SREIT – JPM
JPM Tips 3 S-REITS To Short Based On “Crash Tests”
JPMorgan tips three Singapore REITS, or S-REITs, to own based on “crash-test” scenarios. “The S-REITs to own have sustainable income streams, relatively conservative asset values and gearing levels at the lower end of the risk spectrum. General risk aversion toward the sector as well as the debt refinancing overhang has created the most obvious valuation anomalies when risk is taken into account,” analysts Christopher Gee and Joy Wang say in report. Expects the market-weighted long portfolio to post 31% total return through end-2008. Says likes A-REIT (A17U.SG) with target price of S$2.93, CapitaMall Trust (C38U.SG) with target price of S$3.67, CapitaCommercial Trust (C61U.SG) with target price of S$2.27; all three rated Overweight. At Thursday’s close, A-REIT ended down 3.9% at S$1.98, CapitaMall +0.3% at S$3.11, CapitaCommercial down 3.6% at S$1.90.
JPM Cuts K-REIT Tgt To S$1.34; Keeps Underweight
JPMorgan cuts K-REIT (K71U.SG) target price to S$1.34 from S$1.52 on prospect of more substantial dilution to equity holders resulting from REIT’s proposed rights issue. Keeps at Underweight. “The key upside risks to our price target for K-REIT could come from an unexpected improvement in the outlook for office property in Singapore, or confidence being restored in real estate capital markets, thus allowing K-REIT to get out of the vicious cycle it is in currently.”
JPM Downgrades CDL Hospitality To Underweight
JPMorgan downgrades CDL Hospitality Trust to Underweight from Overweight, cuts target price to S$1.51 from S$2.55. Cuts follow house running worst-case scenario through valuation models for all S-REITs under coverage. Says S-REITs with highest lease expiries in 2008-09 are most exposed to sudden deterioration in demand conditions if either rental rates or occupancy levels were to drop unexpectedly. Adds, hospitality-oriented S-REITs, such as CDL Hospitality Trust, are most acutely affected in this test.
AllCo – DBS
Re-financing issues laid to rest
Story: Allco REIT (Allco) share price was hit recently by a spate of negative news ranging from a Moody’s ratings downgrade to ‘Ba2’ in view of its high debt expiry and strategic review to a potential fire sale situation given its inability to obtain refinancing. However, Allco has allayed such unfounded fears by securing an in-principal approval for the extension of its S$550m loan facility expiring in July’08 to end Dec’09. In addition, the proposed strategic review raised concerns of a possible dilutive impact on earnings in the near term.
Point: We have previously maintained that re-financing should not pose much of a problem for Allco given its strong asset base of S$2bn, (of which c. 50% is made up of its Singapore properties) but at a higher price of c. 200 bps above its current rates. The group is in the process of divesting its stake in AWPF and is looking to unlock gains from its Central Park in Perth. As such, we have further adjusted FY08 and FY09 DPU to 6.6cts and 6.8cts to reflect the absence of AWPF. A recent re-composition of its board to include a majority of independent directors is a positive signal to investors as a step in the right direction for good corporate governance and should be viewed positively on a operational, asset divestment and future reinvestment standpoint.
Relevance: With re-financing issues put to rest, a re-rating of Allco would hinge on further newsflow with regards to i) the successful execution of its re-investment plans and organic growth strategies to drive DPU growth which will be partially driven by strong rental reversions from Keypoint offsetting the loss of the income from API and distribution income from AWPF, ii) clarity on the positioning of Allco REIT given API and AFG’s restructuring activities. We maintain BUY on Allco with revised TP of S$1.23 based on a 20% discount to its DCF backed price of S$1.54 on the premise of uncertainties arising from the ongoing restructuring activities at its parent level.
AllCo – Nomura
Our view
Allco REIT has successfully refinanced its S$550mn debt due in July 2008. With the market’s misplaced view of refinancing risk and expectations of a “fire sale” of its Australian assets expunged, we see Allco REIT pursuing an orderly review of its portfolio while the market re-focuses on the REIT’s inherent value. STRONG BUY.
