CCT – BT
CCT has no plans in pipeline to raise equity
CAPITACOMMERCIAL Trust (CCT), Singapore’s largest office trust, has no immediate plans to raise equity.
‘We don’t intend to increase debt in any significant way,’ said Lynette Leong, chief executive of CCT’s manager, at the trust’s Q4 results briefing yesterday. ‘If we are not making any acquisitions, we have no need to do that (raise equity).’
CCT shares gained 1.5 cents, or 1.7 per cent, on the news to close at 87.5 cents yesterday, even as the benchmark Straits Times Index fell. Some industry players have said that CCT could issue equity to reduce its gearing ahead of expected falls in asset values during upcoming revaluation exercises.
‘CCT has unequivocally stated that it is not planning to raise equity. That provides a lot of differentiation with the other Reits (real estate investment trusts) in the market,’ said UOB- Kay Hian analyst Jonathan Koh.
The trust’s gearing now stands at 37.6 per cent, and will be maintained at around that level, Ms Leong said. Total debt as at end-December 2008 was about $2.6 billion. By contrast, gearing was 23.9 per cent as at end-December 2007, while total debt then stood at about $1.26 billion.
For the short-term, CCT has some $116 million of debt due in June 2009, but the trust remains confident that it will be able to secure refinancing as it has some eight unencumbered assets worth $2.7 billion in its portfolio. The Reit on Jan 6 announced that it had secured refinancing for $580 million of loans due in March 2009.
CCT also recently abandoned a plan to redevelop the Market Street Car Park, citing the uncertain market outlook and tight credit conditions.
In Q4 2008, CCT saw its distributable income rise 17.4 per cent to $38 million – from $32.3 million a year ago – on higher rental income.
Distribution per unit (DPU) for the three months ended Dec 31, 2008 rose to 2.71 cents, from 2.33 cents for the same three months in 2007. Net property income also rose 47.8 per cent to $65.6 million, from $44.4 million previously.
Revenue in Q4 2008 was boosted by the acquisition of 1 George Street, a 23-storey office block, as well as higher rental income from other properties.
For the full 2008 financial year, CCT’s distributable income rose 27.1 per cent to $153 million, from $120.4 million in 2007. DPU climbed from 8.7 cents to 11 cents, while net property income rose 34.2 per cent to $233.5 million.
CCT also wrote down about 3 per cent of its portfolio value to $6.7 billion, from June 2008’s $6.9 billion. This translated into a 1.3 percentage point increase in gearing. The lower valuation assumes a fall of about 10 per cent in rentals this year, CCT said.
Analysts said that the results were within expectations and reiterated their positive calls on the stock. ABN Amro and Citigroup issued fresh ‘buy’ calls, while Macquarie Research rated the stock as an ‘outperform’. ‘We believe CCT remains a deep value play on the office sector,’ said Macquarie analysts Tuck Yin Soong and Elaine Cheong.
Looking ahead, CCT expects to face challenging times due to the adverse economic climate, said Richard Hale, chairman of the trust’s manager. ‘Our focus continues to be on retaining our tenants and on being proactive in cost containment,’ he said.
CCT is forecasting a DPU of 12.34 cents for 2009. The trust’s manager is actively engaging tenants for forward lease planning and 79 per cent of the 2009 forecast gross rental income has been locked in with committed leases.
Shipping Trusts – OCBC
Relentless stream of negative news flow
Grim industry outlook. Lloyd’s List reports that spot ocean freight rates for some container cargoes have fallen to zero on the Asia-Europe trades, after stripping out surcharges. Asian countries such as South Korea, Taiwan and Japan have seen 25-45% YoY declines in exports according to the most recent monthly data1 . Last week, Drewry Shipping Consultants revised its estimate for 2008 global container traffic growth to 152.8m TEUs, up 7.2% YoY. It is projecting a marginal 2.8% YoY expansion for 2009. In contrast, it projects that the global container fleet will increase by 12.7% this year. The consulting firm said that the demand-supply imbalance is still far too large, despite liner efforts to remove tonnage. Four small container operators went out of business in 2008 and Drewry said that further casualties “are a real possibility”.
Ship values are falling. At the same time, reports of falling asset values continue streaming in. According to Fairplay, both bulker and tanker ship values reached new lows last week. Tankers have seen a 25-40% decline in vessel value. A five-year-old VLCC2 recorded a value of just over US$100m last week, much lower than its US$163m peak price in August. The dry bulk sector has seen even more extreme declines of 65-70% from last year’s peaks. Five-year-old Capesize values have collapsed from US$154m in July to just US$44m last week.
