Suntec – OCBC
Initial yield on MBFC tight but consider strategic merits
EGM convened for MBFC acquisition. As announced previously, Suntec REIT will acquire a one-third stake in Marina Bay Financial Centre (MBFC) Phase 1 from Cheung Kong Holdings Ltd and Hutchinson Whampoa Ltd. MBFC Phase 1 constitutes Towers 1 and 2, and also Marina Bay Link Mall. The stake will be acquired based on an agreed property value of S$1,495.8m, which includes rental support of S$113.9m over a 60-month period from the completion date of the acquisition. The S$2400 per square foot price (ex-rental support) is equivalent to what K-REIT [NOT RATED] is paying for its one-third stake. The transaction is subject to unitholder approval, with an EGM being called for Friday, 26 Nov at 10 AM.
Financing details released. Suntec REIT recently released more financing details for the proposed acquisition. In the unitholders’ circular, Suntec said it plans to fund the total acquisition cost through S$1105.0 in debt (72%) and S$428.2m in equity (28%). Suntec has arranged debt financing via a 3.5 year term loan (S$773.5m) and a 4.5 year term loan (S$331.5m). It disclosed that this facility was secured at a very competitive all-in cost of debt of 3.12%. As for the equity portion, Suntec plans to raise the S$428.2m through a private placement (with timing and issue price dependent on market conditions).
Initial yield tight but consider strategic merits. In the unitholders’ circular, Suntec estimates MBFC’s FY11 net property income at S$60.6m. We understand that tenants are only moving in progressively through the year (occupancy assumptions were not disclosed), and this NPI figure is heavily supported by S$37.2m in rental support, or 32.7% of the total rental support amount. This translates to a fairly tight initial yield of 4% on the acquisition. Nevertheless, we believe this is a sound acquisition for Suntec from a long-term, strategic perspective – both from the perspective of a Grade A office landlord and specifically with Suntec’s core focus on the Marina Bay area.
Maintain BUY. We have revised our earnings estimates to incorporate the proposed acquisition, which we assume is completed on 01 Jan 2011. We have revised our issue price assumption down from S$1.50 per unit to S$1.30 per unit, but our fair value estimate slips only marginally from S$1.64 to S$1.63 due to the lower-than-expected cost of debt. Suntec is one of the best proxies, in our view, to the office market / revitalization of the Marina Bay area today in terms of both exposure and valuations. With an estimated total return of 19.1%, maintain BUY.
Sabana REIT Prices IPO At S$1.05 Per Unit – DJ
Sabana Shari''ah Compliant Industrial Real Estate Investment Trust, or Sabana REIT, has priced its initial public offering at S$1.05 per unit, allowing the company to raise as much as S$664.4 million in gross proceeds, people familiar with the situation said Friday.
The first Shariah-compliant listing in Singapore is planning to sell a total of 632.8 million units in the IPO, with the units listing on the Singapore Exchange likely on Nov. 26, one of the people said.
Of the total offering, 101.8 million were placed to cornerstone investors.
The offering would also be the world''s largest listed Shariah-compliant REIT by total assets. The Singapore-based REIT''s assets are estimated at S$850 million.
The pricing of the units is at the middle of the price range of between S$1 and S$1.10.
The company intends to use the proceeds of the IPO to purchase properties and to pay off debt-related costs.
Daiwa Capital Markets, HSBC and United Overseas Bank are advising Sabana on the deal, while HSBC is also the sole financial adviser.
REITs – CIMB
Still interesting but could grow more risky
• Downgrade to Neutral from Overweight. The SREIT sector met our Overweight expectations since our upgrade in May. While valuations are not demanding and sustained low interest rates remain favourable for REITs, we downgrade the sector on increased risks expected from non-accretive potential acquisitions and possible cash calls as well as limited upside for the large caps. No changes to our earnings estimates or individual stock ratings. Our top pick is still Cache Logistics for its attractive 8.3% yields and undemanding valuations at book value. Among large-cap REITs, CCT as the cheapest is our preferred liquid REIT, provided it is able to make accretive acquisitions. Our top short is CMT, which has limited growth catalysts for the next two years in our view, significant capex needs and possibly increased interest costs if holders of its convertible bonds exercise their put options next year.
• REIT sector trading at book levels. The REIT sector has made a good recovery since its trough and now trades at book levels, above the last two years’ average P/BV of 0.8x. The largest-cap REITs, CMT and AREIT, trade at about 30% premiums to the sector, which is their historical mean premium. A review of the debt profiles of the 14 large- and mid-cap REITs shows healthy asset leverage at 31.6%, and interest cover ratio at 5x.
