Singapore Reit News

Bond issue seen improving CCT portfolio

It provides flexibility for acquisitions and asset enhancement initiatives: Goldman

CAPITACOMMERCIAL Trust’s (CCT) second major fund-raising exercise in less than a year could pave the way for the office landlord to improve its portfolio, analysts said.

The trust on Wednesday said that it will issue $225 million worth of convertible bonds and use 75-90 per cent of the proceeds to enhance its assets and refinance debt.

‘Although bite-sized, we think the proceeds from convertible bonds provides financial flexibility and paves the way for long awaited acquisition(s) and/or asset enhancement initiatives to enhance its office portfolio,’ said Goldman Sachs analyst Paul Lian, who has a ‘buy’ call on CCT.

He added that the news allays market concerns that CCT, which is partly owned by Singapore’s largest property group CapitaLand, is losing its foothold in the office market with the sale of Robinson Point and the potential redevelopment of StarHub Centre to residential use. Both deals were announced early this year.

In an update yesterday, CCT said that the convertible bonds issue has been fully placed out to institutional and accredited investors. The bonds, which are due in April 2015, are unsecured and convertible into new CCT units at a conversion price of $1.356 per new unit. They come with an interest rate of 2.7 per cent per year.

Credit Suisse, the lead manager for the issue, could exercise an option within the next 28 days to increase the size of the issue by up to $25 million to $250 million, CCT added.

The bond issue marks the second big fund-raising action for CCT in less than a year. The trust in mid-2009 raised $804 million in a rights issue and paid off some of its debt to cut down its gearing.

With this latest convertible bond issue, CCT will have more cash on hand. But gearing is expected to climb.

Goldman Sachs estimates that 2010 gearing could rise to 36 per cent from 32 per cent. But CCT has no major refinancing pressure until its $355 million convertible bond put option is due in May 2011 and $520 million worth of commercial mortgage-backed securities is due in Sept 2011.

CCT chief executive Lynette Leong pointed out that the bonds are unsecured, which preserves CCT’s existing pool of unsecured properties and ‘will give CCT the financial flexibility to respond quickly to any growth opportunities in the future’.

Eight properties with a total asset value of $2.8 billion (out of CCT’s eleven properties) are unsecured against any borrowings.

In a statement, Moody’s Investors Service said that it sees no impact on CCT’s ‘Baa2’ corporate family rating or ‘Baa3’ senior unsecured debt rating from the latest convertible bond issue.

‘Leverage will increase modestly, but the long-dated convertible bond issue will improve CCT’s liquidity and funding stability,’ said Moody’s vice-president and senior credit officer Peter Choy. ‘It will also provide funding for CCT’s portfolio reconstitution, designed to enhance asset quality.’

But others were bearish on the stock as office rents in Singapore are expected to continue sliding.

‘We think office rents could continue to trend downwards over the next 1-2 quarters and possibly bottoming out by end-2010,’ said DMG & Partners Securities, which issued a fresh ‘sell’ call. ‘Judging from the huge supply of office space, it could take at least 1-2 years for excess capacity to be absorbed before rents start their upward climb.’

CCT shares lost four cents, or 3.5 per cent, to close at $1.09 yesterday.

Increases flexibility for acquisitions

To issue S$225m 5-year convertible bond due 2015

CapitaCommercial Trust (CCT) intends to issue S$225m of 2.7% unsecured five-year convertible bonds (CBs). The conversion premium of 20% (S$1.356) compares well with CCT's April 2008 S$370m CB (23.9%) and CapitaLand's July 2009 S$1.1bn CB (20%). 10-25% of the proceeds will be used for working capital and 75-90% for asset enhancement initiatives (AEIs)/refinancing. Interestingly, bondholders will not be entitled to an early put option on this issue.

Increases flexibility to make good acquisitions

CCT has no immediate refinancing risk and we view this issue as proactive balance sheet management. We estimate post CB gearing at 35%, after taking into account S$225m Robinson Point divestment proceeds and a S$70m multicurrency Medium-Term Note (MTN) issuance. At a comfortable gearing of 30-45%, the REIT has significant headroom to strengthen its portfolio with good Grade A office acquisitions. We think the share price would perform if the company is able to acquire well. Newsflow on the redevelopment of Starhub Centre would be another price catalyst, in our view.

Accessing cheap debt

The CB's 2.7% coupon would help lower CCT's 3.9% average cost of debt. In the past two months, other SREITs with good credit standing have been able to secure 3-5 year debt at a low cost of 3.3%-3.6%, mainly through MTN programmes. The average cost of debt is now very close to 2005-2006 levels. We believe more SREITs will refinance debt before expiry to lock in these low interest rates. SREITs that have 2010 refinancing events include CapitaRetail China Trust (CRCT) and Starhill.