Lenders are the wild card. The biggest threat to the shipping trust sector is the loan-to-market value (LTV) covenant. The preceding data shows that a breach of the required LTV level, which triggers a technical default, is a real possibility. Pacific Shipping Trust is the only trust without LTV covenants on its loan books. The biggest unknown, in our view, is whether and how lenders choose to call out such a breach. One optimistic viewpoint is that lenders will “forgive” or relax LTV requirements for owners with ships on longer-term fixed charters such as shipping trusts, but this could just be wishful thinking.
We are staying cautious. Trying to predict how lenders will react, which ultimately depends on their risk appetite and capacity, is a dangerous guessing game in our opinion. The high trailing yields seem tempting but external events such as an LTV breach could reduce or eliminate distributions. We retain our NEUTRAL rating on the sector. The trusts release 4Q08 results in the next couple of weeks. While quarterly cash earnings tend to be fairly stable, managers’ articulation of the trusts’ strategy and outlook for 2009 could be worth noting.
KREIT – DBS
Results in line
K-reit’s strong performance was expected, boosted by organic growth and ORQ contributions. However, looking ahead, the acceleration in office rental decline would continue to moderate DPU growth outlook. Despite inexpensive valuations of 11.9% FY09 yield, 0.3x P/bk NAV and implied yields of 9.8%, maintain Hold call with TP of $0.80 on the lack of short-term catalyst.
Results within expectations
K-reit reported a 30% rise in Q4 revenue to $14.3m while distributable income rose 152% to $17.4m (DPU: 2.67cts), thanks to contributions from ORQ, positive rental reversions and lower operating expenses. For the full year, the group chalked a 166.7% improvement in distribution income to $58.2m. The group revalued its properties, with a marginal surplus of $7m vs Dec 07 level. Value of Prudential Tower and ORQ saw a small decline of 1-1.5% while KTGE and Bugis Tower experienced a 0-3% hike in value.
Weak office sector outlook
Outlook for the office leasing market remains uncertain. Office rentals have dipped in 4Q08 and are expected to decline further this year. Amongst its buildings, Prudential Tower continued to see its occupancy decline to 92.3% from 96.4% qoq. K-reit has 27% and 26% of its NLA due to renewal/review in FY09 and FY10 respectively, largely from KTGE Towers. While reversions are still positive, the acceleration in rental rate decline would erode DPU growth outlook. Our FY09 projection has factored in a 15% rental dip, accompanied by a 10% drop in vacancy level.
Valuations inexpensive, no short-term catalyst
Current valuations appear to have factored in much of the expected office weakness with implied cap rates of 9.8% vs actual passing yield of 4.1%. However, short-term catalysts are not visible. The stock is trading at FY09 and FY10 DPU yield of 11.9% and 11.7% respectively. While K-reit does not have refinancing concerns and have a relatively long average lease expiry of 5.6years, its low stock liquidity could hamper investor interest.
REITs – BT
MAS gives Reits a New Year gift
Refinancing of maturing debt facilitated; clarity on leverage ratios
Reit managers here have been given more breathing space on borrowing limits by the Monetary Authority of Singapore (MAS), which has clarified how downward revaluations of properties should be treated.
Basically, MAS has said that Reits need not worry if their leverage has increased because properties have been revalued and are now worth less.
Under MAS’s Property Fund Guidelines, an S-Reit’s total borrowings and deferred payments (the ‘aggregate leverage’) should not exceed 35 per cent of its deposited property. This maximum limit is set at a higher 60 per cent if the Reit obtains a credit rating and publicises it.
In a circular to Reit managers and trustees earlier this month, MAS confirmed that if the aggregate leverage has gone up because of a decline in property values, it will not amount to a breach of leverage limits. MAS also made the important point that refinancing of existing debt by a Reit is not to be construed as incurring additional borrowings.
‘So if at the point of refinancing, a Reit has to revalue its assets (which lenders will require), and so long as the refinancing is of existing debt, MAS will not consider this as additional borrowing and hence the Reit will not be in breach of the statutory leverage limit,’ says Giam Lay Hoon, group general counsel of Oxley Capital Group, which owns a stake in the manager of Cambridge Industrial Trust.
MAS also said that it will permit Reits to raise debt for refinancing purposes earlier than the actual maturity of the debt to be refinanced, without having to include such funds raised in the aggregate leverage limit. However, this is ‘provided that the funds are set aside solely for the purpose of repaying the maturing debt’.
‘The trustee must place these funds in a separate trust account which shall be drawn on only to repay the maturing debt,’ MAS said in its circular.
