Cambridge – DBSV
Cash call for acquisitions
• Cash call to fuel growth ambitions
• Earnings accretion from acquisitions is neutral; boost from interest savings from new loan facility
• BUY CIT for its high yield of 10%
Proposing to acquire 3 properties for S$116.8m. The three properties are located in the Western part of Singapore. The first property is at 4 & 6 Clementi Loop; Cambridge REIT (CIT) has agreed to pay the Vendor, Hoe Leong Corporation, S$40m with an additional S$23.3m payable upon completion of construction of an additional adjacent building in 2012. The remaining two properties (costing a total of S$53.5m) are still at MOU stage with CIT doing their due diligence. When acquired, CIT will lease them back to the vendors for durations of over 5 years, with lease extension options ranging 3-6 years. Completion of the acquisitions is expected to be in 3Q11.
Rights issue to raise S$56.7m. To part fund the purchase of the mentioned properties, CIT is proposing a 1-for-8 rights issue to raise gross proceeds of about S$56.7 m. The rights are priced at S$0.429 (15% discount to closing price of S$0.505 and a 13.7% discount to TERP of S$0.497), with the remainder from debt. Based on a projected yield of 8%, we estimate mild accretion to earnings from the above properties. Distributions will instead be boosted by interest savings from a recently secured S$320m loan facility, which will shave off over 150 bps in expenses (all in cost of 4.4% vs 5.9% previously).
Near term dilution, but stock still offers yields >10%, BUY. As the acquisitions are expected to complete towards 3Q11 while the rights units are expected to be issued in Apr 2011, our DPU estimates will be reduced by 5% in FY11 to 4.7 Scts but lifted by c1% to 5.1 Scts in FY12, translating to yields of over 9.3-10.1%. Maintain BUY.
HPH Trust – BT
More than the sum of its ports?
IT IS not always true that bigger is better, and Hutchison Port Holdings Trust spent last week finding that out first-hand.
The region’s largest ever initial public offering (IPO) went on its roadshow amid a great deal of scepticism, as analysts and market-watchers fell over themselves to list the number of reasons the IPO was more of an IP-no.
These had ranged from remote reasons such as a certain sunglass-wearing dreadlocked figure whose country has sneezed all over equity markets in recent weeks, to the more immediate issue of the trust’s distribution per unit (DPU) being quoted in Hong Kong dollars.
To be sure, the choice of currency is not nit-picking, as the Hong Kong dollar is pegged to the US dollar. Between 2007 and the start of this year, the HK dollar has depreciated against the Sing dollar by 16.8 per cent. While it is little consolation, it is worth noting, however, that all three shipping trusts in Singapore declare their distribution in the beleaguered US dollar.
Much has also been made of how the trust’s expected yield of about 5.9 per cent for 2011 (based on the expected offer price of US$1.01) pales in comparison to that of the shipping trusts’, which started out offering yields in the neighbourhood of 8 per cent.
While both businesses involve water in one way or another, that is where the grounds for comparison end. Shipping trusts have come undone by counterparty risk lately, with charterers threatening to default or handing a vessel back to the trust several years early and leaving it at the mercy of the spot market.
These charterers, unlike the large liners that frequent Hutchi-son’s ports in Hong Kong and China, are so obscure that some analysts have had an uphill battle sizing up their creditworthiness. For all the heartburn-causing moments shipping trusts have had in the last 12 months, unitholders have more than earned their 8-10 per cent antacid premium.
All that aside, most of the pundits have said very little about the port business itself, strangely enough. A port’s earnings have more to do with trade volumes than anything else. In that respect, it is looking very promising for Hong Kong and China, where its ports assets are.
Morgan Stanley is forecasting export growth of 15 per cent and import growth of 18 per cent for China this year. This is also the year that the mainland’s 12th five-year plan starts, which will see the launch of a whole pipeline of projects, all of which need to be fuelled by cargo going through the ports.
If any exuberance from Hutchison seems suspect, it might help to know that its competitor feels the same way about container volumes. Tianjin Port Group is expecting its container volumes to more than double from last year to as much as 20 million 20-foot equivalent units (TEUs) a year by 2015. It is putting its money where its mouth is, with a 110 billion yuan investment planned.
By 2015, Hutchison’s Yantian terminals will be larger, too. Its Yantian West Port Phase II will add three million TEUs in capacity a year. How this will be funded has been a sticking point with some analysts, wary of the bite it might take out of the total distribution for unitholders.
However, development capital expenditure is not going to do that for the next two years, at the very least. For 2011 and 2012, the trust’s capex of HK$1.84 billion and HK$1 billion respectively is going to come out of the existing reserves of the portfolio, which stand at HK$5.19 billion.
This has been partially the reason the trust has been so bold as to commit itself to a distribution that is 100 per cent of its distributable income. There is nothing to hold it to this ratio in the future, but 100 per cent is a very difficult number for unitholders to forget.
Relative to its competitors, its assets appear to have the upper hand – or the deeper waters. Its terminals at Yantian are of the deepwater kind, which many of its nearby competitors that are on the Pearl River Basin cannot claim to have. With Maersk possibly ordering 30 18,000-TEU ships – the largest the world has seen – being deep has become an advantage in the ports business that has got nothing to do with wearing a beret.
