Suntec – DBS
Making hay while the sun shines
Story: We believe Suntec’s depressed share price performance in recent months could be due to concerns about the refinancing of its bridging loan that is due Oct 2008 and is already priced in. Its current yields of 6.2- 6.7% are already higher than industry peers’ 5.3-5.8%. To put things into perspective, funding is unlikely to be a problem given its “Baa1” rating and low gearing, the
S$421m to be refinanced represents only 23% of total debt, and any incremental funding costs would have a marginal impact on total average interest cost and earnings.
Point: More importantly, investors should focus on the strong recurrent income stream from the group’s properties. Positive office rental reversions thanks to the sharp surge in rentals in the past 12 months should underpin earnings growth. There is further room for upward earnings revision when the group rejuvenates Park Mall, including developing two adjoining land parcels it bought recently. With gearing at 31%, funding these activities should not stretch its balance sheet significantly.
Relevance: The investment case for Suntec is its strong organic growth amid a positive office rental reversion cycle as well as attractive FY08F and FY09F yields of 6.2-6.7%. There is also room for earnings expansion as Park Mall has not been factored into our estimates. At the current price, valuations are undemanding vis-à-vis its sector peers. Our price target of S$1.98 is adjusted to reflect higher funding cost for the bridging loan, higher terminal cap rate of
4.5% (vs 4% previously), and dilution from CB conversion. Maintain Buy.
KREIT – UOBKH
Clarity on the rights issue
8-for-5 rights issue at S$1.39/unit. K-REIT Asia has finalised detailed for the proposed renounceable rights issue. The rights ratio is 8-for-5 (equivalent to 16-for-10). The rights units are priced at S$1.39 each, representing 8.3% discount to prevailing market price. Keppel Corporation and sponsor Keppel Land, who own 72.7% of K-REIT in aggregate, have given irrevocable undertaking to take up their respective allocations of rights units.
K-REIT will raise gross proceeds of S$551.7m (higher than S$446.5m based on our previous assumption of 3-for-2 rights issue at S$1.20), which will be utilised to repay bridging loan from Kephinance Investment, a subsidiary of Keppel Corporation. K-REIT will seek refinancing for the balance of bridging loan of S$391.3m due in Sep 08 with long-term debt. We estimate gearing will be reduced from 57.3% to 29.4% after completion of the rights issue. The rights issue will reduce book NAV from S$3.78 to S$2.26 per share.
Benefiting from positive rent reversions. K-REIT is well positioned to ride the upswing in office rentals with 44.5% of net lettable area (NLA) due for expiry and another 21.9% of NLA due for rent review between 2008 and 2010. Occupancy is 100% for Prudential Tower and Bugis Junction Tower and 99.8% for Keppel Towers & GE Tower. Current asking price is S$15 to S$18psf pm for Prudential Tower and beyond S$10psf pm for Bugis Junction Tower, Keppel Towers and GE Tower. Average portfolio gross rental was only S$4.65psf pm (excluding contribution from One Raffles Quay) in 4Q07. There is significant room for positive rental reversion as leases are renewed at higher rental rates.
K-REIT provides FY08 distribution yield of 7.55%, a whopping spread of 5.24% over 10-year Singapore government bond yield at 2.31%. Our target price is S$1.99 based on two-stage dividend discount model with distribution per unit (DPU) diluted for rights issue starting 3Q08.
CCT – BT
CCT gets option to buy 1 George Street for $1.17b
Deal comes with income support from seller CapitaLand till 2013
Big office investment sales deals have not ground to a complete halt. CapitaCommercial Trust announced yesterday that it has an option from sponsor CapitaLand to buy 1 George Street for $1.165 billion or $2,600 psf of net lettable area, showing that income support may be the way to make acquisitions palatable to Reits.
This is especially so when it comes to office blocks with a substantial portion of leases signed a few years ago when rentals were weak. Never mind that income support for such deals may once have been frowned upon.
The deal for 1 George Street involves a five-year rental guarantee, with seller CapitaLand ensuring a minimum net property income of $49.5 million per annum, translating to a net property yield of 4.25 per cent per annum on the purchase price till 2013.
This means that CapitaLand will top up any shortfall in net property income to ensure that the $49.5 million floor is achieved every year for the period. The acquisition will be funded entirely through debt; there will be no equity raising.
1 George Street is a 23-storey Grade A commercial building that was completed three years ago. It is fully leased and its tenants include The Royal Bank of Scotland, WongPartnership and Lloyd’s of London (Asia).)
Most of the leases were signed around 2004/2005, when office rents were weak, which is why CapitaLand is providing yield protection for the asset’s acquisition by CCT. The $49.5 million annual minimum net property income implies gross monthly rentals of $10.50 psf. Given that the current average market rental in the Raffles Place area is about $16.30 psf, this spells upside for 1 George St as leases are renewed, CapitaCommercial Trust Management CEO Lynette Leong said.
Leases for about 50 per cent of the net lettable area in the property will come up for renewal in 2008 and 2009. Recently, a new lease for a small space in the building was signed for $19 psf, Ms Leong revealed.
