher than its peers – we view this acquisition as a strategic move as this would allow the group to manage the asset more efficiently. Valuation remains attractive at 0.8x P/BV given its strong sponsor link and is offering FY12/13 yields of 7.3%, the highest in the office reit space. Retaining our BUY call at an unchanged DCF-backed TP of S$1.21
FCOT – DBSV
Strong uplift from refinancing
• Refinancing of its S$500m loan at 100 bps lower rate
• FY13F DPU to increase by up to 9.7%
• Maintain BUY at a revised TP of S$1.26
Refinancing of its S$500m loan. Frasers Commercial Trust (FCOT) announced that they have entered into facility agreements for the following (1) a 3-year term loan facility amounting to S$320m (at a rate of SOR + 1.55% p.a.) and (2) a term loan facility of S$185m (at a rate of SOR +1.83% p.a.). The S$320m facility will be secured by a mortgage over FCOT’s interest in China Square Central and 55 Market Street while the S$185m facility will be secured over its interest in Alexandra Technopark. These new facilities are expected to be drawn down before June to refinance its S$500m term loan expiring in November 2012.
Strenghtening balance sheet. Via the refinancing, the trust is expected to (i) reap significant interest savings upon refinancing. We estimate annual savings of cS$5m as the weighted average cost of the new facilities is SOR +1.65%, much lower that the expiring term loan (SOR + 2.65%). Assuming that the refinancing takes place before 4QFY12, we expect FY12 DPU to increase by 2.0% and FY13 DPU to increase by 9.7%; (ii) extend FCOT’s debt maturity profile. The break-up of the S$500m loan into two smaller tranches of 3 and 5 year maturities will lengthen the trust’s weighted average debt maturity from 1.36 years to 3.88 years, reducing any risks of a large refinancing exercise in any one year; and (iii) free up the mortgage on Keypoint property, paving the way for a potential sale (subject to shareholders’ agreement in the upcoming EGM).
Maintain BUY, at a higher TP of S$1.26. The trust is trading at 0.74x P/BV and FY12/13 yield of 6.6% – 7.8%. We continue to like FCOT’s pro-active efforts to reshape its portfolio since the beginning of the year. We believe rerating catalysts from the stock would depend on the reit’s ability to deploy Keypoint proceeds to the repurchase of CPPUs or share buyback (resolutions in the upcoming EGM) which are more yield enhancing in our view compared against debt repayment. Maintain BUY at a slightly higher DCF-backed TP of S$1.26.
FCOT – CIMB
Refinancing savings round 2
Secured rates for FCOT’s SGD loan (overall margin savings of 100bps) met our expectations. We expect a partial repayment eventually when unit holders approve the sale of KeyPoint and when management finalises the best use for the sales proceeds.
We keep our DPUs and DDM-based target price (discount rate: 9.1%) unchanged. Our estimates assume the use of KeyPoint divestment proceeds for 50% redemption of its CPPUs and part-repayment of loans. Maintain Outperform on catalysts from more accretive capital deployment.
What Happened
FCOT has announced that it has entered into agreements for a S$320m three-year loan and a S$185m five-year loan to refinance its S$500m SGD term loan facility. Interest rates for the loans are at SOR plus margins of 1.55% and 1.83% respectively from the date of first drawdown. The loans are secured over China Square Central, 55 Market Street and Alexandra Technopark.
What We Think
Loans are secured at an overall margin of 165bps over SOR, a 100bps saving from the previous borrowing spread of 265bps. This is fairly in-line with our expectations. While FCOT has entered into agreements for a collective S$505m in borrowings for refinancing, we expect a partial repayment eventually when unit holders approve the sale of KeyPoint during the EGM on 12 Jul 2012and management finalises the best use of the sales proceeds. Management had raised the possibility of a partial CPPU redemption, partial loan repayment, and share buyback in its circular dated 18 Jun. We understand that management had entered into the facilities to ensure flexibility in the use of KeyPoint sales proceeds and there are no major penalties for early repayment.
What You Should Do
We keep our DPUs and DDM-based target price unchanged with refinancing rates fairly in-line with our expectations. Our estimates assume the use of KeyPoint divestment proceeds for 50% redemption of its CPPUs and part-repayment of loans. Maintain Outperform on catalysts from more accretive capital deployment.
K-REIT – CIMB
A fuller OFC
We are net positive on K-REIT’s acquisition of another 12.4% in OFC, with increased control and good placement price outweighing slight negatives from higher asset leverage. Placement price of S$1.17 (15% premium to VWAP) could provide a benchmark for the share price.
We raise our DPU estimates and DDM-based target price (discount rate: 8.2%), factoring in accretion from the purchase. Maintain Outperform on favourable risk-reward. We see catalysts from an earlier bottoming of the office market and tax savings.
What Happened
K-REIT announced the acquisition of an additional 12.4% stake in Ocean Financial Centre (OFC) for S$261.6m (S$2,380 psf) or S$285.7m (2,606psf) including S$24.1m in income support till Dec 2017 from Avan Investments. This acquisition will take its stake in OFC to 99.9%.Equity cost of S$228m will be funded by a mix of debt (S$158.2m) and equity (S$70.2mprivateplacement at S$1.17apieceto Ong Holdings, 14.6% premium to VWAP of S$1.02, though still below NAV at 0.9x P/BV).
What We Think
Overall acquisition price and terms were fairly similar to that for K-REIT’s acquisition of its initial 87.5% stake back in Oct 11. Slight difference came from a lower support quarterly NPI of S$27.6m (prev: S$30.5m) and rental of S$13-14psf. Positives came from increased control and stake in the asset and premium on the placement price (which could seta target/support for share price). We understand that K-REIT had approached the vendor forthe purchase who apparently paid a premium to VWAP due to his confidence in K-REIT. Slight negatives however came from a fairly high aggregate leverage of 43.9% (previously 41.8%) after the deal.
What You Should Do
Overall, we are net positive on the deal, as we see advantages from increased control in OFC and good placement price, outweighing slight negatives from higher asset leverage. We raise our DPU estimates and DDM-based target price (discount rate: 8.2%), factoring in accretion from the purchase. Maintain Outperform on favourable risk-reward.