Valuation: prefer office landlords to residential developers

Our DCF-based price target assumes a 2.6% risk-free rate, 1x beta, and 5% equity. We like CCT, Suntec, Keppel Land, and CDL Hospitality as a tourism play.

Calibrating our estimates

Calibrating our earnings estimates. CCT announced today that S$225mil convertible bonds due Apr 2015 have been priced at 2.7% coupon and conversion price of S$1.356/unit, with an option to upsize to S$250mil within 30 days. We have raised our earnings estimates for FY10E – FY12E by 7 – 13% as we factor in lower borrowing cost as a result of CB issuance (1.8%), previously announced results, and the divestment of Robinson Point.

Starhub Centre asset plan the near term catalyst. CCT during its full year results briefing has highlighted the potential of converting Starhub Centre into residential and commercial use building. If all relevant approvals are obtained, we believe a sale of the assets would be the most likely outcome and we see potential for the trust to realize a 10% premium to current book value (see detailed analysis inside).

Deployment of capital the key to share price performance. While we believe that CCT is trading at an undemanding valuation with 6% trough yield, the heavy equity load the trust current carries is likely to continue impacting its share price performance. Yesterday's CB issuance in our view reiterates management's intention to acquire assets in the near term. We estimate that CCT will have about S$900 million capacity for potential acquisitions before hitting 35% gearing, assuming a divestment of Starhub Centre at 10% premium to book.

We retain our Neutral rating on CCT, and continue to view Keppel Land as the preferred play on Singapore office. We raise our Dec-2010 DDM-based PT modestly to S$1.15/unit as we increase our earnings estimates but factoring in a potential dilution from the 2015-CB. Key upside risk to our rating and price target include significantly better than expected rent reversions or a quicker than expected proper deployment of excess capital. Key downside risks include a worse than expected operating performance or inability to deploy excess capital.

Addressing FY11F maturities

Extending debt maturities, retaining financial flexibility

CCT has priced its proposed S$225mn issue of a 2.7% CB due 2015. The issue could potentially be upsized to S$250mn. While FY10F debt maturities appear to be now fully addressed, CCT could face debt maturities of up to S$1.01bn in FY11F. The reopened unsecured public debt market allows CCT to secure longer-term funding at a relatively lower cost without sacrificing too much financial flexibility.

Marginal changes to DPU

Taking into account capital management initiatives since our last update (we have assumed the latest CB issue to be upsized in our model), we cut our net finance cost projection by 0.28Sct/unit but this was largely offset by a change of 0.25Sct/unit in our amortization assumption of transaction costs for borrowings. Overall, there is a minor increment of 0.02Sct/unit in our FY10-12F DPU forecasts.

Investment-grade assets' cap rates likely to remain tight

Following the reopening of the MTN market late last year, the recent deals by CCT and AREIT signal further improvement in the public debt market and investment-grade assets' cap rates are likely to remain tight. While this means external growth is increasingly challenging, enhanced capital value fundamentals should help bolster portfolio NAV. Unencumbered assets also provide greater scope for portfolio management (such as the sale of Robinson Point), which could be a reason for CCT's preference for unsecured debt funding.

Reiterate BUY rating with price target S$1.35

Our NAV and price target is tweaked by S$0.01/unit to S$1.35 (from S$1.34) to reflect changes in FY10F net debt forecast. This implies a potential total return of 25.9%, including an FY10F yield of 6.4%.

Good Demand For Debt Paper

CCT has this morning successfully issued $225 mln worth of convertible bonds, which on full conversion at $1.356 per unit, will lead to issuance of 169.93 mln new units, representing 5.9% of existing units. The coupon rate is 2.7%. (There is an over-allotment of $25 mln, which if fully converted, will result in the issuance of 18.44 mln new units, or 0.65% of existing issued.)

COMMENTS

1. Dilution is insignificant.

2. While 75-90% of the proceeds have been earmarked for "asset enhancement and refinancing of existing liabilities", the capital raising will give CCT the flexibility when other opportunities present themselves.

3. Note that 8 assets with asset value of $2.8 bln, out of 11 in CCT's portfolio valued at $6.1 bln, are unsecured against any borrowings.

4. We still believe the revival of earlier plan to redevelop the Market Street Car Park is a distinct possibility in the not-too-distant future, which if so, would send a strong message on what management thinks of the office market, where consensus is for a glut in the next 2 years.

5. As at end '09, CCT's gearing is a comfortable 33%: total debt of $2003.86 mln, down from $2561.6 mln a year ago, on total assets of $6100 mln. Debt would have dropped by $125 mln following the partial repayment of the Medium Term Notes due on Mar 17 '10, reducing gearing to 30.8%.

6. With yield of 6.6% based on annualized DPU for Q4 '09, and a pro-active management, we maintain BUY.