FSL – OCBC
In Limbo
Good 1Q results. First Ship Lease Trust (FSLT) posted a 10% QoQ gain in 1Q revenue to US$16.6m as the trust’s November acquisitions made their first full-quarter contribution to income. It is paying out 2.59 US cents as DPU, up 7% QoQ and 21.6% over the base DPU promised at listing. We hesitate to call that a 13% return though, as a significant component of that DPU is a depreciation payout which is a return of capital rather than a return on capital. This is reflected in the 4% QoQ decline in NAV to 88 US cents thanks to FSLT’s aggressive depreciation strategy.
Acquires two crude oil tankers. FSLT also announced the acquisition of two crude oil tankers for US$140m. Bought from Turkey-based Geden Lines, the tankers will be chartered back to them for ten years, with early buyout options attached. The charter rate will be on a floating rate basis, linked to the US$ Libor, and acting as a natural hedge for FSLT’s debt. Basically, instead of the typical shipping trust M.O. of taking on a fixed charter rate and then fixing debt using an interest rate swap, FSLT has eliminated the extra swap counterparty. FSLT has said that the acquisitions will add US$0.16 to 2Q DPU and US$0.28 to every full quarter thereafter. The transaction highlights FSLT’s flexibility in moving between different shipping sub-sectors.
Half-way through 2008 target. With this transaction, FSLT has exhausted its credit facility from IPO (3-month US$ Libor + 100 bps) and moved on to its new facility (Libor + 120 bps). In terms of its acquisition target for the year, FSLT has US$160m – or to be conservative, the US$150m remaining in its debt facility – left to burn. Deal flow is not a problem as management says the credit tumult has churned up some choice acquisitions. The problem is what happens once FSLT hits the 1x debt-to-equity point. Because of its aggressive payout strategy, FSLT is on a relatively shorter leash (which we like) in terms of debt. The plan has always been to issue equity once that 1x target is hit. For now, FSLT is saying it will not issue equity at 12% yields – too dilutive. But how quickly the sector will re-rate to more attractive levels is still an unknown. For now, we’re reducing our fair value estimate to S$1.20 to reflect the weakening US dollar. We will review our ratings on the asset class as a whole after Rickmers Maritime posts its results. BUY.
MapleTree – CIMB
Respite from debt woes
• 1Q08 results in line on traditionally quiet quarter. Distribution income of S$21.0m was in line with our expectation (23% of our full-year forecast) on a traditionally quiet quarter. However, DPU of 1.9cts came in above Street (27% of full-year) and our estimates (28%) as our assumption of an increased share base from equity fund-raising this year has not yet happened. Gross revenue of S$42.6m was up 48% yoy on contributions from 23 properties acquired in 2007. This was in line with our expectation (24% of full-year) due to a traditionally quieter first quarter; contributions from new acquisitions usually come in in the second half of the year (1Q07: 21% of full-year DPU, 1Q06: 20% of full-year).
• Short-term debt refinanced, cost of debt lowered. Management announced the conversion of S$155m of borrowings due in 2008 into term loans and in-principle approval from banks to convert another S$300m. After conversion, MLT’s shortterm debt of S$476m (35% of total debt of S$1.36bn) should be reduced to 2% of its total debt. Weighted average interest rates also declined from 3.3% p.a. in 4Q07 to 2.9% p.a. in 1Q08, as interest rates for major currencies dropped sharply during the quarter. With this refinancing, Moody’s confirmed MLT’s original Baa2 rating after an earlier review for possible downgrade.
• Sale of non-core properties under consideration. As at 31 Mar 08, MLT’s asset leverage ratio was 54.7%, up slightly from 53.4% a year ago. This was largely due to borrowings drawn down to fund committed acquisitions in 1Q08. Management is considering the sale of some non-core assets to lower its gearing, which is pushing near the regulatory limit of 60%.
• Maintain Outperform and target price of S$1.36. Our DDM-derived target price (discount 6.9%) stays at S$1.36, with no changes in our estimates. Although gearing levels remain high and equity-raising looks difficult in 1H08, we draw confidence from: 1) management’s ability to refinance its significant short-term debt; 2) MLT’s quality asset portfolio; and 3) the positive outlook for the Asian logistics industry. Maintain Outperform.
