REITs – BT
Scrip dividends for Reits: why not?
IS THE use of scrip – instead of cash – as a way of issuing dividends to unitholders a violation of the basic characteristics of a real estate investment trust (Reit)?
One school of thought says that it is a violation as the scrip dividend scheme, if widely practised, runs counter to the objective of a Reit as a ‘stable, high-payout, pass through vehicle’.
This argument has its merits. But given the current unprecedented global financial turmoil, which has made many rethink previously established financial practices, the issue deserves a look from a different perspective. This is important as, like it or not, more trusts are likely to resort to scrip dividends amid an environment of credit squeeze.
If proper guidelines are in place on how cash conserved from issuing scrip dividends should be used, there is no reason why some Reits can’t take the scrip dividend route, even if it is a part scrip, part cash scheme with an opt-out option.
Given the present economic climate, asset values have dropped, sometimes in large percentages and there is very tight financial liquidity as banks seek to manage risks and minimise losses. The nature of business or life is that nothing is ever certain. We try our best to manage the challenges as they confront us.
Often times, we adapt, improvise, modify and even take a 180 degree-turn just to survive.
A Reit which had a good business model just two years ago is probably facing a different set of figures now. Falling asset values cause the net gearing to rise. Drops in consumer spending due to unemployment and other reasons bring lower yields as rentals fall. A very high degree of conservatism among financial institutions to minimise potential non-performing loans (NPLs) brings higher borrowing costs.
Taken together, these three factors threaten to sink many a less sturdy Reit. Unitholders don’t want to see their Reits collapse due to refinancing failures, a view shared by those against the scrip dividend practice.
Scrip dividends have been with us for a long time. The argument is that if you bought into a business, getting a bit more of the business is often a good thing so long as sound management prevails. Though it’s perhaps unfortunate that in today’s context, more companies resort to it for different reasons.
Reitholders who had invested even a year ago are looking at large losses on the prices of their units. Many Reits are trading at substantial discounts to net tangible assets (NTAs) or initial public offering (IPO) prices.
Real estate is fundamentally a medium to long-term investment. From this viewpoint, the current guidelines for Reits to distribute at least 90 per cent of their distributable income to qualify for tax benefits should perhaps be re-examined. This percentage and the accompanying tax benefits could be reduced on condition that the amount not distributed as a result of a scrip dividend be set aside for paying debt. A regulatory requirement to ensure that the retained earnings are correctly deployed to mitigate the accompanying drop in cash distribution is important. Savvy long-term investors may then shift their focus on short-term DPUs (distribution per unit) to net gearing and cash balances. This allows for Reits to be built on sturdier ground to stabilise them from regular oscillations in asset values and economic cycles.
There are investors who look forward to putting their money in a Reit that has a good portfolio with very little gearing. It has to do with times past where we often looked upon debt as a burden and tried to pay cash for our purchases if possible.
A well-managed Reit that can reduce its gearing regularly over time may even end up with zero gearing or a net cash surplus position. Owning more shares in such a Reit is probably the best real estate investment one can make. It pays ‘good yields’ as there is little financing costs and insulates unitholders from bankers who keep the umbrella when it starts to pour. And a Reit built on ‘solid sturdy ground’ may trade close to or even above their NTAs in good times, a far cry from today’s deeply discounted prices.
FCT – BT
Moody’s confirms FCT’s Baa1 rating; outlook negative
MOODY’S Investors Service yesterday confirmed the Baa1 corporate family rating of Frasers Centrepoint Trust (FCT). The outlook for the rating is negative.
This concludes the review for possible downgrade initiated on Oct 20, 2008, said Moody’s.
‘The rating confirmation reflects FCT’s good franchise value and relatively stable income stream supported by its well-located suburban retail assets. In Moody’s opinion, these assets are at the lower end of the asset risk spectrum as they mainly provide tenants with non-discretionary household items,’ said Kathleen Lee, a Moody’s vice-president/senior analyst and lead analyst for the trust.
‘The confirmation also factors in the trust’s manageable debt maturities and with banks with good relationships with its sponsor, Fraser Centrepoint Ltd (‘FCL’), to facilitate gradual conversion of its short-term debts to term and/or committed banking facilities, which will support its ongoing capital expenditure needs,’ noted Ms Lee. ‘FCT’s conservative financial policy also generates good credit metrics relative to its peers,’ she added. A reflection of this is the debt/Ebitda of six to seven times.
The outlook for the rating is negative reflecting the trust’s asset concentration exposing it to the weak economic environment and property market conditions in Singapore. Furthermore, these conditions render uncertainties in the level of tenant occupation and achieved rentals at Northpoint upon completion of the renovation works expected by Q2 2009.
A return to a stable outlook is unlikely at this stage given the inherent weaknesses in the trust’s operating profile and its limited financial flexibility amid the weak operating environment. Conversely, the ratings could face downward pressure if progress is not made in securing committed medium-term bank facilities to fund the trust’s ongoing capital expenditure over the next few months, and/or should headroom in its unitholders’ funds covenant fall away due to material asset impairments or worse-than-expected rental or occupancy conditions.
