CitySpring – Lim and Tan
• The proposed 11-for-20 rights issue at 39 cents each should be welcomed by investors, even though there could be some disappointment it is not to be privatized :
a. it removes a major overhang which has been bothering investors since the downgrade warning by S&P last November;
b. without this capital raising, CitySpring would be in no position to maintain its distribution, which has been kept at 4.2 cents a unit (or 3.28 cents on pro-forma basis);
c. management has given an undertaking there will not be need to raise further equity down the road (except in the event of CitySpring making yield accretive acquisitions);
d. Temasek, which owns 27.8%, has undertaken to take up to 85% of the new units, with the remaining 15% to be underwritten by DBS, Goldman Sachs.;
e. the $204.8 mln net proceeds will be used to reduce high-cost borrowings; and perhaps more importantly,
f. it better places CitySpring to “pursue organic and inorganic acquisitions and investment opportunities”.
• The subscription price represents a 19% discount to the theoretical ex-rights price of 48.35 cents (53.5×20+39×11/31).
• Temasek has obtained whitewash waiver in the event it ends up having to take up 85% of the rights units, which would raise its stake to 48.1%, and which would have triggered a mandatory general offer.
• We are maintaining BUY on 6.8% pro-forma yield now that major uncertainties have been removed.
FCOT – CIMB
Near-term catalysts in sight
• Near-term catalysts from early refinancing; initiate with Outperform. FCOT is a commercial REIT investing primarily in offices in the region. We use DDM (discount rate 9.4%) to value FCOT at S$0.99. Since taking over in 2008, FCOT’s management has stabilised its capital structure and assets and divested non-core holdings. With a stabilised portfolio and capital structure and a strong sponsor in F&N, we see no reason for its depressed 40% discount to book and forward yields of 7-8%. We see catalysts from early re-financing and improvements in occupancy and rentals.
• DPU upside just from refinancing. FCOT’s entire debt will be maturing in 2012. With a high cost of debt of 4.3% vs. 3% for most REITs in their recent refinancing, we anticipate an 11% DPU uplift even with a minimal rate reduction of 50bp.
• Further kicker from expiry of master lease. The master lease for its largest local asset, China Square Central (net rents of S$4+ psf), will be expiring in 2012. With significant leases due for expiry in 2012 and F&N’s expertise in retail management, direct management of the asset could allow FCOT to ride the rental upside. Possible AEI and hotel development to unlock value could also be low hanging fruits for FCOT.
• We do not see an overhang from CPPUs, with limited dilution of 4% on full conversion. Redemption of the CPPUs at par could even allow accretion if overall funding costs for FCOT come in below the CPPU rate of 5.5%.
Valuation and recommendation
DDM-derived valuation. We use DDM to value FCOT, the methodology we use to value all the REITs under our coverage. We use a discount rate of 9.4%, derived from a risk-free rate of 3.8%, an equity risk premium of 4.3% and a beta of 1.3x. We also assume a terminal growth rate of 2%.
Initiate coverage with Outperform and target price of S$0.99. We initiate coverage with a target price of S$0.99, which represents a total return of 30% from a forward yield of 7% and price upside of 23%. Since taking over the reins in 2008, FCOT’s management has stabilised FCOT’s capital structure and assets and divested noncore holdings. With a stable portfolio and capital structure and a strong sponsor in F&N, we see no reason for its depressed 40% discount to book and forward yields of 7.1% (vs. office S-REITs’ averages of 0.8x P/BV and 6.1% DPU yield). We do not see an overhang from CPPUs (with limited dilution on full conversion) and even anticipate accretion from potential redemption at par on favourable funding rates. We thus initiate with an Outperform, anticipating catalysts from early re-financing at favourable costs of borrowing and improvements in occupancy and rentals.
CitySpring – BT
CitySpring trust unveils $210m rights issue
CITYSPRING Infrastructure Trust is looking to raise $210.2 million through a renounceable rights issue to strengthen its balance sheet.
