FCOT – BT
FCOT may sell assets in Japan, Australia
FRASERS Commercial Trust (FCOT) may sell its assets in Japan and Australia worth over $98 million, as it restructures its portfolio following a strategic review.
The trust said this yesterday as it released results for the fourth quarter ended Dec 31, 2008. Its performance was dampened by rising borrowing costs and higher property expenses.
Net property income for the trust fell 10 per cent year-on-year to $18.6 million in Q4 08. This contributed to a 41 per cent plunge in distributable income to $9.3 million.
As a result, distribution per unit (DPU) dived 43 per cent from a year ago to 1.26 cents. This translates to an annualised DPU of 5.01 cents, and a distribution yield of 21.3 per cent based on FCOT’s closing price of 23.5 cents on Dec 31. FCOT closed 0.5 cent up at 24.5 cents yesterday.
Of its portfolio of 10 assets, FCOT is exploring the sale of Cosmo Plaza in Japan and its investment in the Allco Wholesale Property Fund (AWPF) in Australia. A strategic review which began last August concluded that these assets ‘do not meet the long term investment strategy’ of the trust, said FCOT.
After further write- downs, Cosmo Plaza and units in the unlisted AWPF were valued at $72.6 million and $26.3 million respectively as of Dec 31.
‘Divestments of these assets will be conditional upon a number of factors and appropriate updates to unitholders will be made in due course,’ FCOT said.
On top of the possible asset sales, FCOT also said that it was deferring asset enhancement plans for retail areas in KeyPoint and China Square Central under the current economic and financial market conditions.
‘Management priorities include the refinancing of the trust’s existing facilities and addressing the capital structure of FCOT,’ said Low Chee Wah, CEO of the trust manager Frasers Centrepoint Asset Management (Commercial).
‘We are studying a variety of options and will look to begin implementing them during the course of the year.’
FCOT has $624.5 million of borrowings due in one year or less, and its gearing was 54.4 per cent as of Dec 31.
For FY2008, FCOT’s net property income rose 32 per cent from a year ago to $81 million. Nevertheless, its DPU still registered a 5 per cent drop to 6.35 cents.
CMT – BT
CapitaMall Trust DPU dips in Q4
Trust exploring options to refinance $876.2m of debt
CAPITAMALL Trust (CMT), Singapore’s biggest property trust, said that distributable income for the fourth quarter fell 2.1 per cent as it faced higher finance costs.
Distributable income for the three months ended Dec 31, 2008, was $61 million, down from $62.3 million in 2007. Distribution per unit (DPU) fell to 3.65 cents, from 3.82 cents in 2007.
The trust is a unit of Singapore’s largest property group, CapitaLand. Q4 net property income rose 11.1 per cent to $85.9 million, from $77.3 million in Q4 2007.
Turnover was boosted by Atrium@Orchard, which CMT bought in August 2008, as well as higher revenue from new and renewed leases and from the completion of asset enhancement works.
But finance costs rose 61.4 per cent to $30 million, causing a year-on- year drop in Q4 net income. The increased finance costs were partly due to the convertible bonds CMT issued to fund the Atrium acquisition.
For the full 2008 financial year, distributable income rose 12.9 per cent to $238.4 million, up from $211.2 million in 2007. DPU rose to 14.29 cents from 13.34 cents.
‘The majority of the retail trades across CMT’s portfolio of malls are still faring well for full year 2008, although there were some signs of weakening in discretionary spending towards end-2008,’ said Lim Beng Chee, chief executive of the trust’s manager.
Last year, CMT signed 363 new and renewed leases at average rents 9.3 per cent higher than preceding rentals, which were typically committed some three years ago.
Gross rental revenue locked-in for 2009 already exceeds 87 per cent of 2008’s total gross revenue. ‘This will underpin the net property income for 2009,’ said the trust.
Mr Lim remains confident that CMT’s tenants will continue to stay on in its malls, even as retail sales are expected to drop this year.
The trust will take a pro-active approach to engage its tenants and meet up with them more often, he said.
Mr Lim also pointed out that turnover rent (where CMT takes a cut of tenants’ sales) contributed just 2-4 per cent of CMT’s total gross revenue in 2008.
The trust is also exploring options to refinance $876.2 million of debt before it matures in the second half of 2009.
CMT hopes to refinance all debt in one go and is already in talks with banks. Analysts said that refinancing should not be a problem as another one of CapitaLand’s Reits, CapitaCommercial Trust, was able to refinance at attractive rates recently.
CMT, which owns 14 retail malls in Singapore, last quarter said that it will put some upgrading plans for its properties on hold. The trust in May 2008 also raised its target asset size to $9 billion by 2010 from an earlier forecast of $8 billion.
Yesterday, CMT said that total assets rose 1.9 per cent to $7.2 billion on the latest revaluation.
‘CMT remains one of our top picks in the S-Reit (Singapore real estate investment trust) space,’ said Macquarie Research analysts Tuck Yin Soong and Elaine Cheong yesterday as they issued an ‘outperform’ call on the stock. CMT shares lost two cents to close at $1.48 yesterday.
FSL – JPM
32% ’09 yield despite lower DPU, cash conservation a positive, deep value but limited catalysts
• FSLT declared 4Q08 DPU of US¢3.08 (S¢4.63) or a quarterly yield of 10%. At the same time, the trust guided down 1Q09 DPU to US¢2.45 (S¢3.68) in a bid to conserve cash as it reduces payout ratio to about 77% of distributable cash from 100% previously. This will result in 32% dividend yield for 2009. Stock remains very deep value but with limited catalysts, in
our view. Maintain Neutral.
