CCT – CS
One-for-one rights issue: 37% dilution on FY10 DPU
● As widely expected, CCT has announced a fully underwritten renounceable one-for-one rights issue to raise gross proceeds of S$828.3 mn at a rights price of S$0.59, a 44.3% discount to the closing price of S$1.06. CAPL, which owns 31.4% of CCT, has underwritten to subscribe for its pro-rata S$260 mn.
● The net proceeds will primarily go towards paying down CCT’s existing borrowings, which is likely to be the expiring S$885 mn in 2010.
● Also, adjusting for a 10.1% asset write-down to S$6.0 bn due mainly to sharp rent declines since the last revaluation in December 2008; pro forma gearing will fall to 30.7% from 38.3% as of March 2009. Pro forma NAV will fall 52% to S$1.51 from S$2.91.
● After adjusting for interest and manager fee savings, we estimate FY09-11E DPU to be diluted 27-37%, implying FY10E yield of 7.3% on TERP S$0.825 versus S-REIT sector’s 10%. While the rights should alleviate share overhang concerns, we expect the office sector to remain challenging on negative demand and 16% new office supply by 2012. We maintain our target price of S$1.00 cum-rights.
CCT – OCBC
Overhang concern on gearing removed
1-for-1 Rights issue at S$0.59. Last Friday, CapitaCommercial Trust (CCT) announced that it will be doing a 1-for-1 Rights issue at an issue price of S$0.59 per rights unit. Issue price is at a steep discount of 44.3% to its closing price of S$1.06 prior to the trading halt. Approximately 1.4b units will be offered, raising gross proceeds of S$828.3m from the exercise. Of the proceeds raised, approximately 85%-95% (S$704.1m-S$786.9m) will be used to reduce borrowings. CapitaLand, which has a 31.4% stake in CCT, has committed to subscribe its proportionate share of the Rights units, which will require capital commitment of ~S$260m.
Steep decline in asset value warrants the need for capital raising. Latest valuation report of CCT’s properties revealed a sharp decline in the valuation of CCT’s assets. Valuation of its combined asset portfolio (as at 22nd May) has declined by S$681m (10.2%) from its December valuation to S$6,029.6m and the lower valuation was due to independent valuers using more conservative rental rates in their forecasts despite keeping their cap rate assumptions largely unchanged. Decline in asset value has pushed CCT’s gearing level up from the reported 38.3% at the end of 1Q09 to 43.1% now, which is close to the upper band of CCT’s target gearing level of 30%-45%.
Financial impact. Following the Rights issue, CCT’s gearing level will decline from 43.1% to 30.7%, which is near the lower bound of its target gearing range. Net asset value will also decline from the reported S$2.94 per unit at the end of 1Q09 to ~S$1.52 per unit after adjusting for the decline in asset value and dilution impact. Our DPU forecast for FY09 will also be diluted by 46.4% to 6 S-cents, translating to a DPU yield of 7.3% base on the theoretical ex-Rights price of S$0.825 per unit.
Maintain BUY. The weak office market outlook is already a well-known fact and with declining office asset values, CCT’s move to tap on the equity market is within our expectation. Depending on new debt for refinancing is unlikely to be sustainable as declining asset value would reduce the amount of loan obtainable through encumbering of assets and cost of borrowing could increase with the higher gearing. With the overhanging concern on its gearing removed, we think that this should be a positive catalyst to CCT’s share price. We keeping our fair value of S$1.33 and maintain our BUY recommendation on CCT. Our ex-Rights fair value will be S$0.96.
CCT – BT
CCT raising $828.3m via 1-for-1 rights issue
Exercise will reduce gearing to 30.7% despite fall in value of portfolio in latest revaluation
CAPITACOMMERCIAL Trust (CCT) plans to raise $828.3 million in a rights issue as it seeks to reduce its gearing, it said yesterday.
The move comes as the office real estate investment trust (Reit) saw the value of its portfolio fall 10.15 per cent in the latest valuation exercise. CCT said that the value of its Singapore properties fell from $6.71 billion in December 2008 to $6.03 billion yesterday.
The fall in CCT’s portfolio value – which came about as the valuers factored in falling market rents – would have pushed the Reit’s gearing from 38.3 per cent to 43.1 per cent. But with the rights issue, the gearing will instead fall to 30.7 per cent. The Monetary Authority of Singapore has set a 60 per cent threshold for a Reit’s gearing.