• Sponsor injections likely to take centre stage in 2011. We anticipate more sponsor injections in 2011 which could include Ion Orchard Shopping Mall (into CMT), Ocean Financial Centre (into KREIT), and Pantai Hospitals in Malaysia (into PLife REIT).
• We expect risk levels to increase as: 1) asset prices rise under intensifying competition from funds and other investors; 2) assets with limited operational histories are unlikely to be accretive in the short term without income support from vendors; 3) a lack of accretive assets locally could drive REITs to acquire more overseas assets, increasing forex uncertainties and tax leakages; 4) the possibility of more cash calls particularly for mega-acquisitions as most REIT managers are unlikely to go for long-term gearing ratios beyond 45%; and 5) an increasing preference for private placements over rights issuances in recent equity fundraising points to a less equitable position for minority REIT investors.
FCOT – OCBC
High quality assets, Strong sponsor; Initiate with BUY rating
High quality assets. Frasers Commercial Trust (FCOT) owns 10 properties across three countries with retail and office components. FCOT derives some 52% of its gross revenue from Singapore, which comprises China Square Central, 55 Market Street and Alexandra Technopark. These assets are either high-quality commercial property located near the heart of the financial district or high-tech business space development at the fringe area of the central-region of Singapore. FCOT also owned four commercial properties in Tokyo & Osaka. Other asset includes Central Park (Perth) which is a premium grade office tower and the tallest building in Perth.
Strong sponsor. Sponsor, Frasers Centrepoint Limited (FCL), a wholly-owned subsidiary of Fraser and Neave, Limited (F&N), is a leading Singapore-based property company with a strong global foothold in property development, property investment, serviced residences and investment funds. Apart from financial support, having a developer sponsor also allows FCOT to be granted rights of first refusal to a possibly rich pipeline of sponsor-owned assets for future acquisition. In the near to middle term, StarHub Centre, Alexandra Point and Valley Point are possibly slated asset injection targets for FCOT, if they prove yield-accretive to unitholders.
Stable income. FCOT enjoys a number of blue-chip longtenure leases (such as Commonwealth of Australia, BHP Billiton Petroleum etc.) and master leases that provide longterm income stability to the REIT along with potential for rental upside. Approximately 65% of FCOT’s revenue is derived from such leases. 25% of its gross rental income also has built-in annual rent step-ups. In line with our OVERWEIGHT rating for Office-REITs, we believe that FCOT will likewise be able to ride on the recovery cycle & benefit from positive rental reversions in FY11-FY12. We also see potential to grow income through asset enhancement initiatives and acquisitions.
Valuation. FCOT is trading at a 59% discount-to-book compared to the broader Office-REITs which are trading at 30% discount-to-book. We believe this significant discount is unwarranted, considering FCOT’s high-quality assets, strong sponsor and sound financials. At S$0.16 per unit, FCOT has recently proposed the unit consolidation of five existing units, which it opined will improve market perception and attractiveness of its units. We concur with the manager’s strategy and apply a 40% discount to our RNAV instead, deriving a fair value of S$0.17. This translates to an estimated total return of 12.6% (Price Upside: 6.3%; Distribution Yield: 6.3%). We initiate coverage of FCOT with a BUY rating.
Rickmers – BT
Rickmers posts US$54.6m Q3 loss after compensation hit
RICKMERS Maritime posted a net loss of US$54.6 million for its third quarter ended Sept 30, 2010, against a net profit of US$9.2 million for the corresponding period a year ago.
The blow to the trust’s bottom line was dealt by a US$64 million payment of compensation to Polaris Shipmanagement Company Limited for not taking delivery of seven vessels.
Excluding the one-off payment, profit from operations would have been US$9.4 million for the quarter.
Its income available for distribution for its third quarter slipped 4 per cent, from US$19.2 million to US$18.3 million.
It also posted a 4 per cent dip in charter revenue, from US$38.1 million to US$36.7 million, today.
Rickmers kept its distribution per unit (DPU) at 0.57 US cents, unchanged from its previous three quarters, representing a payout of 13 per cent of income available for distribution.
Year-to-date, the trust posted a 7 per cent drop in income available for distribution, to US$54 million.
Revenue for the same period rose 2 per cent to US$110.2 million.
It recorded a net loss of US$48.5 million for the period, against a net profit of US$25.5 million a year ago.
The trust’s fleet of 16 container ships saw a 99.63 per fleet utilisation rate for the quarter.
The remaining committed charter revenue as at Sept 30 stood at US$785 million.
‘The container market has experienced a real bull run this year, but the peak period has come to an end. We do expect to see a softening of charter rates in the coming months,’ said Thomas Preben Hansen, chief executive officer of Rickmers Trust Management, the trust’s trustee manager.