The trust, partly owned by Temasek Holdings, will issue about 539 million new units at a price of 39 cents per rights unit. The issue will be offered to unitholders on the basis of 11 rights units for every 20 units held, said its trustee-manager CitySpring Infrastructure Management yesterday.
Temasek, which owns 28 per cent of CitySpring, has irrevocably undertaken to subscribe for 85 per cent of all the rights units. The existing directors of the trustee-manager also intend to take up their entitlements under the rights issue in full, said CitySpring.
The rights issue is at a 27.1 per cent discount to CitySpring’s last transacted price of 53.5 cents per unit before a trading halt was imposed for the second half of the day yesterday.
Net proceeds from the issue, expected to be $204.8 million, will be used to reduce CitySpring’s net gearing, and give it the flexibility to pre-pay or refinance bonds that it previously issued to finance its acquisition of Australian undersea electricity transmission cable Basslink.
Funds could also be used for CitySpring’s general corporate purposes.
‘The rights issue will strengthen the group’s balance sheet and give it greater flexibility to reduce its gearing, whether at Bass-link or CitySpring level.
‘The trustee-manager is confident that following the rights issue, the negative outlook on the bonds’ rating can be removed, thereby ensuring that Basslink is not precluded from continuing to make distributions to CitySpring,’ it said.
Standard & Poor’s has a BBB- rating on the Basslink bonds and a negative outlook on them, citing Basslink’s vulnerability to refinance the bonds at a higher interest cost in 2015. When the bonds were issued, it was stated that if their rating falls to BB+/Ba1 or lower, Basslink will not have to make distributions to CitySpring.
Basslink generated cash earnings of A$10.8 million ($14.2 million) for the three months ended March 31, 2010, up 83.1 per cent from the same period a year ago. This helped to lift CitySpring’s cash earnings for the quarter, during which the trust upped its cash earnings by 7.4 per cent to $23.5 million for the fiscal fourth quarter.
Over the last three financial years, Basslink has distributed an average of A$4.7 million per quarter to CitySpring.
CMT / CCT – BT
CapitaMall Trust and CCT issue US$645m secured notes
CapitaRetail China Trust raises gross proceeds of $70m from placement
CAPITACOMMERCIAL Trust (CCT) and CapitaMall Trust (CMT) yesterday announced the issue, through Silver Oak, of US$645 million five-year secured floating rate notes (FRNs).
Separately, CapitaRetail China Trust (CRCT) – another trust in the CapitaLand stable – announced a successful private placement.
The FRNs issued by Silver Oak are secured by Raffles City Singapore, a mixed-use property jointly owned by CCT (60 per cent) and CMT (40 per cent), through special-purpose trust vehicle RCS Trust.
Silver Oak is a special-purpose company incorporated to provide credit facilities to RCS Trust.
Half of the notes have been placed with Asian institutional investors and the other half with European investors. The issue was 1.7 times subscribed.
Proceeds from the notes – which have been assigned an AAAsf rating by Fitch Inc and a Moody’s Investors Service rating of Aaa(sf) – have been swapped into S$800 million.
In addition, Silver Oak has drawn down S$164 million from a S$200 million five-year term-loan facility granted by DBS Bank, HSBC and Standard Chartered Bank.
‘The S$800 million proceeds from the FRN, together with the amount of S$164 million term loan, are on-lent to RCS Trust to refinance RCS Trust’s existing aggregate debt of S$964 million, ahead of the latter’s expected maturity date on 13 September 2011,’ said the managers of CCT and CMT.
‘The balance S$36.0 million of the term loan is expected to be fully drawn down in September 2011 to finance purposes such as asset enhancement initiatives and working capital.’
The interest rates payable by RCS Trust for the S$800 million proceeds and the S$200 million term loan will be fixed at 3.09 per cent per annum and 3.025 per cent per annum respectively, from Sept 13.
CapitaCommercial Trust Management Limited chief executive officer Lynette Leong noted that this ‘marks the completion of the early refinancing of CCT’s only outstanding debt for 2011 and extension of its portfolio debt maturity’.