Oxley Capital’s Ms Giam welcomed MAS’s responsiveness to tight credit market conditions. The CFO of a Reit manager told BT that the MAS clarifications would ‘give some breathing space for some Reit managers with high gearing and with properties in danger of being substantially depreciated’.
This, he said, would ease the pressure on these Reits to recapitalise through raising fresh equity and reduce pressure on the unit price of these Reits.
‘However, ratings agencies will continue to be nervous about property depreciation as that may reflect sliding rents and occupancies and a rise in tenant-default rates,’ he added.
Stan Ho, Fitch Ratings’ senior director and head of Non-Japan Asia structured finance, stressed that ‘any downward revaluation of the underlying property would raise the loan-to-valuation ratios as far as banks lending to Reits are concerned, and this would need to be considered in our ratings for Singapore Reits’.
Kathleen Lee, vice-president and senior analyst at Moody’s Singapore, also pointed out that while a downward revaluation may not breach MAS’s statutory aggregate leverage limit for S-Reits, ‘lenders to Reits can set their own covenants and a downward revaluation could trigger a breach of some of these covenants and that could also lead to a re-rating of the Reit’.
In a separate development, MAS is understood to have sought feedback recently on whether the current minimum distribution payout ratio for S-Reits should be lowered, from 90 per cent of distributable income currently to, say, 75-80 per cent. Some Reit managers are lobbying for the cut. ‘Cash is a premium today and Reits may want to conserve their cash for a host of reasons, including servicing loans, reducing debt or just as general ammunition,’ an industry player said.
However, a rival disagreed, arguing ‘this would go against the fundamentals of why the S-Reit market was created’.
Reits have a high degree of transparency and investors have a high level of certainty of distributions from Reits. ‘So when you give more flexibility to the Reit manager in terms of how much of distributable income it has to pay to unit holders, it creates more uncertainty for the investor. Investors like clarity,’ he added.
KREIT – BT
K-Reit Asia’s Q4 distributable income soars to $17.4m
Net property income up 68% to $11.8m; DPU down due to rights issue last year
KEPPEL Land’s listed office trust, K-Reit Asia, yesterday reported a distributable income to unitholders of $17.4 million for the fourth quarter ended Dec 31, 2008 – a 152 per cent jump from a year ago.
This followed a 68 per cent year-on-year increase in net property income to $11.8 million, due to lower property expenses and higher rental income.
Investment properties held directly by K-Reit achieved an average gross rental rate of $6.08 psf in December last year, compared with $4.65 psf in December 2007.
Despite the higher earnings, K-Reit’s distribution per unit (DPU) in Q4 2008 was 2.67 cents, lower than the 2.8 cents in the same period last year.
This was due to K-Reit’s rights issue in May last year, which added more than 390 million new units to the market.
On an annualised basis, K-Reit’s DPU in Q4 was 10.62 cents, generating a distribution yield of 15.2 per cent based on its unit closing price of 70 cents as at Dec 31, 2008. K-Reit last closed unchanged at 67 cents yesterday.
For FY2008, K-Reit reaped a net property income of $39.7 million, 40 per cent higher than in FY2007. This led to a 167 per cent surge in distributable income to $58.1 million.
DPU for FY2008 was 8.91 cents, marginally higher than the 8.82 cents a year ago. This translates to a distribution yield of 12.73 per cent.
For the period July 1, 2008 to Dec 31, 2008, K-Reit will pay out 5.07 cents per unit on Feb 23 this year. This will bring the total DPU payout to 13.04 cents for the period Jan 1, 2008 to Dec 31, 2008.
Trust manager K-Reit Asia Management sought to reassure investors about K-Reit’s financial strength yesterday. Having raised proceeds of $551.7 million from the rights issue in May 2008, K-Reit has a low aggregate leverage level of 27.6 per cent as at end-December 2008 and has no debt refinancing needs until 2011, said CEO of the trust manager, Tan Swee Yiow.
K-Reit also established a $1 billion multi-currency medium term note programme yesterday as an additional source of funding.
Mr Tan added that it would take a more than 54 per cent drop in K-Reit’s portfolio value for the leverage level to exceed 60 per cent. Under current rules, a Singapore-listed Reit’s aggregate leverage should not exceed 60 per cent of its deposited property if it obtains a credit rating and publicises it.
And while the year ahead could be challenging, K-Reit is still keeping an eye out for selective asset acquisitions across Asia. The Reit will adopt a ‘cautious and prudent’ approach to this, said Mr Tan.