FSL – BT
FSL Trust secures 2-year loan-covenant waiver
But interest margin raised 50 to 70basis points during waiver period
SHIPPING trust First Ship Lease Trust (FSLT) has announced some relief amid the sector’s finance woes by securing a two-year waiver from the loan-to-value covenant for its credit facility, although it comes at a higher price of a 50 to 70 basis point increase in the interest margin for the duration of the waiver period.
During the waiver period, which will extend until the end of the second quarter in 2011, the minimum coverage ratio of the charter-free fair market value of FSLT’s vessel portfolio over its outstanding indebtedness will be cut from 145 per cent to 100 per cent.
FSLT will also make quarterly loan repayments of US$8 million during this period, which will progressively reduce its outstanding loan balance and lower its refinancing risk at the respective loan maturities in 2012 and 2014. To date, FSLT has already voluntarily pre-paid US$12 million of its loans.
‘We are very pleased to secure this arrangement with our lenders, which addresses a key concern for investors in relation to any potential LTV covenant breach,’ said FSLT trustee-manager FSL Trust Management CEO Philip Clausius. ‘With our voluntary pre-payments and now agreed amortisation on these loans, we have established a clear framework for FSLT’s balance sheet going forward. We are now able to affirm with confidence our quarterly DPU guidance of 1.5 US cents from Q3 FY2009 onwards,’ he added.
Based on FSLT’s closing price of 60 Singapore cents yesterday, this represents a prospective annualised yield of approximately 14 per cent.
In connection with the waiver arrangement, however, all loan tranches under FSLT’s credit facility will bear a higher interest margin of 1.7 per cent over the three-month US dollar Libor on the outstanding loan amount during the waiver period. The margin increase will be reduced to 25 basis points after the expiry of the waiver period.
The extra interest expense arising from the higher interest margin during the waiver period averages US$700,000 per quarter and will not affect FSLT’s DPU guidance of 1.5 US cents per quarter.
As the credit facility is revolving in nature, FSLT will be able to re-draw on the committed but undrawn portion of its credit facility after the waiver period.
FSLT’s current portfolio comprises 23 vessels which are all leased on long-term bareboat charters. These are all fully financed and there is no committed capital expenditure or requirement for additional funding.
FSLT also reiterated that it has been receiving prompt lease rental payments from its lessees and there has been no request by any of its lessees to re-negotiate lease terms.
REITs – OCBC
Opportunities for yield arbitrage
Yield divergence. S-REITs have re-rated strongly YTD on the risk rally but the gains haven’t been equally distributed. We are seeing some interesting pockets of yield divergence. Using consensus estimates, Suntec REIT is trading at a 300 points yield premium to CapitaCommercial Trust (CCT) despite support from its retail portfolio and fairly similar gearing. Similarly, consensus DPU estimates for Suntec and K-REIT are identical over FY09-10, but Suntec still trades at a significant yield premium. Part of the premium, in our view, is driven by expectations of an equity issue. Meanwhile, CDL Hospitality Trusts is trading at a 260 basis points premium to Ascott Residence Trust (ART). Gearing and geography may play a part here.
Outlook driven? There is also some notable yield divergence between sectors. Pure foreign plays (excluding Saizen and First REIT) are trading at an average consensus yield of 8.8% versus the office REITs at an average of 10.1%. This is an interesting discrepancy that is overriding the typical country risk premium that is awarded to some of those names. Industrial and office REIT yields are at par on average, but average price to book is 0.7x for the industrials versus 0.5x for the office owners.
Arbitrage opportunity. Economic data is still really sideways, in our view – there is some recovery and bottoming out thanks to stimulus efforts but private sector and consumer activity is still a question mark. As such, we don’t expect much capital appreciation for the sector ex major news flow. We do expect opportunities for yield arbitrage as the divergence corrects, especially as clarity increases on the office outlook.
Rights issues, repackaged. Recent activity in the sector includes equity issues (A-REIT, round two); acquisitions (Suntec and K-REIT); and a combination of both (Fortune REIT). Things don’t change as much as branding does: managers will toss around buzz words including “position of strength” and “acquisition opportunities” but the end result will be the same: further equity issues. This is not always a bad thing, in our opinion, as either avenues of growth open up or gearing is lowered (still desirable). We expect more activity as: 1) managers exploit significant re-rating; 2)laggard REITs start de-leveraging; and 3) managers resort to inorganic options to propel the next leg of DPU growth, or even to sustain DPU. We identify Suntec, Mapletree Logistics Trust and Frasers Centrepoint Trust as likely candidates for an equity/acquisition two-for-one in the next six months. Maintain NEUTRAL; top picks are CCT and ART.
K-REIT – DBS
Deepens hold on Pru Tower
• Buys 67300sf at Prudential Tower at 15% below valuation
• Strengthen strategic hold but muted earnings impact
• Maintain Hold with TP of $0.99
Strengthens strategic hold. K-reit has enlarged its ownership of Prudential Tower to 73% of the total strata space with the purchase of 67300sf NLA for $106.3m or $1579psf. This price is fair given it is 15% below market valuation of $1850psf and 24% sub the Dec 08 book value of $2066psf for its existing space. The deal will be totally debt funded, thus lifting K-reit’s current gearing from 27.6% to 31.1%.
