Suntec – OCBC
Sector news positive for Suntec
Sector news a positive… The recent news of two successful S-REIT refinancings bodes well for Suntec REIT (Suntec). Office-focused CapitaCommercial Trust has secured a 3-year term loan facility to refinance some S$580m due in March ’09, while Cambridge Industrial Trust has refinanced S$390.1m of loans. Some S$3.4b of S-REIT debt is still due for refinancing in the next 9 months but the news is overall a positive signal – especially that of Cambridge, a smaller and non-sponsored S-REIT, which was perceived as relatively higher risk. Please see our sector report out today for more details.
Waiting for the same from Suntec. Suntec has about S$825m of debt, or about 40% of its total borrowings, up for refinancing in the next 12 months. This is a lengthy process – we understand Suntec began talking to lenders late last year – and both the S-REITs mentioned here only announced done deals about two months prior to debt expiry. However, the sooner Suntec can clear this overhang, which is weighing down valuations, the better. Its cost of debt is likely to increase from the last reported all-in cost of 3.2%. The REIT is currently leveraged at 0.32x debt-to-assets.
Income outlook still bleak. Recent news reports suggest office rents fell 15-20% in 4Q CY081 . Suntec REIT, which will likely release FY08 results next week, should also register a decline in achieved rentals, in our view. The REIT will see almost 70% of its office portfolio ex One Raffles Quay up for renewal in the next two years. We are projecting Suntec City office rental rates to tumble down to single digits this year. We also expect vacancy rates to be on the rise. We estimate the average passing rent at Suntec City Office is currently in the S$6.50 ballpark, comfortably below our fairly bleak reversionary rent expectations for the next two years. On the retail side, we have priced in a conservative 8-10% per annum decline in Suntec City Mall rentals over the next two years.
Maintaining BUY. Our RNAV estimate of S$1.05 prices in a 38% decline in asset values. Our fair value estimate for Suntec is S$0.90, at a 15% discount to our RNAV estimate. We expect (non-cash) revaluation losses going forward, which could potentially stress the REIT’s tolerance for gearing. We believe our valuation reflects the risk of an equity recapitalization (which is not necessary, but possible). Suntec has seen a 21.5% increase in share price since our last report. Maintain BUY.
FrasersCT – CIMB
Taking stock
• Occupancy and shopper traffic remain high. A site visit to FCT’s three properties show occupancy levels remaining high, with the exception of Northpoint which is undergoing asset enhancement work. We are positive that rents and occupancy will stay stable in FY09.
• Outlook for FCT properties remains positive. Despite a negative macro environment, we believe that suburban retail malls such as FCT’s will be resilient with no significant new supply in the suburbs, limited lease expiries in 2009 and stepped-up rents incorporated in 86% of its leases.
• Further provision for decline in Northpoint occupancy levels. While we earlier only provided for a moderate decline in Northpoint’s occupancy to 95% from full occupancy, we now factor in a more conservative decline to 70% in anticipation of more rent-free periods or rebates which may be dished out to new tenants.
• Maintain Outperform with lower target price of S$1.06 (from S$1.13). We have a lower DPU of 7.0cts (from 7.3-7.4cts) for FY09-10 as a result of lower occupancy assumptions for Northpoint. Still using DDM valuation, we have a lower target price of S$1.06 (unchanged discount rate of 9.4%). At 0.6x P/BV, FCT remains a cheaper exposure to Singapore’s retail market than CMT (0.7x). Yields remain high at 9.9%.
CCT – BT
CCT $580m refinancing boosts shares of S-Reits
MOST Singapore-listed real estate investment trusts (S-Reits) chalked up gains yesterday as news of CapitaCommercial Trust’s (CCT) $580 million loan allayed refinancing concerns facing the sector.
Fourteen out of 21 Reits closed higher. The FTSE ST Reit Index rose as much as 6.4 per cent in the day before ending at 407.09 for an 8.96-point or 2.3 per cent gain.
Among the Reits, CCT led the rally in percentage terms with a 7 per cent or 6.5-cent increase to close at $1.00.
Fortune Reit followed close behind, jumping 6.4 per cent or 14 HK cents to HK$2.34 (S$0.45).
CCT announced on Tuesday that it had obtained a three-year term loan of up to $580 million to refinance borrowings due in March.
The trust also said that it would drop the redevelopment of Market Street Car Park into a Grade A office and commercial building.
‘Including this club loan, CCT’s latest all-in cost of debt is estimated to fall well within 4.4 per cent, which is 80 basis points higher than its current 3.6 per cent,’ said DMG & Partners analyst Brandon Lee in a note yesterday.
