Rickmers – OCBC
Uncertainty driving volatility
Vessel secures new employment. Rickmers Maritime (RMT) announced that its vessel – Kaethe C. Rickmers (formerly Maersk Djibouti) – has secured employment with South American liner CSAV. The agreement is for a one-year charter at US$8,288/day, and also gives CSAV the option to renew the charter for another 12 months at US$23,888/day (averaging to a two-year daily rate of US$16,088). We note that the vessel was earlier earning US$22,708/day with Maersk. The US$8,288 rate is below our estimate of US$10,000/day – but it is a far better alternative to not securing any employment at all (which had seemed a likely possibility a few weeks ago). We note that CSAV is a current charterer of Pacific Shipping Trust; the liner has made great strides in resolving its own financial difficulties.
Implications of the April maturity of the US$130m loan facility. RMT had US$110.7m in cash as of 31 Dec but the question is if the remaining seven lenders will be willing to release that cash to only three lenders, considering the outstanding capital commitment of US$918.6m and the very likely breached loan-to-value covenants on the existing US$773.8m loans. The key determinant of the outcome is how close the banks and the sponsor are to reaching an overall agreement (which is in approximately month 12 of discussions). We re-iterate that it is not in the sponsor's best interest for RMT to default as the sponsor will end up footing the bill for the new ships (which are perhaps worth about half of what they cost). The lenders are probably not keen to see a default situation either (especially if they also lend to the sponsor). The likely outcome is that the burden will eventually be passed to RMT's unitholders through dilution via fresh equity.
Uncertainty driving volatility – witness the 25.6% unit price decline in the last two days on what can hardly be called 'new news' . Some investors may be waiting to see if there is a positive or even neutral resolution of the April loan maturity (and hoping that this would translate to a positive market reaction). But they should be mindful that the underlying problem does not go away – and any solution is likely to come at the expense of unitholders (unless the order book disappears completely, which is highly unlikely). In what is essentially a dragged-out and uncertain situation, we do not find offering a rating on RMT productive – as such we are SUSPENDING COVERAGE of the trust.
Cache Logistics Trust – BT
New Reit hoping to raise $400m
Cache Logistics Trust prospectus says 474.2m units will be offered at 84-88 cents each
CACHE Logistics Trust has lodged its listing prospectus with the Monetary Authority of Singapore, revealing that the new Reit hopes to raise about $400 million through its IPO.
According to the prospectus, Cache is offering 474.2 million units at 84 to 88 cents each.
A distribution yield in the range of 8.82-9.08 per cent has been forecast for 2011, depending on the issue price.
Cache is managed by ARA-CWT Trust Management (ACT) which is 60 per cent owned by ARA Asset Management Ltd and 40 per cent by CWT Ltd.
Daniel Cerf, formerly deputy chief executive of K-Reit Asia Management is ACT’s CEO. Mr Cerf, a licensed architect in the US, was previously general manager of special duties at Keppel Land.
Lim How Teck, who recently resigned as non-executive independent director of AIMS AMP Capital Industrial Reit Management, is ACT’s chairman and non-executive director.
Cache is a Singapore-based Reit and will principally invest in logistics properties in the Asia-Pacific as well as real estate-related assets.
Its initial portfolio of properties consists of six logistics warehouse properties in Singapore with an aggregate gross floor area (GFA) of 3.86 million square feet and a value of about $730 million.
The properties are CWT Commodity Hub, CWT Cold Hub, Schenker Megahub, C&P Changi Districentre, Hi-Speed Logistics Centre and C&P Changi Districentre. The properties are part of a sale and leaseback agreement entered by Cache with CWT and C&P Holdings respectively.
According to the prospectus, the initial portfolio is 94.1 per cent occupied by and contracted to 262 end-users comprising domestic and international companies.
The largest end-user accounts for 16.1 per cent of the total GFA of the initial portfolio. The top five end-users together account for 56.5 per cent of the occupied GFA.
CWT and C&P Holdings are the master lessees for these properties. Of the occupied GFA, 79.1 per cent is occupied by direct counterparties of the master lessees being third-party logistics service providers and third-party end-users.
The remaining 20.9 per cent of the occupied GFA is contracted from the master lessees by CWT related entities, which has in turn been fully contracted for use by third-party end-users.
C&P Holdings is a significant shareholder of CWT with a stake of 35.9 per cent.
The master lease agreements provide for lease durations ranging from five to 10 years and a weighted average lease expiry of 6.4 years, with locked-in annual rental escalations and a triple net lease structure for the first five years of the initial contracted lease term.
CWT and C&P has granted right of first refusal to Cache, providing the Reit with access to future acquisition opportunities. As at Dec 31, 2009, there are 11 properties totalling 2.3 million sq ft of GFA currently owned by CWT in Singapore, China and Vietnam and two income-producing properties totalling over 723,651 sq ft of GFA currently owned by C&P in Singapore of which Cache has first right of refusal.
