FSL – OCBC
Multiple layers of risk; maintain HOLD
3Q results as expected. First Ship Lease Trust (FSLT) announced that it generated US$23.7m of revenue in 3Q08, up 84.8% YoY, thanks to the acquisition of six vessels in the past year. The trust will distribute US$15.3m, or 3.05 US cents per share for 3Q08, up 9% QoQ and 36.8% YoY. This translates into an annualized distribution yield of 38%. The results were generally in line with our expectations.
Latest loan terms will impact DPU. While FSLT had so far secured debt financing on bullet repayment terms, lenders require the newest US$65m loan tranche to be amortized from Sep 2010 until the loan’s maturity in Apr 2012. We assume FSLT will have to use its cash income to pay down the loan from 2010 onwards. As FSLT is currently paying out 100% of its cash income, we estimate that DPU would fall 7.5% to 40% YoY over 2010-12 on the existing equity base and portfolio.
Loan-to-value at 175%. FSLT disclosed that the latest fair market value of its vessel portfolio as of mid-October is US$896m, or about 11% less than the original acquisition cost. This represents 175% of FSLT’s outstanding loan value of US$513m. One of the loan covenants mandates a minimum coverage of 145%. The fair market value of the current portfolio would have to fall about 20% to breach this covenant, triggering a technical default.
Multiple layers of risk. While a credit market breakdown has been averted, credit markets are still illiquid due to risk aversion arising from mass deleveraging and an imminent global recession. FSLT has a diversified portfolio with long lease terms, but it is not immune to its environment. Counterparty defaults may lead to a rate reduction or at worse, an idle ship. Asset values in turn are likely to depreciate as the industry turns. These risks are magnified by the use of leverage. If the loan-to-market value covenant is breached, lenders may demand that FSLT start using its cash income to pay down debt. Distributions could be reduced, or even cut to zero in such a scenario. We believe that recent price levels fully reflect the current risks and maintain our HOLD rating. Our fair value estimate of 43 S cents prices in a bear case scenario with a 25% fall in charter income, a 50% fall in terminal asset value and zero distributions from 2009 onwards (income is diverted to pay down debt).
FCOT, MI-REIT – BT
By EMILYN YAP
CREDIT rating agencies have turned more pessimistic on two real estate investment trusts (Reits) in Singapore: Frasers Commercial Trust (FCT) and MacarthurCook Industrial Reit (MI-Reit).
Standard & Poor’s (S&P) Ratings Services yesterday changed its CreditWatch status on BB-rated FCT from positive to developing. The revision arose from concerns over FCT’s debt of $70 million, which will be due on Nov 22.
‘FCT has yet to finalise its refinancing plans to the level of certainty we expected,’ said S&P credit analyst Wee Khim Loy.
FCT owes $70 million to the Commonwealth Bank of Australia, due next month. In addition, it owes the bank $400 million and $150 million, which will fall due in July and December 2009 respectively.
According to S&P, FCT has said it is making progress in obtaining firm commitment from a consortium of banks to refinance the debts. This is helped by the financial flexibility and satisfactory credit profile of Frasers Centrepoint Ltd (which owns 18.27 per cent of FCT) and Fraser and Neave Ltd (which owns Frasers Centrepoint).
S&P expects FCT to have firm committed refinancing arrangements ready by Oct 31. Otherwise, FCT’s rating may be placed on CreditWatch negative or lowered.
Separately, Moody’s Investors Service yesterday placed MI-Reit’s Baa3 corporate family rating on review for a possible downgrade.
With ‘dramatically changed market conditions’, MI-Reit is ‘likely to retain much greater asset and tenant concentration than is consistent with a Baa3 rating’, said Moody’s lead analyst for the trust, Kathleen Lee.
The review also recognised refinancing risks facing MI-Reit. The trust has 91 per cent of its total debt or $201 million falling due next April, which is not covered by available committed facilities.
Nonetheless, Moody’s noted that MI-Reit’s credit metrics still have reasonable headroom against its bank loan covenants. Its revenue stream is also supported by a relatively long- lease maturity profile, mitigating the effects of low asset diversification and moderate tenant concentration.
Moody’s review will focus on MI-Reit’s progress in securing committed financing for debt maturing in April next year. It will also consider management’s strategy in improving the asset portfolio and revenue streams in the next 1-2 years.
MapleTree – CIMB
Treading with care
• In line. 3Q08 DPU of 1.84cts was in line with Street and our expectations, growing 6.7% yoy, only because of a lower-than-expected number of units issued from a recent rights issue. YTD distributable profit of S$69.1m was below our expectation, at only 66% of our full-year forecast. However, this could be attributed to the lagged effect of contributions from announced acquisitions in the year. Gross revenue of S$46.0m was up 19.6% yoy, on contributions from acquisitions completed earlier.
• Completion of acquisition properties. As at 30 Sep 08, the acquisition of Northwest Logistics Park (Phases 1 & 2) and Kashiwa Centre was completed, leaving only two properties for completion in 4Q08. These are the G-force property in Malaysia and ISH Waigaoqiao property in China worth a total of S$45.8m.
• Refinancing worries over for now. MLT has refinanced about S$500m of its debt with proceeds from its rights issue. Total debt has been reduced from S$1,461m to S$1,023m with asset leverage falling to a healthy 36.9% from 56.3%. Debt maturity will not exceed 12% of its total debt over the next three years (Figure 1). MLT has also S$360m of committed working capital lines and term loans received at hand.
