PST – BT
PST minority shareholder criticises report by IFA
He says it fails to consider factors such as revenue from new ships
AN institutional investor of Pacific Shipping Trust (PST) – which is being taken private by its holding company – has criticised the financial adviser’s analysis of the deal, which has determined that the current takeover offer price as fair.
The analysis did not account for the significant boost to revenue from ship acquisitions that were announced a year ago that could, in turn, raise the distribution per unit (DPU), said Stuart Hong, who holds 1.8 per cent of PST through his investment firm Unisysco Holdings.
Mr Hong also told BT that the peer comparison with the two other shipping trusts – Rickmers Maritime and First Ship Lease Trust – was not well executed because the advisers did not fully consider the impact of PST’s stronger creditworthiness on its valuation.
In early October, holding company Pacific International Lines proposed to buy up the remaining 40 per cent of PST that it does not own. The shipping firm offered 43 US cents in cash per unit, representing a 14.7 per cent premium over the last-traded price of 37.5 US cents at the point of the announcement.
But the shipping trust – the first to be listed in Singapore in 2006 – went public at 45 US cents per unit.
The shipping trust went on an acquisition blitz last year, acquiring nine vessels for charter that should all be delivered by the second quarter of 2013.
By Mr Hong’s estimates, these acquisitions that are tied to charter agreements could double revenue – an issue that was said to have not been considered by the appointed independent financial adviser (IFA), PricewaterhouseCoopers Corporate Finance (PwCCF). Without reviewing any forecasts, PwCCF was said to have reported to the independent directors that the privatisation deal was fair.
‘It’s about information inequality,’ said Mr Hong, who has been investing in the shipping trust since January 2009. Financial forecasting of shipping trusts is easier compared to an operating company under normal circumstances, added Mr Hong.
‘One of the main reasons is that your revenues is roughly the daily charter rate times 365. Annual revenues will roughly double, as a result of these acquisitions, and I think that is material.’
PST noted that it would cut its minimum income distribution starting the third quarter of 2009 to 70 per cent from 90 per cent, saying that it wanted to retain cash to fuel future growth.
‘So effectively, my money is helping to fund the 2010 acquisitions,’ said Mr Hong. ‘If the offeror wants to buy my shares, I am entitled to know what PST bought with my money. By that, I need to see the P&L forecasts for the acquisitions.’
Turning to the peer comparison – a common practice by financial advisers – Mr Hong claimed that the poorer creditworthiness of PST’s peers was not reflected. For example, First Ship, which has a S&P’s rating of BB- for its long-term debt, was negotiating to secure a significant loan facility at the time that the PwCCF report was released – a point that was said to have not been raised in the report.
It was only a few days later that First Ship said that it had secured a term loan of US$479.6 million that came with a ‘substantially higher’ interest margin than its last loan facility.
In response to queries, PST said that these concerns can be addressed by the IFA at this Friday’s extraordinary general meeting, which will be held for unitholders to vote on the deal. PST units closed unchanged at 42 US cents yesterday.
Retail REITs – DBSV
Stable sector amid market gloom
• Consumers may become more cost conscious
• More resilient non-discretionary spending should support suburban retail sales and rents
• Positive rental reversion and AEI to underpin Retail Reit earnings
• Prefer MCT (TP S$1.09) and CMT (TP S$2.08)
Back to basics. YTD (9M11), retail index excluding motor vehicles sales grew by 8.1% y-o-y, which is a shade below the 2007 peak driven largely by discretionary spending. Looking ahead, we believe consumers may start to tighten their belts amid growing economy uncertainties with early indicators signaling weakening consumer confidence. That said, unemployment at relatively low levels of c2-3%, should help to partly offset the drag and support consumer spending. Hence, malls comprising higher components of supermarket and departmental stores will fare better.
Suburban occupancy and rents show resilience. Occupancy in the retail market is generally higher than office and the multi-factory industrial space as supply activities in the retail sector are less speculative. As evident in 2009, despite economic uncertainties, retailers took up a total of around 1.6 m sq ft of retail space (>3x the long term average) and occupancy dipped only by a marginal 1%pt, hence underlining the resilience of the sector. Within this space, suburban occupancy and rents appeared to be “stickier” than Orchard Road prime space during recessionary periods. In addition, suburban retail space per capita is still under served compared to other major cities and will benefit from the steady population growth.
Earnings underpinned by positive rental reversion and AEI works. During the GFC, we noted that average occupancy rates of the retail reits were high, moving within a tight 1%pt with suburban landlords able to renew rents up. Hence, we believe that rental reversions for retail space will remain positive despite the anticipated slowdown in economy. Earnings growth will also be underpinned by asset enhancement initiatives and asset repositioning moves.
Stock Picks: MCT and CMT. Among the retail landlords, we like MCT as it has the highest proportion of its income up for renewal. We expect healthy positive rental reversion given that the expiring rents were locked in at lower rates. We also like CMT as a market leader in its space. Both MCT and CMT also offer FY11-13F earnings CAGR of c.8%, one of the highest in the Sreit sector.