Beyond the medium-term, however, several things remain to be seen, such as how future capital expenditure will be funded and whether its investment mandate will change. The trust is entitled to invest in other assets after three years, without the unitholders’ approval.
But as trading kicks off this Friday in the shadow of Middle Eastern unrest and general glumness, one suspects that holding on to the units past the short-term is going to be absorbing enough.
PCRT – BT
Perennial China play should take Reit route
Malls slated for acquisition can be injected into a private fund for time being
PERENNIAL Real Estate’s recent decision to defer the initial public offering of its Perennial China Retail Trust (PCRT) following international roadshows last week is reminiscent of the time in November 2001 when CapitaLand had to scrap the IPO for its SingMall Property Trust (SPT) because of poor demand.
Coincidentally, the CEO of the manager of SPT and the CEO of PCRT’s trustee-manager Perennial China Retail Trust Management are the same person – Pua Seck Guan.
Mr Pua said recently that Perennial plans to tweak the PCRT deal to current market conditions and bring it to market ‘soonest possible’.
First, let’s recap the offer that has been shelved. The business trust was to have offered 1.09 billion units comprising an international placement of 610.2 million units, a public tranche of 50 million units and cornerstone units of 432 million units. Priced at $1 per unit, the offer would have raised about $1.1 billion in gross proceeds to be used mostly for the acquisition of four properties in China costing about $1.1 billion.
Only one of the four assets – a mall in Shenyang – is completed and leased out while the rest are in pre-leasing stage or under development and due for completion between 2012 and 2014. The trust’s distribution yield was to be 3.02 per cent for financial year 2011, rising to 3.08 per cent for FY2012. Post-listing, gearing was to be around 1.8 per cent.
PCRT had pledged to pay at least 90 per cent of distributable income to unitholders for the first two years and pegged its leverage limit at 60 per cent of the value of its properties.
Perennial is now expected to raise less equity, reduce the offer price of its units to below $1 apiece and assume some gearing.
Discount sought
Talk in the market is that investors indicated during the roadshows that they would like a discount of 5-10 per cent on the purchase price of the assets. The equity to be raised is also expected to fall to $700-800 million, assuming the cornerstone investors stay on.
Cutting the assets’ purchase price, floating a smaller equity portion and raising more debt should boost yields to investors. However, it makes sense for the trust to increase borrowings only if the cost of debt is lower than the property yield. The problem is, borrowing costs in China are high, at 6-7 per cent or more; even if PCRT were to borrow in Singapore, costs could be 4-6 per cent. So raising debt may reduce the yield to investors .
Mr Pua is in a hurry to finetune his offer and relaunch PCRT’s IPO ‘soonest possible’, understood to mean in 4-6 weeks’ time. That’s not surprising as the sellers of the assets would not want to be locked into an arrangement with PCRT for too long. They would want to be free to sell their respective assets to other potential buyers. After all, the vendors are not the sponsors of PCRT, unlike the arrangement between many real estate investment trusts (Reits) and their sponsors who are committed to providing an acquisition pipeline. Also, some cornerstone investors may lose interest in PCRT if a relaunch of the IPO takes too long.
But even if PCRT tweaks some financials of its offer, nagging concerns which are said to have been highlighted during the roadshows may remain. One is the strength of the trustee-manager’s management team; other than Mr Pua, who built a name for himself in the local mall management business.
There is also the question of whether Mr Pua has too much on his plate. In addition to PCRT, he is involved with Katong Mall, Chinatown Point and the landmark Capitol redevelopment site in Singapore, each with different sets of investors.
Some observers also wonder what PCRT’s niche as an investment product is. It’s not a Reit, which must hold at least 90 per cent of the value of its properties in completed, income-generating assets. So, in some ways, PCRT can be seen as more of a property developer.
But there are already so many China property developers for investors to choose from. There may be more interest for another Reit, given the steady income they distribute to unitholders.
Perhaps Perennial could take a leaf from the SPT episode when in late 2001, after SPT’s listing was shelved, CapitaLand kept it on its balance sheet while it enhanced the assets.
Then, in July 2002, the trust was rebranded CapitaMall Trust (CMT) and launched successfully, with a more attractive price and yield, improved asset performance, leaner management fee structure and with sponsor CapitaLand retaining a bigger stake. CMT arguably remains Singapore’s most successful Reit.
Maybe Perennial could consider a similar approach and inject the malls slated for acquisition by PCRT into a private fund. It could persuade the cornerstone investors secured for PCRT as well as other parties to invest in this fund, which will hold the assets until their development is completed and they are leased and their earnings stabilised and any asset enhancement done. At that point, Perennial could consider floating a China mall Reit.