Nevertheless, ‘the apparent availability of credit would serve to reinvigorate investors’ sagging belief in the credit-dependent Reit model’.
Supporting this view, another Reit analyst told BT: ‘Credit is available, especially to the better-sponsored Reits, but cost of funding is likely to go up.’
In a December report last year, DBS Vickers had estimated that the all-in cost of debt for Singapore Reits could rise from an average of 3.2 per cent to over 4 per cent.
CCT’s plan to abort the redevelopment of Market Street Car Park – estimated to cost $1 billion to $1.5 billion – also won Nomura Singapore’s support.
But the outlook for CCT is not entirely rosy yet. ‘We take a positive view of the refinancing… (but) this announcement is likely to be the last significant price catalyst for CCT this year as we expect more negative news flow on falling office rents and declining office space demand,’ said CIMB analyst Janice Ding.
Concerns over possible asset writedowns and the impact on gearing also continue to loom over the Reit sector.
As the property market falls, ‘a reduction of capital values would lead to a writedown in book values of S-Reits… This would translate to a higher gearing level for S-Reits,’ said DBS Vickers in its report.
CCT – DMG
Refinancing Fog Cleared
Near-term refinancing fog cleared. CapitaCommercial Trust (CCT) has secured a 3-yr term loan of S$580m from DBS, UOB, Standard Chartered and Bank of Tokyo-Mitsubishi UFJ to fully refinance its S$580m CMBS (a 5-yr & 4-tranche loan issued in Mar 04) due in Mar 09. Following this successful refinancing exercise, CCT’s next major loans will be due in 2010 (S$885m) and 2011 (S$633m). We reckon the remaining ST Loan of S$76m due this year should not pose too much of a problem, given CCT’s 3Q08 cash position of S$72.4m.
Higher funding costs implied. Including this club loan, CCT’s latest all-in cost of debt is estimated to fall well within 4.4%, which is 80 bps higher than its current 3.6%. However, we note that it is still reasonably more attractive than the 6.6% Cambridge Industrial Trust obtained a month ago for its S$390m refinancing facility. Given the ongoing credit squeeze, we are not surprised by the widening spreads, which have ranged between 200 – 400 bps since 2H08. Through a weighted average method of CCT’s current outstanding loans and interest rates, we estimate the club loan’s effective cost of debt to be in the range of 3.6 – 4.9%. Taking the 5-yr SOR (which has been quoted at an average of ~ 2% for the past one month) as the base rate, this implies a credit spread of 160 – 290 bps.
But positive news nonetheless, for CCT and S-REITs. As this term loan will only need to be secured by a single property (Capital Tower) as compared to seven for the CMBS, CCT now has S$2.8b worth of unencumbered assets, thus ratcheting up its financial flexibility in capital and balance sheet management. More importantly, we conjecture that this is very positive news for the S-REITs sector, as it goes to show that credit is still available (albeit at higher costs) if needed, provided the REIT has quality assets, a strong sponsor, good track record and management. Further, we draw comfort from the fact that capital raising has taken the form of straight debt instead of equity issuance, which could bring about potential dilutive effects.
Redevelopment of Market Street Car Park shelved. Given the credit squeeze and the importance of capital preservation, we side with management’s decision to shelve the redevelopment of Market Street Car Park into a commercial building. From our view, other viable reasons could be the uncertainty on the demand front given the global macroeconomic slowdown, coupled with the substantial supply of office space coming onstream in 2010 – 11.
Maintain NEUTRAL at lower target price of S$1.05. In our opinion, the apparent availability of credit would serve to reinvigorate investors’ sagging belief in the credit-dependent REIT model, at the same time assuaging their concerns over possible recapitalisation through other avenues such as distressed asset sales and rights offerings. For CCT, while we cannot deny the positive impact from the successful refinancing, we hold the view that in the near term, its performance will be vulnerable to the macroeconomic weakness given its direct proxy to the weakening domestic office sector. Our FY09 – 10 DPU estimates have now edged down by 3.2 – 6.3% to 10.86¢ (previously 11.60¢) and 11.07¢ (previously 11.44¢) respectively, in light of assuming a higher all-in funding costs of 4.4% (previously 4.0 – 4.2%). That say, the all-in funding cost could still edge lower as the interest cost for its S$650m term loan would be re-fixed in Jan 09. As such, we are lowering our DDM-pegged target price for CCT to S$1.05 (previously S$1.08), with cost of equity at 10.0%. Maintain NEUTRAL.