‘It (the rights issue) will reduce CCT’s gearing to the low end of our target gearing range of 30 per cent to 45 per cent through property market cycles,’ said Lynette Leong, chief executive of the Reit’s manager. The cash proceeds from the rights issue will also enhance CCT’s financial flexibility by boosting its balance sheet and improving its credit profile, she said.
Daiwa Institute of Research analyst David Lum told Bloomberg: ‘It seems CapitaCommercial is building up capacity to refinance debt, and creating a buffer against potential asset writedowns.’
CCT said in April that it has no more refinancing requirements for this year.
Ms Leong said yesterday: ‘We have achieved our refinancing objectives for 2009 by securing refinancing for borrowings in advance of debt maturity dates.’
The rights issue is being done from a ‘position of strength’, she added.
The proceeds will be used to repay future debt, and priority will be placed on debt due next year, Ms Leong said yesterday. CCT has some $885 million of debt due in 2010.
To raise the cash, CCT will sell 1.4 billion shares at 59 cents each in a one-for-one rights issue. The offer price represents a 44 per cent discount to the the stock’s last traded price of $1.06. The offer price is also a discount of 61 per cent to CCT’s net asset value per unit of $1.51 after taking into account the revaluation of CCT’s properties and completion of the rights issue.
CapitaLand, which has a 31.4 per cent stake in CCT, will take up its full entitlement of rights issue worth some $260 million in all.
The trust also revealed yesterday that the value of its property portfolio fell from December 2008 to May this year as market rents declined. The three most valuable wholly-owned properties in CCT’s portfolio – Capital Tower, Six Battery Road and One George Street – saw their values fall by 9.4 per cent, 13.8 per cent and 11.9 per cent respectively. Raffles City, which CCT co-owns with another CapitaLand unit CapitaMall Trust (CMT), also saw its value fall by 5.3 per cent.
Analysts have said that office rents could fall by up to 70 per cent from their peaks in 2008 to their trough sometime in 2011 or 2012. Office rents fell 11 per cent in in the first quarter of 2009, according to data from the Urban Redevelopment Authority.
CCT is the latest Singaporean listed company to raise funds via a rights issue, joining companies such as DBS Group Holding and Keppel Land in turning to investors for cash.
CCT’s parent company CapitaLand earlier this year raised $1.84 billion in a rights offer while CMT raised another $1.23 billion. Market rumours of a rights issue have dogged CCT since.
CapitaLand shares gained 1.2 per cent to $3.43 yesterday as trading resumed following the announcement. Trading of CCT shares remained suspended.
CapitaLand has risen 34 per cent and CCT has gained 18 per cent this year.
MI-REIT – BT
SINGAPORE – Macarthurcook Industrial Reit posted a 19.4 per cent drop in distribution to unitholders for its fourth quarter ended March 31.
Distribution to unitholders fell to $5 million for the three months from $5.8 million a year ago.
This translates to a distribution per unit of 1.875 cents, compared with 2.22 cents a year ago.
Net property income rose 15.7 per cent to $9.27 million from $8.02 million.
REITs – ML
Growth momentum limited; Maintain cautious stance
Bulk of equity issuance completed
YTD S-REITs have raised S$2.5bn in new equity (19% of end 2008 market cap). While we believe that the bulk of the sector funding has now been resolved, we maintain our cautious stance. YTD S-REITs are up 13%, underperforming both the STI (+27%) and developers (30%). We expect underperformance to continue as we are unable to identify significant catalysts that will re-rate the sector.
Appetite for acquisitions limited
Improvements in the debt and equity markets bode well for the outlook for REITs given the capital intensive nature of the business model. Despite this we struggle to see how REITs will be able to achieve significant growth momentum over the next 12 months. We believe REIT managers will continue to maintain a conservative stance with regards to gearing and that without an appetite for further acquisitions, earnings upside will be limited to organic growth.
Growth outlook still muted
Given the downturn in the property market, no sub-segment has been spared and both rentals and occupancies are under pressure. In particular, we expect operating metrics for the office and industrial sub-segments to weaken. Looking across the S-REITs, we expect an average of 4% negative DPU growth in 2009 and 2010 respectively. This is driven primarily by lower rentals, higher debt costs and the dilution from recent equity issuance.
CMT remains our preferred S-REIT pick
Our preferred exposure to the sector remains CapitaMall Trust given its weighting to the retail sector which we believe will fare relatively better verses other property sub segments. We remain negative on the industrial exposed A-REIT and expect its operating metrics to face further downward pressure. Given our expectation that the office market will not show signs of recovery until at least 2012, we would also avoid office-exposed CapitaCommercial Trust and Suntec.