Local touch
Some think that Mr Pua’s track record is more applicable to Singapore, where he built up CMT, rather than China. Investors may be more enthused if he were to float, for instance, a vehicle containing the three Singapore properties that he’s involved in. Then there’s also the IPO of Mapletree Commercial Trust, holding Vivocity mall, Merrill Lynch Harbourfront, and PSA Building – valued at $2.7-2.8 billion in total – expected to be launched soon. Slightly over $1 billion equity may be raised, analysts estimate. Some investors may be more keen on parking their monies in that vehicle, for now.
REITs (Japan Assets) – BT
S’pore Reit buildings in Japan get away lightly
The damage unleashed by the earthquake and tsunami on the north-eastern coast of Japan has left most of the properties owned by Mapletree Logistics Trust, Parkway Life Real Estate Investment Trust (Reit) and Global Logistic Properties (GLP) relatively unscathed.
Mapletree Logistics Trust said yesterday that 13 out of its 14 properties in Japan ‘escaped with either no damage or minimal damage’. Its remaining property in Sendai – where devastation has been greatest – Sendai Centre, has been affected by the tsunami, the trust said.
The latest valuation has put the cost of reinstating the building at about 600 million yen, or about S$9 million. The trust’s manager, however, does not expect the cost of repairs to amount to that much.
‘Preliminary report suggests that the building is intact. However, the affected area has been cordoned off by the local authorities due to safety measures. The full extent of damage can only be ascertained when access into the property is allowed,’ the trust said in a filing on the Singapore Exchange yesterday.
Sendai Centre is the second smallest of the trust’s properties in Japan by revenue contribution, accounting for 0.7 per cent of its portfolio’s total gross revenue.
On Friday night, GLP said that damage to its property had been estimated at about 3.9 billion yen or US$47.5 million, with the likely loss of rental income coming up to 0.89 billion yen or US$10.8 million. In total, this accounts for less than one per cent of GLP’s US$6.3 billion portfolio of properties in Japan. The majority of the repairs to its properties will take place in the next 30 days.
‘The low level of losses are testimony to the quality of our portfolio and property management as well as the rapid response of our dedicated team in Japan,’ said Jeffrey Schwartz, deputy chairman of GLP, who had been visiting the operations in Japan when the earthquake took place.
Parkway Life Reit, which has 29 properties in Japan, said that none of them have been structurally affected. ‘In addition, none of our properties are located within the evacuation zones of the nuclear plants in Fukushima Prefecture, with our nearest property to the nuclear plant site at least 200 kilometres away,’ it said yesterday.
Saizen Reit, a firm with 22 properties in Sendai alone, said on Friday night that its manager, Japan Residential Assets Manager Limited, and asset manager, KK Tenyu Asset Management, were contacting local property managers to assess the extent of the impact, but that it was being hampered by ‘breakdown of telecommunications networks and power blackouts’.
The collective value of its properties in the three affected areas – Sendai, Koriyama and Morioka – stand at 5.88 billion yen, accounting for 15.5 per cent of its total portfolio value.
Mapletree Logistics Trust, Parkway Life Reit and GLP have said that all their staff in Japan are safe and accounted for.
CMT – BT
CMT’s $250m bond issue fully taken up
To meet overwhelming response, lead manager may choose to exercise upsize option to raise size of issue to $350m
CAPITAMALL Trust’s (CMT) $250 million offering of three-year unsecured convertible bonds has been fully snapped up by institutional and accredited investors.
The base offering size of the bonds, due April 2014, was raised from an initial $200 million – as announced at the launch – to $250 million because of the strong demand, said CMT.
‘We are encouraged by the strong response to the issue of our convertible bonds,’ said Simon Ho, chief executive officer of CapitaMall Trust Management Limited (CMTML), manager of CMT. He added the issue was to ‘optimise’ overall debt structure and ‘diversify’ funding sources.
To meet overwhelming response, the lead manager may choose to exercise the upsize option within 30 days from March 10, 2011 to further raise the size of the issue by up to $100 million, to $350 million. The sole bookrunner and sole lead manager for the issue is Credit Suisse (Singapore) Limited.
The conversion price for the bonds stands at $2.2692 per unit and will offer an interest of 2.125 per cent per annum, payable on a half-yearly basis.
The funds raised from the bond issue will be used primarily for debt refinancing, which includes the refinancing of an existing convertible bond of $550 million that has a put option on July 2, 2011 at 105.43 per cent of the principal amount. The put option is currently out-of-the-money.
Moody’s sees ‘no impact’ on CMT’s rating as a result of its latest bond issue.
They added though the new bond issue could raise CMT’s debt-to-assets ratio beyond that incorporated in the trust’s current rating, the redemption of the entire existing convertible bond of $550 million with fresh proceeds and available cash is expected to take leverage back to levels in line with current ratings.
Moody’s Investors Service currently has an A2 corporate family rating or A3 senior unsecured debt rating for CMT.
The only other major debt maturing in the next 12 months, other than the put option pertaining to the existing convertible bond, would be CMT’s 40 per cent share in term loans drawn under a term loan facility granted to RCS Trust by a special-purpose company, Silver Oak Ltd.
However, analysts generally feel this is not a source for worry and is likely to be manageable by the trust going forward.
CMT shares eased two cents to end at $1.81 yesterday amid a broad market retreat.