Mapletree – BT
By KALPANA RASHIWALA
Mapletree Logistics Trust Management Ltd (MLTML), the manager as manager of Mapletree Logistics Trust said on March 16 that it has no plans for any equity fund raising exercise.
MLTML also clarified that MapletreeLog is not the subject of the various media articles over the weekend which reported on Mapletree Industrial Trust (MIT), a private trust which owns a portfolio of ex-JTC factories and is managed by a different management team from MLTML. The articles had reported on MIT saying it could not afford to give its tenants the rental rebates they wanted.
MapletreeLog is a Real Estate Investment Trust listed on Singapore Exchange with a pan-Asia portfolio of warehousing and logistics facilities.
‘The manager also wishes to reiterate that as per MapletreeLog’s distribution policy stated in the prospectus dated 18 July 2005, it will distribute at least 90 per cent of its taxable income to unitholders. MapletreeLog’s distribution policy remains unchanged,’ MLTML added.
FCT – BT
By ANGELA TAN
Moody’s Investors Service on Monday confirmed the Baa1 corporate family rating of Frasers Centrepoint Trust (‘FCT’).
The outlook for the rating is negative.
This concludes the review for possible downgrade initiated on October 20, 2008.
‘The rating confirmation reflects FCT’s good franchise value and relatively stable income stream supported by its well-located suburban retail assets. In Moody’s opinion, these assets are at the lower end of the asset risk spectrum as they mainly provide tenants with non-discretionary household items,’ says Kathleen Lee, a Moody’s VP/Senior Analyst and lead analyst for the trust.
‘The confirmation also factors in the trust’s manageable debt maturities and with banks with good relationships with its sponsor, Fraser Centrepoint Ltd (‘FCL’), to facilitate gradual conversion of its short-term debts to term and/or committed banking facilities, which will support its ongoing capital expenditure needs,’ says Lee.
‘FCT’s conservative financial policy also generates good credit metrics relative to its peers — – as reflected by Debt/EBITDA of 6x -7x and EDBITA/Interest coverage of 3.4x -4.5x,’ she adds.
The outlook for the rating is negative reflecting the trust’s asset concentration exposing it to the weak economic environment and property market conditions in Singapore. Furthermore, these conditions render uncertainties in the level of tenant occupation and achieved rentals at Northpoint upon completion of the renovation works expected by 2Q2009.
A return to a stable outlook is unlikely at this stage given the inherent weaknesses in the trust’s operating profile and its limited financial flexibility amid the weak operating environment.
Conversely, the ratings could face downward pressure if progress is not made in securing committed medium-term bank facilities to fund the trust’s ongoing capital expenditure over the next few months, and/or should headroom in its unitholders’ funds covenant fall away due to material asset impairments or worse than expected rental or occupancy conditions.
In addition, the rating could be lowered if financial metrics weaken such that the trust’s Debt/EBITDA increases above 6.5x and interest coverage falls below 4x.
The last rating action with regard to FCT was taken on December 1, 2008, when its Baa1 rating was placed on review for possible downgrade.
Suntec – OCBC
Focus on cash calls and cash flows
New office asset value reality is already priced in. The Business Times reported on Friday that the entire 32nd floor of Suntec City Tower 1 has been sold for about S$1300 per square foot of strata area. This is about 40% lower than previous strata floor transactions completed about seven months ago (above the S$2000 psf level). We believe this new deal is important as it gives an indication of the current market value for office space. However, Suntec REIT’s current market value already reflects an implied asset value of S$885 psf for Suntec City Office (our estimate) – or a 32% discount to this latest transaction. Our valuation prices Suntec City Office at about S$1106 psf.
Potential risk of cash call. In our opinion, the refinancing of the S$825m in debt due this year is less of a problem than the potential need for an equity issue. In 4Q CY08, Suntec REIT saw property values fall 7% against its 3Q CY08 revaluation. We believe cap rates used by independent valuers still do not fully reflect downward trends in S-REIT capital values. For example, we understand that Suntec City Office was valued at S$1900 psf, or 46% higher than this latest transaction. This scepticism towards the accuracy of these valuations is creating downward pressure on share prices – Suntec’s current share price of S$0.505 is at a 75% discount to reported NAV. As capital values fall, we estimate that Suntec could eventually need up to S$480m in fresh equity to maintain gearing at 40% levels. In the current environment, rights issues may need to be underwritten in order to succeed. As a non-sponsored REIT, any rights issue by Suntec could require the backing of investment banks or sub-underwriting arrangements with substantial shareholders.
Focus on cash flows. There are inherent strengths in Suntec’s portfolio and we continue to believe in the merit of our BUY call on Suntec. The biggest concern today is how deeply earnings – and consequently distributions – will be affected by deteriorating economic conditions. We have adjusted our earnings and valuation assumptions, with a fairly conservative assessment of rents and occupancy levels. Our new DPU estimates for FY09-10 are 6-10% below consensus. This still translates to reasonable distribution yields of 18.6% and 16.1% in FY09F and FY10F respectively. Our SOTP value for Suntec falls 10% to S$0.95. Maintaining the 15% discount to SOTP, our fair value estimate falls from S$0.90 to S$0.80.