• Stable portfolio to provide rental resilience. As at 30 Sep 08, 64.1% of its leases had long tenures exceeding three years, and 35.9% had leases of three years or less. This combination should provide a broad and resilient rental base which is positive in the uncertain economic climate today.
• Changes in assumptions. We remove our earlier assumptions of new acquisitions of S$300m each for 2009-10 in view of the global financial uncertainties. We also remove the discount given for a share overhang from the rights issue. Additionally, we revise our assumption of 70% contribution from new acquisitions to 40% to account for the longer time lag between the announcement and actual contribution.
• Maintain Neutral; lower target price of S$0.60 (from S$0.85). After changes in our assumptions, our DPU estimates for FY08-10 decrease by 0.6-11.1%. Our DDM-derived target price (discount 9.6%) accordingly falls to S$0.60 from S$0.85. We believe that MLT’s rental resilience, healthy leverage and management’s conservatism after the rights issue will yield stable distribution to unitholders despite macroeconomic negatives. Maintain Neutral.
First Reit – BT
FIRST Real Estate Investment Trust (First Reit) yesterday reported net distributable income of $5.3 million for the third quarter ended Sept 30, 2008 – 12.4 per cent more than a year ago.
This was driven by a 7.4 per cent year-on-year hike in gross revenue to $7.6 million in Q308. Higher rentals from four Indonesian properties acquired in 2006 and rentals from another four local properties bought last year contributed to the revenue increase.
To be paid out on Nov 28, distribution per unit (DPU) for the healthcare trust in Q308 was 1.92 cents, 0.2 cent more than in the same period last year. This translates to an annualised DPU of 7.60 cents. Based on the closing price of 39.5 cents on Oct 17, the distribution yield stands at 19.2 per cent.
‘In today’s challenging economic environment around the world, we remain optimistic that the demand for quality healthcare will continue to grow,’ said Ronnie Tan, CEO of First Reit manager Bowsprit Capital Corporation Ltd.
‘Healthcare tends to be a resilient sector – everyone still has to look after his health in good or bad times. Moreover, the aging population and its related diseases will continue to provide opportunities for healthcare services.’
First Reit’s portfolio comprises eight properties in Singapore and Indonesia. According to the trust, revenues are derived from long- term leases which are denominated in Singapore dollars and have no provision for downward rental revisions.
Looking ahead, First Reit said that it will focus on improving the income-generating capacity of its existing healthcare properties. It will enhance assets and work with tenants to continually upgrade healthcare services.
While the trust continues to have headroom for more acquisitions (with debt-to-property valuation ratio standing at 15.6 per cent), Dr Tan said: ‘We will continue to exercise prudence in assessing the attractiveness, timing and sequence of future acquisitions.’
The manager expects First Reit to continue performing well for the rest of the financial year. The trust’s unit price ended 1.5 cents higher yesterday at 41.5 cents.
MapleTree – BT
MapletreeLog slashes leverage ratio to 36.9%
MAPLETREE Logistics Trust (MapletreeLog) cut its leverage ratio to 36.9 per cent in the third quarter of this year – down significantly from 56.3 per cent in Q2.
At Sept 30, its debt was down about 30 per cent – from $1.461 billion in the previous quarter – to $1.023 billion, with the help of a rights issue in July.
However, this had a dilution effect on its distribution per unit (DPU).
For Q3, MapletreeLog reported DPU of 1.84 cents, down 9.8 per cent quarter on quarter but up 7 per cent year on year.
Distributable income of $25.4 million was 33.1 per cent higher than a year earlier, while net property income was up 18.7 per cent to $40.2 million.
At the close of the rights issue offer period, only 59.9 per cent of valid acceptances were received. MapletreeLog’s sponsor Mapletree Investments took up the balance of the units and applied for excess rights, lifting the final demand tally to 130.7 per cent.
The rights issue, which was completed on Aug 22, saw 831.1 million new units issued, increasing the number of outstanding units from 1.108 billion to 1.939 billion. MapletreeLog raised $606.7 million from the issue – and used a significant portion to repay loans.
Of its current debt of $1.023 billion, $114 million is due to mature within 12 months. ‘We are comfortable with this,’ said Chua Tiow Chye, the chief executive of Reit manager Mapletree Logistics Trust Management.
Mr Chua also said the trust has committed bank lines and firm proposals that are twice the amount, as well as other uncommitted lines.
‘We are well positioned to weather the current challenging environment as there is no funding or refinancing risk,’ he said.
Weathering the ‘challenging environment’ means MapletreeLog will get off the acquisition trail for a while, especially as it would like to maintain a leverage ratio of 40-45 per cent.
It has announced two acquisitions with a book value of $46 million that are pending completion.
Mr Chua said that looking forward, growth will be at a more moderate pace of 3 per cent. ‘If we do acquisitions, it will be based on debt and equity,’ he said.
MapletreeLog’s less aggressive stance will also extend to its tenants. ‘With the downturn, we need to be more circumspect on how much we can push tenants on rental reversion,’ Mr Chua said, adding that the trust will look instead at ‘rental retention’.
Expenses increased 26.4 per cent year on year to $5.8 million in Q3, due to higher property taxes and land rents.
Still, rental reversion was about 30 per cent higher. The trust’s portfolio of 79 buildings, valued at $2.485 billion, also had an occupancy rate of 99 per cent.