FrasersCT – UOBKH
Rental Reversion Higher Than Expected
Strong rental reversion at Causeway Point. Frasers Centrepoint Trust (FCT) reported strong rental reversion for Causeway Point in its 2QFY08 results. Revenue contribution from its largest mall Causeway Point gained 11% yoy to S$14.6m, benefitting from strong rental reversion and higher turnover rent. 20,816sf of retail space at Causeway Point representing 5% of total net lettable area (NLA) was renewed at 16% above preceding rental rates in 2QFY08. FCT has also increased the number of leases with turnover rents from 16% in 2QFY07 to 62% in 2QFY08. Stronger performance at Causeway Point has offset lower occupancy at Northpoint due to ongoing asset enhancement initiative (AEI), helping FCT generate 10.3% yoy increase in revenue to S$21.6m and a 16.8% yoy increase in distributable income to S$12m in 2QFY08.
Ready pipeline of acquisitions. FCT has a ready pipeline of acquisitions that will double NLA to more than 1.2m sf when fully completed. It has entered into a put and call option agreement with sponsor Frasers Centrepoint Limited for the purchase of Northpoint 2 at between S$139.5m and S$170.5m. Northpoint 2 is 70% completed and is expected to obtain a temporary occupation permit by Aug 08. 68% of the NLA has been committed and Northpoint 2 is on schedule to be injected into FCT in 1QFY09. We expect YewTee Point and Bedok Mall with NLA of 80,000sf each to be injected in 3QFY09 and 2QFY11 respectively. We estimate the three new malls to contribute 28.6% of total revenue in FY12.
Upgrade to BUY. FCT focuses on suburban retail malls, which provide defensive qualities. We have raised our FY08 DPU forecast by 15% to 7.7 cents to factor in strong rental reversion from Causeway Point. FCT provides FY08 distribution yield of 6.4%. Our target price for FCT is S$1.66 based on the two-stage dividend discount model. We have upgraded our recommendation from HOLD to BUY as our new target price provides upside of 37.2%.
CCT – BT
Is CCT getting 1 George Street too easily?
CAPITACOMMERCIAL Trust’s (CCT) $1.165 billion proposed acquisition of 1 George Street from CapitaLand announced last month will be put to a vote of unitholders before June 30 – with CapitaLand abstaining.
By all accounts, CCT unitholders will approve the acquisition. After all, it’s not easy for Singapore real estate investment trusts (Reits) to grow through acquisitions these days. On the one hand, tight credit market conditions make it difficult to get debt funding while on the other, Reits are trading at relatively high distribution yields – because of the general stock market slide – making it difficult to make yield-accretive acquisitions if they need to raise equity to foot the bill.
CCT, however, is more fortunate. It won’t be issuing any equity and has secured full debt funding for its proposed purchase of 1 George Street; and even then, its gearing will rise to only about 40 per cent from 27 per cent now.
However, CapitaLand shareholders will not get to vote on the sale of 1 George Street to CCT because the size of the transaction does not cross any of the thresholds that would trigger a mandatory shareholder vote. Put simply, although the transaction is big, it’s small relative to CapitaLand’s size.
Some parties are complaining that CapitaLand should have conducted an open competition to ensure that it obtained the highest price for the award-winning property.
CapitaLand may have gotten more than the $1.165 billion or $2,600 per square foot (psf) of net lettable area that it will get from CCT. A competition would have been more transparent, especially since the deal with CCT involves an income-support element. CapitaLand will top up any shortfall to ensure a minimum annual net property income of $49.5 million till 2013.
Bidding competition
Another reason CapitaLand should have had a bidding competition is because the headline price of $2,600 psf is lower than the $2,700 psf at which the asset was valued in a deal last August when CapitaLand bought the remaining half-share in the property – notwithstanding that confidence in the office market is weaker today and that the higher price earlier reflected control premium.
From the viewpoint of CapitaLand shareholders, the group could make a bigger profit from selling 1 George Street to external parties than the $47.1 million it expects to book from the proposed deal with CCT. (This amount is after accounting for the five-year income guarantee and CapitaLand’s 30.5 per cent stake in CCT.)