The three banks have further granted a five-year committed revolving credit facility of S$300 million, available to finance future capital expenditure, asset enhancement initiatives, and general corporate and working capital purposes.
Meanwhile, CRCT announced yesterday that its initial private placement size of S$55 million was 2.5 times subscribed. As a result, the full upsize option was exercised, raising gross proceeds of about S$70 million through the placement of 59.8 million new units.
Said Victor Liew, chairman of CapitaRetail China Trust Management Limited (CRCTML): ‘The strong demand by investors for the private placement is testament to the attractiveness of CRCT as an investment for unitholders to tap into China’s consumption growth.’
Each new unit was issued at $1.17, representing a discount of approximately 3.2 per cent to CRCT’s adjusted volume weighted average price.
The total demand book comprised over 40 existing and new investors from Asia, the United States and Europe.
CapitaMalls Asia’s (CMA’s) subsidiaries subscribed for about 12.9 million new units.
Gross proceeds from the private placement will be used to finance the acquisition of New Minzhong Leyuan Mall, with the remaining balance funded by a drawdown from CRCT’s existing debt facilities.
CRCTML also intends to declare an advance distribution for existing unitholders, for the period from Jan 1 to June 29, at an estimate of between 4.26 cents and 4.30 cents per unit.
The books’ closure date for the advance distribution is June 29 at 5pm. The advance distribution will be paid around Sept 23 this year.
In the stock market yesterday, CCT shares closed two cents lower at $1.43, CMT shares closed one cent lower at $1.90, and CRCT shares closed three cents lower at $1.22.
MLT – OCBC
Completes KPPC Pyeongtaek Centre buy
KPPC Pyeongtaek Centre. Mapletree Logistics Trust (MLT) announced on 17 Jun that it has completed the acquisition of KPPC Pyeongtaek Centre in South Korea. Recall that MLT has previously reported on 25 May that it has signed a conditional sale and purchase agreement with Korea Port Processing Co. Ltd (KPPC) for this property at a purchase price of approximately S$85.9m (KRW 75.6b). The property comprises two blocks of dry goods warehouses with a total GFA of about 100,900 sqm. There is also potential for organic growth as it has yet to maximise its permissible plot ratio, which will yield an additional GFA of close to 20,000 sqm. The vendor, KPPC, will lease the entire property for a period of 5 years with an annual rental escalation of 3.0%.
Important milestone in South Korea. MLT has stated that this acquisition marks an important milestone to entrench the trust into the South Korea market. Given the sizeable acquisition, the contribution of South Korea to the total portfolio’s gross revenue is expected to increase from 2.7% to 5.6%. Consequently, KPPC will be the first Korean customer in MLT’s list of top ten tenants; thus further diversifying its tenant base. Assuming that the purchase price and other acquisition costs of the property are fully funded by debt, we estimate that MLT’s gearing should increase to about 41.3% in FY11 from 37.7% in FY10 (after taking into account all acquisitions and divestments announced to date).
Yield-accretive acquisition. According to MLT, the new property provides an initial NPI yield-on-cost of 8.6%. We have factored in contributions from KPPC Pyeongtaek Centre starting on 18 Jun with a modest starting rent of S$7.02 psm/month or KRW 6178 psm/month (GFA basis). Based on our estimates, this compares favourably with the NPI yield of 5.58% in FY10.
More acquisitions to come. Apart from Korea, MLT has also said that it is actively looking at acquiring a warehouse (60,000 sqm and 98% leased) in Malaysia from its sponsor. MLT should be able to complete this acquisition by this year. Going forward, its main acquisition focus continues to be in Singapore, Malaysia and South Korea. MLT has a proven track record of executing a virtuous cycle of accretive acquisitions and competitive fund-raising. It is also a favourable move to recycle proceeds into better-yielding assets. Reiterate BUY with an unchanged RNAV-derived fair value of S$1.01.