‘With the yield-protection given by CapitaLand, CCT will be able to attain minimum returns from this asset. The five-year yield protection eliminates all the downside risk and whatever upside there is from the asset, it will all flow through to CCT. That’s a pretty compelling offer,’ Ms Leong said.
The deal drew an inevitable comparison with K-Reit Asia’s acquisition of a one-third stake in One Raffles Quay from its parent, Keppel Land. The two deals have similarities – they involve income support and are at prices seen as lower than market.
However, Ms Leong, at a media and analyst briefing yesterday, argued that there were important differences between the two deals.
For one, CCT will get 100 per cent direct ownership of 1 George Street, and the asset will enjoy full tax transparency as a result of being owned by a Reit. This means that CCT would not have to pay tax on income from this asset, unlike K-Reit Asia’s acquisition of a one-third stake in ORQ which is being effected through the purchase of shares in the company that owns ORQ. Hence, the income that K-Reit will receive from the asset would be net of 18 per cent corporate tax.
Another difference is that KepLand will provide income support only till 2011 whereas CapitaLand is doing so till 2013, beyond the 2011/2012 timeframe when a spike in Grade A office space is expected.
CapitaLand Commercial CEO Wen Khai Meng explained that the reason for ‘providing the floor for five years is to address the view that there will be a huge supply in 2011/2012’.
Another difference: CCT has secured 100 per cent committed debt funding for its proposed acquisition of 1 George Street and will not have any equity raising exercise. K-Reit, on the other hand, is seeking unitholders’ approval for a rights issue to help partly refinance a bridging loan taken from Keppel Corp to complete the acquisition of the one-third stake in ORQ.
The $2,600 psf of net lettable area at which CapitaLand is proposing to sell 1 George St to CCT is lower than the $2,700 psf at which the asset was valued at in a deal last August when CapitaLand bought the remaining half share in the asset to gain full ownership of the award-winning property.
CapitaLand expects to book a gain of about $47.1 million after taking into account the yield protection and the company’s 30.5 per cent interest in CCT.
Mr Wen said that the group had to pay $2,700 psf in last August’s deal for control premium. ‘We feel $2,600 psf, plus income support, is a good deal given that CapitaLand still has about 30 per cent stake in CCT and given that we are the manager of the Reit and have a certain responsibility to help our sponsored-Reit to grow.
‘I personally dislike income support, because it conjures up all sorts of wrong impressions. But it would be challenging for a Reit to justify non-yield accretion for the first few years in an acquisition. Based on current rental rates at 1 George Street, the yield would be below 4.25 per cent, but we are seeing very strong rental reversion,’ he said
‘The yield-protection arrangement of 4.25 per cent pa for five years makes the acquisition compelling, given the current blended yield of CCT’s Grade A office assets is 3.2 per cent,’ Ms Leong said.
Even with 100 per cent debt funding for the acquisition, CCT’s gearing will rise to only about 40 per cent from the current 27 per cent, the trust’s manager highlighted.
The deal will be subject to CCT unitholders’ approval at an extraordinary general meeting to be held by June 30, as it is deemed an interested party transaction. CapitaLand is not allowed to vote. The acquisition is slated for completion by end-July.
AREIT – BT
$484m gain in value of A-Reit properties
The trust attributes the 14.2% surge to improving industrial property market
ASCENDAS Real Estate Investment Trust (A-Reit) said yesterday the book value of its investment properties rose $483.6 million – about 14.2 per cent – during the latest annual valuation exercise.
A-Reit attributed the increase – from the previous book value at Feb 29, 2008 – to an improving industrial property market, which has led to higher occupancy and higher rents across its portfolio.
The latest valuations will be reflected in A-Reit’s financial statements for the year ending March 31, 2008, the trust said.
Valuations were revised upwards across all sectors, with the business & science parks sector registering the largest appreciation of $244.4 million.
Properties in the high-tech industrial sector appreciated $116.5 million, while those in the light industrial sector (including flatted factories) and logistics & distribution centres registered gains of $60.2 million and $63.2 million respectively.
A-Reit’s third development property – HansaPoint@CBP, which was completed in January 2008 – appreciated by $43.2 million, or 166 per cent, from its development cost. Post-revaluation, the annualised net property income yield of the property portfolio is about 6.4 per cent, which is in line with the prevailing market, A-Reit said.
The adjusted net asset value, based on the Dec 31, 2007 balance sheet, will be $1.85 per unit.
The valuations were done by DTZ Debenham Tie Leung, CB Richard Ellis, Chesterton and Jones Lang LaSalle, A-Reit said.
The trust said the increases in valuation are testament to the ‘manager’s proactive asset management strategies in maintaining high occupancy rates and the manager’s ability to deliver value to unit-holders by pursuing attractive acquisitions and development opportunities while maintaining a disciplined approach to ensure risks are mitigated’.
A-Reit’s shares closed nine cents higher at $2.29 yesterday. The stock price has shed 6.9 per cent since the start of the year.