Shipping Trusts – OCBC
US peer looks for asset value recovery over 2-3 Years
Highlights from SSW's FY09 conference call. Seaspan Corp [SSW, NOT RATED], a container-focused US-listed comparable of the Singapore-listed shipping trusts reported FY09 earnings earlier this week. Basic 4Q09 EPS of US$0.22 was three cents below consensus. SSW discussed its newbuild order book – 23 vessels will be delivered over the next three years, costing roughly US$1.8b total. SSW has been addressing the financing need on several fronts: 1) reduced dividends; 2) a US$200m preferential share issuance; 3) debt facilities. We note that while SSW is not constrained by loan-to-value covenants on existing loans, access to the roughly US$270m remaining from a US$1.3b credit facility is restricted because of market value covenants. SSW has other committed debt available, however. Management estimates further equity needs of US$180-240m over a period of 18 months.
SSW optimistic on a 2-3 year horizon. SSW's management noted that line majors have done a good job managing effective supply. A primary contributor is slow-steaming – SSW said that, the number of vessels required on the Asia-Europe trade has increased from eight to 10 or nine to 11. SSW very frankly said the recent demand side pick-up was due largely to inventory re-stocking, and that the market would "normalize once the stocking is finished" and as more supply was added. It said that the current "abnormal" market would trend down but 2010 would still be much better than "2009 and even 2H08". Management was more optimistic on a longer time horizon saying rates could "reach the level of average historical amount over the next two to three years [and asset values would follow]".
Sector view intact, prefer PST. Pacific Shipping Trust, a pure container play, is not struggling with capex commitments or debt issues with no loan-to-market value covenants on its loan documents. On the flipside, it has a fairly concentrated charterer base of two, its sponsor Pacific International Lines and South American liner CSAV, which had last year requested for rate renegotiations (ongoing issue). As a result, we continue to rate PST as a HOLD. A key risk for FSL Trust, in our opinion, is that LTV covenant concerns may drive the manager to raise expensive unsecured debt. Rickmers Maritime, the other pure container play, is facing high capex commitments and LTV covenant issues as well. A positive resolution of its US$130m April loan maturity could be a turning point for the sector. The outlook for the broader ship finance industry remains uncertain, and we stay NEUTRAL on the sector.
CCT – DBS
Capital management exercise
• Issues $225m convertible bonds
• Healthy balance sheet, gearing estimate to remain at 33%
• Maintain Hold, TP $1.23
Raises $225m of convertible bonds. CCT has announced the issue of $225m 2.7% convertible bonds (CB) with an over-allotment option of $25m. The 5-year bond will be maturing in Apr 2015 but can be redeemed by CCT Trustee from Apr 2013. The bonds are unsecured and can be converted into units at a conversion price of $1.356/unit, which is at a 20% premium to yesterday's closing price. If fully converted, CCT's unit base would expand by 5.9%. Proceeds from the issue are earmarked for general working capital (10-25%) and asset enhancements and debt refinancing(75-90%).
Balance sheet remains healthy. We estimate CCT's gearing level to remain at c33%, assuming the CB proceeds are utilized to retire existing debt and after taking into account the issuance of S$70m worth of fixed rate notes in Feb 2010 and sale of Robinson Point. There is unlikely to be refinancing pressure for the total $1,025m loans due next year, inclusive of $370m CB put option due in May 2011. Average cost of debt is expected to trend down marginally from the present 3.9% while the average debt maturity would be extended to an estimated 2.5 years.
Maintain Hold, TP $1.23. We are retaining our Hold call and target price of $1.23. We believe share price catalyst could appear when the group announces further details on its portfolio review exercise, including plans for Starhub Centre, and the gap between stock price and book NAV could narrow over time. In the near term, some overhang from the CB issue could hamper price performance.
REITs – BT
Moody’s still negative on outlook for Reits
PROSPECTS for real estate investment trusts (Reits) in Singapore remain challenging as there will be a greater supply of office, industrial and retail space coming onstream, said Moody’s Investors Service yesterday.
The rating agency kept its outlook for the sector over the next 12 months negative. This places it at the bearish end of the scale compared with two other research houses – DMG & Partners has a ‘neutral’ rating on Reits and OCBC Investment Research recently upped its call to ‘overweight’.
Moody’s was particularly concerned about the influx of office, industrial and downtown retail space at a time of unexceptional economic growth. Its sovereign unit estimates that Singapore’s GDP will expand by around 5 per cent this year.
‘This is below the average GDP growth of 8 per cent from 2004 to 2007 and will not be adequate to absorb the strong increase in supply of commercial properties that was planned before 2008, based upon the then much higher economic growth rate,’ it said in a report.
According to Moody’s, around 6.6 million square foot of new office space will enter the market between this year and 2012. While landlords have managed to secure tenants for more than 30 per cent of the new supply, there will still be pressure on occupancy and rents over the medium term, it said.
When it came to the retail sector, Moody’s was more worried about rents at Orchard Road. This is because about 3.7 million sq ft of new space will be ready in the next two years, some of it at the two integrated resorts.
Moody’s acknowledged that most Reits have been rather resilient and have turned in stable results. But ‘pressure on earnings may increase in 2011 when new supply comes on stream across all property segments if demand is not increased’, it said.
Not all market watchers shared Moody’s view completely. DMG analyst Jonathan Ng agreed that office Reits would face a tougher time as rents continue to slip, but he was neutral about prospects for retail and industrial Reits, and positive on hospitality Reits’ performance.
Mr Ng was not particularly concerned about new retail space coming onstream as pre-commitment rates have been strong.
In a March 4 report, OCBC Investment Research upgraded its call on the Reits sector. Of the eight Reits it covers, five most recently turned in results meeting the house’s forecasts while three did better than expected.