FCOT – OCBC
Divestment of the Australian Wholesale Property Fund (AWPF)
Divestment of all units in AWPF: Frasers Commercial Trust (FCOT) announced on 12 May that it has completed the sale of all 39,758,513 ordinary units in Australian Wholesale Property Fund (AWPF) to National Nominees Ltd for an aggregate consideration of AUD22.2m (equivalent to S$29.11m). Including transaction costs, the net proceeds worked out to about AUD22.04m (S$28.9m). Prior to completion of the divestment, FCOT had a 39% indirect interest in AWPF and as at 31 March, the carrying value of the investment amounted to AUD24.94, (S$32.52m). The divestment is in line with the manager’s objective to reshape the portfolio of FCOT as the investment in AWPF is considered non-core. Taking into consideration that AWPF has not paid any distributions since Mar 2008, the Manager is of the view that the divestment is in the interest of unitholders as the net proceeds from the divestment will be utilised to reduce debt liabilities.
Positive on Divestment. Despite the divestment loss of S$3.62m, we view this transaction positively. AWPF was inherited from FCOT’s predecessor, Allco Commercial REIT (acquired prior to the financial crisis). Its book value on FCOT’s balance sheet has also dropped from a high of $75.1m in 4Q07 to a low of S$26.1m in 3Q09. We do not see much upside potential for the solely New South Wales assets, and have always reiterated that the capital could be recycled for better income maximizing purposes such as debt pare-down or yield accretive refurbishments. According to our estimates, this successful divestment will lower FCOT’s aggregate leverage from 37.8% as of 31 Mar to 37%. It will also provide FCOT with additional debt headroom of S$101.8m before surpassing the 40% gearing mark. The impact on FY11 DPU is, however, marginal with this divestment.
Looming Dent on Japan Assets. Our primary concern now rests with its Japan exposure1 . As of 31 Mar, FCOT’s Japan assets account for 9.6% of its gross revenue and 7.92% of its overall NPI. We noted that 100% of the leases for Azabu building in Tokyo and 65.5% for Galleria Otemae in Osaka will expire by FY12. We remain wary of the prospects in Japan, as office rentals are unlikely to see further uplift following Japan’s recent natural disasters. Furthermore, some occupiers have postponed or are reassessing their office strategies, which will likely delay the market recovery. DTZ has also forecasted Grade A office rents for Tokyo to decline further, only showing growth in 2013. Maintain BUY with a reduced fair value of S$0.87 (prev: S$0.89).
FCOT – DBSV
Focusing on Core Assets
FCOT announced that they will be divesting the units in Australian Wholesale Property Fund (AWPF) for AUD22.2m (S$29.11m). Recall AWPF was inherited from the previous ALLCO portfolio, which comprises a 39% indirect interest in an Australian registered investment scheme. Basically this fund has been a drag on earnings and valuations post the financial crisis. The fund had stopped paying dividend since March 2008 and valuation has dropped from a high of AUD$59.2 m (S$75.1m) in 2007 to AUD$24.9 (S$32.52m) as at end-2Q11.
We view this move positively as firstly, the group would immediately get rid of this drag on earnings. We do not see that this Australian fund will have much upside in the medium term. Secondly, we believe utilising the proceeds from the divestment to partially pare down an existing AUD150m term loan will lower gearing and there will likely be some interest savings which should lift bottomline marginally. Based on our numbers, post divestment gearing will drop slightly from 39.2% to 37.8% and DPU in FY 2011/12 will increase slightly by <1%. We continue to like FCOT with the manager taking proactive steps to reshape their portfolio by divesting non-performing assets including Cosmo Plaza earlier this year. We believe there are still opportunities for the group to enhance their DPU through asset enhancements and more capital management exercises.
Maintain BUY with an unchanged TP of $1.05.
CMT, CCT – DBSV
CMT and CCT jointly extend early tender offer to buy back CMBS for Raffles City
CMT and CCT have jointly extended an early tender offer to the CMBS holders of Silver Oak SPV. The group had earlier partially funded the purchase of the Raffles City property through a revolving credit facility of S$164m and an issue of S$866m CMBS, through the Silver Oak SPV. CCT’s 60% share of the CMBS amounts to cS$520m and CMT’s 40% share is S$346m.
The notes are due to mature on 13 Sep 2011 and both CMT and CCT have extended an early offer to buyback the notes by 2 June 2011 at a purchase price of 100.25 percent of the principal amount together with accrued and unpaid interest. Notes tendered after the Early Offer Deadline but before the Expiration Deadline will be purchased at 99% of their principal amount together with any accrued and unpaid interest thereon. The tender offer will expire on 8 June 2011.