But muted near term earnings impact. The deal comes with up to a total $5m of net income support for 5 years after completion of the transaction. Based on the proforma FY08 net income of $5.5m (inclusive of support), NPI yield is estimated at 5.2% yield. While downside risk is protected by the income support structure, earnings accretion from this purchase is marginal given that the NPI yield of 5.2% (based on $5.5m proforma FY08 net income inclusive of support) is marginally better than the present implied yield of 5.15%.
Maintain Hold. Deceleration in the pace of office rental decline and increasing dealflows in the office sector indicate some stabilization in the sector. However, transaction yields of >5% are still on the higher end of the historical band of 4.2-6%, highlighting the still cautious outlook within this segment. This deal will benefit Kreit in the long run when the office market recovers. In the near term, downside risk is small as is immediate additional earnings impact. Thus, maintain Hold with TP of $0.99.
K-REIT – BT
K-Reit deal comes with 5.2% guaranteed yield
Trust’s aggregate leverage to rise to 31.1% from 27.6%
K-REIT Asia’s acquisition of six floors at Prudential Tower for about $106.29 million comes with income support from the seller that will translate to a guaranteed 5.2 per cent net property yield. The acquisition, which will be funded entirely by debt, will be yield accretive to K-Reit, the trust’s manager said yesterday.
The trust’s aggregate leverage will increase from 27.6 per cent to 31.1 per cent. The purchase will also boost K-Reit’s share of Prudential Tower’s strata area from about 44 per cent to 73 per cent.
APF Property Investments, which sold the space to K-Reit under the latest deal, has agreed to provide K-Reit up to $5 million in rental income support over a five-year period. The FY2008 proforma net property income (NPI) attributable to the acquisition is $5.5 million, inclusive of the income support. If the actual NPI is less than the guaranteed NPI, the seller shall pay the difference to K-Reit’s trustee.
‘The 5.2 per cent per annum property income yield is within the market norm and would provide accretive distributable income,’ K-Reit said.
The trust is buying levels 20 to 25 of Prudential Tower. The acquisition cost works out to $1,579 per square foot based on the net lettable area of about 67,300 sq ft. K-Reit said the $106.29 million purchase price is at a 14.6 per cent discount to the $124.5 million valuation of the property by Colliers International.
The valuation, which would reflect about $1,850 psf of net lettable area, took into account the rental income support by the seller, and was done using the market comparison, investment and discounted cash flow methods. Colliers was commissioned by K-Reit’s manager.
Prudential Tower is a 30-storey office block at the corner of Church and Cecil streets on a site with about 85 years’ remaining lease.
The six floors are leased to six tenants – including Prudential Fund Management Services, Prudential Asset Management (Singapore) and Korea Exchange Bank.
BT understands the space was sold through a private treaty deal brokered by Jones Lang LaSalle.
Market watchers say the latest transaction shows improvement in sentiment in the office investment market. ‘It also provides a badly needed transaction for valuers to use as a data point in arriving at investment-grade office capital values,’ a property consultant added.
APF Property Investments is linked to the Asia Property Fund, sponsored by LaSalle Investment Management and PruPIM, which is part of Prudential UK group.
K-Reit highlighted that the provision of rental income support will limit downside risks and provide certainty of income for the next few years.
Rickmers – OCBC
Essentially behaving like a toxic asset
Swift resolutions needed. Rickmers Maritime (RMT)’s increased cash retention following the 72% QoQ cut in 2Q09 DPU is just a drop in the bucket compared to the immediate issues ahead of the trust. In order of urgency (our opinion); RMT needs to 1) resolve LTV clauses that restrict access to loan facilities for the Hanjin vessels due in next five months; 2) secure waivers for LTV covenants on existing loans; 3) arrange payment of US$40m in vessel deposits and of loans that begin amortizing soon; 4) refinance the US$130m top-facility maturing in April 2010; and 5) finance the US$711.6m Maersk vessels due in 2H2010.
What next? RMT is in negotiations with lenders on LTV covenants and also in discussions with all stakeholders on the Maersk orders. RMT does not have the resources to honour its obligations (in our opinion) but it is in the sponsor’s best interest that it does due to 1) reputation risk and 2) the sponsor’s status as an intermediary on committed acquisitions – that is, if RMT defaults, the sponsor is still obligated to purchase the ships from the yards. Possible compromises involve delaying delivery of vessels (for a price) or letting the sponsor warehouse the assets (for a price) or raising a significant amount of equity (ability to do so is questionable).
Disadvantage unitholders. Whatever the final solution, we believe it not likely to favour the unitholders. With the high level of leverage and sizeable acquisitions fixed at peak prices, we believe RMT is essentially behaving like a toxic asset. When a leveraged play unwinds, the equity tranche is the worst place to be. Unitholders are caught in a game of “heads I lose, tails you win” and we think their best option is to exit this investment.
Adjusting valuation for distress. RMT’s unit price has fallen 29% since the 2Q DPU announcement and is now trading close to our original fair value estimate of S$0.39. This estimate values RMT as a going concern, which requires many assumptions including on the trust’s ability to successfully raise US$550m at S$0.53. We expect a high level of price volatility in the next few months and a going concern approach may not reflect the risks inherent in this investment. Our new fair value of S$0.16 is based a probability-weighted valuation approach that reflects the likelihood and consequences of a distressed scenario. Note also we now estimate no distributions are paid in 2H09 and FY10. Maintain SELL.