• MDC no more an issue. The Trust was able to obtain quoted LIBOR based interest rate resets for 1Q09. This is an important positive as the stock declined after banks invoked the Market Disruption Clause on certain interest rate resets in Oct-08. Those affected loans were charged interest rates at the lenders’ actual cost of funds rather than the quoted 3-month LIBOR, plus margin.
• Cash conservation is a positive we believe, as risks of debt covenant breach and lessee default though low, still remain. The Trust would be able to save US$4mn per quarter by lowering the payout ratio. The amount saved, it appears, is more for prudential reasons than for a specific purpose. We believe the Trust should be able to build up a buffer over next few quarters, which would allow it to navigate both covenant and default risks without triggering solvency concerns.
• Out of four key debt covenants, the one most at risk is the requirement to have a 145% collateral cover. As on last assessment in mid Oct-08, the cover stood at 175%. The ship values have declined since and in case banks do ask for an early reassessment of valuations (due Sep-Oct 09), a covenant breach cannot be ruled out. This should lead to a re-negotiation of terms. Outcomes, we believe, may include higher spreads, part amortization (its 7 year bullet now) or part repayment. As of now, we see limited possibility of complete or even substantial part debt repayment being triggered in case of covenant default. The Trust remains current on interest servicing and in our view cashflow visibility remains high on a diversified asset mix for next few years, leading to continued high credit worthiness.
• Lessee default is probably a larger risk to the underlying cashflows and stock price in 2009. Out of eight lessees, the maximum revenue exposure is 20% to Yang Ming and minimum of 6%. The Trust would be able to maintain the currently guided payout of US¢2.45 per quarter, assuming a revenue reduction by about 15% (in other words, default by one lessee). In that case, the Trust would be able to repossess vessels and would take legal action for SLV (Stipulated Lease Value), so as to maintain the economic benefits of the entire leasing period. Other than a situation in which the lessee goes bankrupt, we believe the Trust in most likelihood would be able to safeguard its economic interests even in case of default.
• Overall, we believe the stock remains deep value but lack of visibility on risks and limited near term catalysts leads to an even risk/return tradeoff.
FSL – DBS
Prudence may not be enough
4Q08 distribution of 3.08UScts was in line with guidance but in an act of prudence, management guided for lower distribution payout of 75-80% in 1Q09, vs. 100% payout in FY08. While this is a positive development in our view, causes for concern are multipronged – i) plunging asset valuations triggering technical defaults on debt, ii) customers re-negotiating charter rates, and iii) limited chances of re-rating given the depressed industry sentiments. Downgrade to HOLD at a reduced target price of S$0.50.
Results in line with expectation
Revenue was up 8%, or about US$2m, from US$23.7m in 3Q08 to US$25.7m in 4Q08 – as a result of the maiden contributions from the third Yang Ming vessel, which was delivered in Oct’08. However, higher interest expenses meant that distributable income of US$15.4m remained almost unchanged from 3Q08. Total FY08 DPU amounted to 11.52UScts, implying a trailing yield of 37.5%.
But risks are too big to ignore
While the diversified asset base provides some comfort to earnings, we estimate that portfolio valuations need to drop only about 18-20% for FSLT to trigger a technical default of the LTV covenant. What that may imply is diversion of cashflows to top-up/ repay loans, and/or higher interest spreads. The risk of counterparty default/ charter rate renegotiations cannot be ruled out either, given that not all its customers are blue chips.
Conserving cash implies prudence, but is it enough?
Lowering the payout ratio may help FSLT handle exigencies, as well as pay down the amortizing tranche of the US$65m loan, due from Sep’10. We also estimate FY09 DPU will reduce to about 9.8UScts (down 15% y-o-y). As such, we think the greater risk perceptions and weak industry sentiments will hold sway in the near term and downgrade the counter to HOLD at a reduced target price of S$0.50.
CRCT – DBS
Challenging Outlook
CRCT FY08 distributable income grew by 43% to S$45.9m (DPU of 7.53 Scts), mainly due to contribution from its acquisition of Xizhimen asset. We view that share price performance could be capped by potential equity raisings, given its current gearing of 33%, which is near the 35% regulatory gearing cap. Maintain HOLD, TP$0.66. CRCT currently is trading at c.12% FY09-10 DPU yield.
4Q08 results are in line with expectation. Distributable income of S$14.1m was 23% above forecast and a 64% growth from a year ago. Gross revenues grew 75% yoy to S$31.3m, helped by contribution from the acquisition of Xizhimen. FY08 distributable income came in at S$45.8m (+43.4%), translating to a DPU of 7.53 Scts. Portfolio asset revaluation was 2.5% higher, pulled up by Xizhimen (+10%), but offset by declines in values for most of its other properties.
Lower than consensus DPU estimates. We believe that rental growth is peaking on the back of an uncertain outlook in China. As such, our DPU estimate of 7.3 in FY09, which is at the lower end of consensus estimates, reflects a 10% decline in asking rents combined with increased vacancies at its multi-tenanted malls by 5-10% in 2009. In addition, potential downside risks to our DPU estimates exist if CRCT reduces its current payout ratio, against our estimated 100% payout.
Gearing level cap of 35% could mean possibility of equity raisings. While CRCT’s gearing remains relatively low amongst S-REITs at 32%, its current non-rating means that its debt-funding capacity is limited to a cap of 35%. This might lead to a possible overhang over the share price performance in the near term with unitholders facing a possible equity raising when (i) trust purchases a further asset, (ii) further devaluations in 2009, leading to the trust bursting the 35% regulatory limit.