We believe refinancing this tranche of debt under the current low interest rate environment would be earnings accretive to both reits as the existing average debt cost is relatively high at 4.1-4.2%. Also, these loans are backed by an asset with strong operating performance, which saw NPI yield rising from 3.69% in 2006 to 5.46% in 2010, and low existing loan to value ratios.
Maintain BUY with TP S$2.06 for Capitamall Trust and S$1.59 for Capitacommercial Trust.
Cambridge – DMG
Detail s of potential acquisition revealed
Acquisiti on of 5 & 7 Gul Street 1. Cambridge Industrial Trust (CIT) has entered into a put and call option agreement with Precise Industries Pte Ltd in connection with the proposed acquisition of the property at 5 & 7 Gul Street 1. This proposed acquisition has previously been referred to as ‘Potential Property 2’ during the rights issue announcement on 10 Mar 2011. In the latest announcement, the purchase price of 5 & 7 Gul Street 1 has been revised upwards from S$12.5m to S$14.5m. In addition, initial rental for the lease has been agreed at S$1.36m/year which works out to be ~9.4% gross rental income yield. Previously, we have assumed 8% gross yield from this acquisition. Following the announcement, we revised our FY11-12 DPU estimates upwards by 0.2-0.1% respectively. Maintain BUY with unchanged TP of S$0.59.
Detail of another potential acquisition yet to be revealed. During Mar 2011, CIT revealed that it was undertaking rights issue in order to finance the purchase of 4 & 6 Clementi Loop and two other properties in Western part of Singapore. Whilst one of them has been revealed as 5 & 7 Gul Street 1, the other potential acquisition in the west remains anonymous. Previously indicated purchase price of this anonymous acquisition was S$41m. We have factored in a gross yield of 8%, implying gross rental income contribution of S$3.3m/year to CIT (~4% of our FY12 gross rental income estimate).
CRCT – DBSV
Spreading its wings into Wuhan
• First foray into Central China
• Numerous low hanging fruits to lift entry yield
• Maintain Hold with S$1.30 TP
First property purchase in Wuhan. CRCT announced that it is acquiring the New Minzhong Leyuan Mall in Wuhan from Capitaland for RMB395m (S$76m) or RMB9,469psm GFA. The purchase price is 5-6% below the valuation of RMB417-422m. The property comprises an annexe and a conserved building with a total NLA of 23,361sm. Fronting Zhongshan Ave, the prime-shopping belt in Wuhan, the mall is about 500m away from the Youyilu metro station and near the future Jianghanlu Metro Station, which is expected to open in 2012. Tenants are largely in the fashion and lifestyle trade sectors (61% of its rental income) and F&B including KFC, Pizza hut and MacDonalds, and it houses the only IMAX theatre in Wuhan. The deal, which could boost CRCT’s AUM by 6.4% to S$1.26b, is subject to unitholders’ approval at EGM and is expected to complete by mid 2011.
A step in the right direction. We are positive on the acquisition. Not only is the deal yield accretive from the start, we see the addition of this high shopper footfall property as enhancing portfolio mix as well as boost rental revenue profile with greater diversification of short and long term leases that will enable it to leverage on strong consumption and retail spending trend. In the near term, we believe low-hanging fruits could come from (i) raising present occupancy of 90.6%; (ii) positive rental reversions with c.64.2% and 24.8% of gross rental income expiring in FY11 and FY12 respectively; historically, we believe the property had been able to achieve average rental growth that is above CPI; and (iii) potential tenant remixing by reviewing big box tenants.
A combination of debt/equity financing planned. At an acquisition NPI yield of 8.1%, the purchase would be yield enhancing vs the implied property yield of 7% for the existing portfolio. With an existing gearing of 32.6%, close to the ceiling of 35%, we expect CRCT to adopt a combination of debt/equity financing. This provides a mean to improve trading liquidity as well. Assuming that it raises S$70m of equity funding and the remainder through debt, we estimate FY11-12 earnings could be raised by 4-9% while at DPU level, accretion would be a more modest 2-3%.
Maintain Hold. We believe the acquisition will provide not only an immediate earnings boost but will also strengthen the portfolio’s tenant and lease reversion profile in the longer run. However, with the relatively small DPU uplift and limited upside to our revised DCF-backed TP of S$1.30, we are maintaining our HOLD call. The stock offers a total return of c10%.