Last month, when the deal was announced, CapitaLand Commercial CEO Wen Khai Meng said that the group has a ‘certain responsibility to help our sponsored-Reit to grow’. CapitaLand is aiming for a balanced strategy on its office portfolio by allocating part of it for outright divestment to reap capital gains – as it has done for Temasek Tower, Hitachi Tower and Chevron House – and keeping a core portfolio of office properties for recurring income by divesting them to its sponsored Reits, which provide a tax-efficient structure for holding income-producing assets. Not only does CapitaLand retain a sponsor’s stake in such Reits, it earns fees from managing the Reit – forming an integral part of its successful property fund management model. This strategy is a key attraction to CapitaLand as a stock.
Move is a departure
However, critics also note that CapitaLand’s decision to offer 1 George Street directly to CCT marks a departure of what it has done for its divestments of other Singapore office assets in the past year or so. Temasek Tower, Hitachi Tower and Chevron House were sold through a competitive bidding process to external parties.
In the case of Temasek Tower which was sold in March 2007, CapitaLand Group president and CEO Liew Mun Leong subsequently revealed that CCT had made an offer for Temasek Tower, but its price was below the $1.04 billion offered by the eventual buyer, Macquarie Global Property Advisors Group. ‘Its (CCT’s offer) was below Macquarie’s. We have no reason to give them. That shows we are very transparent. We are not inbreeding. Fair game,’ Mr Liew had said.
Why was 1 George Street different? One point to note is that CapitaLand owned Temasek Tower, Hitachi Tower and Chevron House jointly with other parties, so it could not simply offer these office buildings to CCT on a platter; CCT would have had to compete with other bidders if it had wanted to buy these assets. 1 George Street is also a newer, higher-grade office block compared with the three sold earlier and hence a more desirable asset to CCT.
Perhaps CapitaLand may wish to make clear the criteria it uses in deciding when to offer assets directly to one of its sponsored Reits and when to have an open competition. Otherwise, some big-name overseas property investors may feel that there’s a lack of transparency and a level playing field.
Of course, one could also argue that such investors may have to accept that Reits will always get the first bite when it comes to its sponsor’s assets. After all, that’s what it means to have a long-term sponsor committed to ensuring the Reit’s growth.
FSL – BT
First Ship Lease Trust to pay out US$12.95m in Q1
DIVERSIFIED shipping trust First Ship Lease (FSL) Trust has announced a distribution of US$12.95 million for the first quarter ended March 31, 2008 – working out to 2.59 US cents per unit.
There were no comparative figures for the previous corresponding period as FSL was constituted and listed in March last year. Compared with the preceding fourth quarter’s 2.42 US cents, the Q1 DPU of 2.59 US cents was 7 per cent higher. This came as FSL added ships to its portfolio.
Q1 revenue rose 10.1 per cent from Q4 to US$16.6 million as the impact of the purchase and concurrent leaseback of two product tankers from Groda Shipping and Transportation in November was fully realised during the quarter.
The distribution translates into an annualised DPU of 10.36 US cents, 7 per cent higher than the annualised DPU of 9.68 US cents in the preceding quarter. Based on FSL Trust’s closing unit price of S$1.10 on April 22, this translates into a distribution yield of 12.7 per cent per annum.
Trustee manager FSL Trust Management (FSLTM) said it will continue to pursue acquisition opportunities as part of its strategy to grow the trust. To support this effort, it has broadened the transaction origination platform by hiring a head of sales (East of Suez), who is joining the management team next month.
FSLTM is confident of achieving the previously announced acquisition target of US$300 million for financial year 2008. In fact, with the recent US$140 million Geden Lines transaction involving two Aframax class crude oil tankers announced earlier this week, about 50 per cent of the acquisition target has already been achieved.
‘In view of the greater difficulty in raising conventional bank financing in the current tight credit environment, ship operators are turning increasingly to alternative financing solutions such as leasing. We are bullish in meeting the balance of the acquisition target of US$160 million over the next eight months of this year,’ said FSLTM chief executive officer Philip Clausius.
Funding for these future acquisitions will be from the newly secured US$200 million credit facility, of which about US$150 million remains undrawn.