A-REIT – DBSV
Small but accretive
• Acquires 2 industrial properties for S$179m
• Deepens presence within Jurong Lake District and Changi Business Park
• Maintain HOLD and S$2.14 TP
Acquires 2 industrial properties for S$179m. A-REIT announced the acquisition of 2 buildings in Singapore – 2 Corporation Place (S$99m,S$189psf GFA) and 3 Changi Business Park Vista (S$80m, S$482 psf GFA) – for a total consideration of S$179m. Located within Jurong Lake District and Changi Business Park respectively, the acquisitions will further deepen their already established presence within the 2 industrial hubs. The properties are multi-tenanted buildings housing quality tenants i.e MNCs involved in a variety of valued added sectors like IT, Electronics and engineering.
Initial yields estimated at 7.0%; accretive to earnings with potential upside. Initial yields for the properties are estimated to be in the range of c7.0%, higher when compared to its implied trading yield of close to c6.25%.The properties will be funded by debt – gearing as of Sept’11 is 31.5% and is expected to head to c37.5% after accounting for all its capex requirements by end 2013. We have revised our estimates slightly up by 0.7% in FY13 as we incorporate the acquisition in our numbers. In addition, we see potential upside at 2 Corporation Place, which is only 80% occupied currently; the manager remains confident of improving that given the property’s good accessibility.
Positive long-term prospects in Jurong/Changi Business Park regions; maintain HOLD and S$2.14 TP. While we remain cautious on the outlook of Business Parks/Hi-tech space performance in the immediate term (refer to Industrial REIT sector report dated 8th Dec’11), we acknowledge the longer term benefits of having an increasing exposure in these 2 established hubs. This allows A-REIT to offer new/existing tenants a variety of space choices in these locations. Maintain HOLD. S-REIT offers a FY12-13F yield of 6.7-7.0%.
A-REIT – BT
A-Reit portfolio expands with 2 deals sealed
ASCENDAS Real Estate Investment Trust (A-Reit) has completed the acquisition of two buildings in Singapore for $179 million in total.
A-Reit bought Corporation Place at 2 Corporation Road for $99 million, a seven-storey high-spec industrial building with a gross floor area of 76,185 square metres (sq m) and a net lettable area of 57,645 sq m.
The building, which is located in the established Jurong industrial estate, is 80 per cent occupied, and houses tenants such as Hewlett Packard, Panasonic and Sunningdale Tech.
The seller is Corporation Place Limited, a company in which CapitaLand has a 75 per cent interest. CapitaLand is expected to recognise a gain of about $14.5 million.
A-Reit has also acquired 3 Changi Business Park Vista for $80 million. The six-storey building is A-Reit’s sixth property within the Changi Business Park.
It has a gross floor area and net lettable area of 18,388 sq m and 15,261 sq m respectively and its current occupancy is about 95 per cent.
The acquisitions are expected to have an annualised pro forma financial effect of an additional 0.1 cent per unit on the distribution per unit (DPU) for the fiscal year ended March 31, 2011.
The property trust now owns a total of 97 properties with the latest acquisitions.
For the two acquisitions, A-Reit is expected to incur an estimated transaction cost of about $2.21 million, including $1.79 million in acquisition fees paid to the manager, or 1 per cent of the totaL purchase price.
‘The location and specifications of these properties will further strengthen A-Reit’s market position in the Jurong Lake District and Changi Business Park area and enhance its operational efficiency,’ said Tan Ser Ping, chief executive officer of Ascendas Funds Management (S), the manager of A-Reit.
A-Reit units closed trading 2.3 per cent lower at $1.92 yesterday.
Industrial REITs – DBSV
When the going gets tough, the tough gets going
• Industrial sector to see moderating growth
• Industrial REITs’ long WALE and well diversified portfolio minimize impact on unitholders’ distributions
• Prefer REITs with exposure to the logistics sector – Cache (TP S$1.11) and MLT (TP S$1.07)
No longer a rosy picture. Industrial rents and capital values performed strongly in 2011, with the URA’s reported Multi-User and Warehouse price and rental indices rising by between 16-22% and are currently at multi-year highs. Looking ahead, moderating global PMI figures and slowing manufacturing growth are expected to put a cap on further rental growth, as tenants rationalize their space requirements as production levels fall to below optimal capacity.
Prefer logistics space; rental downside in the multi-user factory, business parks space. We remain optimistic on the outlook of logistics space, which we expect to be most resilient given its limited competitive supply coupled with the fact that demand for warehousing space has historically been the most sticky. The multi-user factory space could see downside due to excess supply entering the market, capping landlords’ ability to continue raising rents. The Business Park space, often seen as an alternative to CBD offices, should see softening rentals due to lower sector occupancy coupled with weakening CBD office rents, and an the influx of new supply in the decentralized office space.
Industrial REITs well diversified and ready to weather the slowdown. Industrial REITs enjoy lower earnings volatility, supported by long term leases for a portion of their portfolios, resulting in longer weighted average lease expiry (WALE), while a diversified tenant portfolio in a myriad variety of trade sectors translates to lower concentration risks. Even after taking into account more moderate rental expectations, impact on S-REITs’ FY12-13F distributions are limited at -0.5-1.7% on our estimates.
Picks: MLT, Cache.
We prefer stocks in the logistics real estate space which should see lower earnings risks. MLT (BUY, TP S$1.07) and Cache (BUY, TP S$1.11) are attractive given their higher than peer average yields of close to 8.0% – 9.0%