Anchor themes
While office supply will remain tight over 2008F, we expect office rents to peak in 1H09F, before seeing cyclical declines of 15.2% in 2010F and 18.0% in 2011F, given increased new office supply.
Strong rental reversions are likely to underpin REIT cashflows. That said, rising concerns over the ability to refinance debt has seen REITs trade below book value. In such an environment, investors need to focus on underlying asset values, with REITs with well-located assets to benefit from rising expectations of M&A activity.
CMT – UOBKH
Proactive enhancements
CapitaMall Trust (CMT) invests in quality income-producing real estate used for retail purposes. It owns 13 retail malls, which are strategically located in the suburban areas and Downtown Core. CMT is the largest retail REIT with market share of 13% for private retail stock in Singapore. CMT has a 20% stake in CapitaRetail China Trust (CRCT), a China-based retail REIT listed on Singapore Exchange. CMT was assigned corporate rating of A with a stable outlook by Moody’s Investor Services. CMT is the first and largest REIT in Singapore.
Creating office blocks at Funan DigitaLife and Tampines Mall. CMT has received provisional permission to utilised unused gross floor area (GFA) of 385,500sf for Funan DigitaLife, which has only utilised 3.8 of its allowable plot ratio of 7.0. The unused GFA will be utilised to build a 4-storey office block with estimated net lettable area (NLA) of 277,630sf on top of the existing mall. NLA for retail will also increase by 14% from 296,601sf to 338,360sf. CMT was also granted an increase in plot ratio for Tampines Mall from 3.5 to 4.2. The additional GFA of 95,000sf will be utilised to build an office block on top of the existing mall. We expect construction to be completed by 2H 2010 and have factored in contributions from the two office blocks starting 1Q 2011.
Enhancing newly acquired properties. CMT submitted written permission to increase plot ratio for Jurong Entertainment Centre from 1.85 to 3.0, almost doubling NLA to 209,700sf. The asset enhancement initiative involves construction of an Olympic-sized ice skating ring. CMT has applied for the ice skating ring to be considered as civic and community uses, which provides
additional floor space of 35,000sf if approved. At Lot One, CMT will decant space occupied by National Library for construction of a 4-storey 16,500sf retail extension housing 50 new shops. Level 1 of the retail extension will be connected to Chua Chu Kang MRT station when completed in 4Q08. Sembawang Shopping Centre is being redeveloped. CMT will decant 42,610sf of residential area and shift more space into high yielding basement, level 1 and level 2. The new mall with NLA of 128,413sf will be completed in 4Q08.
No risk from refinancing. CMT has refinanced S$312.8m bonds due in Feb 08 with S$320m term loan due in Aug 09. Management plans to fix the interest rate to achieve all-in rate of not more than 3.3%, lower than all-in rate of 4.3% for the bonds. There is a smaller S$150m fixed rate note due to Dec 08. Current gearing is 35.3% after raising S$345.9m in placement to finance acquisition of remaining 72.8% stake in CapitaRetail Singapore, owner of suburban malls Lot One Shoppers’ Mall, Bukit Panjang Plaza and Rivervale Mall in Nov 07. CMT provides FY08 distribution yield of 4.51%, a healthy spread of 2.35% over 10-year Singapore government bond yield at 2.16%. Our target price is S$3.83 based on 2-stage dividend discount model.
KREIT – BT
K-Reit feeling effects of financial crunch
K-REIT Asia is going to find it a bit tough to raise the money it needs. The real estate investment trust (Reit) is looking to raise up to $700 million in a rights issue, in part to repay some of the $942 million bridging loan it took from Keppel Corp when it purchased its one-third stake in One Raffles Quay last year. The trust indicated in a recent circular to shareholders that it intends to price the new units at up to 20 per cent discount to the market price. However, K-Reit is seeking to issue only 420 million new shares. The limit is in place to ensure that at least 10 per cent of the total issued units are held by the public after the rights issue.
Keppel Corp and sponsor Keppel Land, who together own 72.7 per cent of K-Reit, have both given irrevocable undertakings to take up their respective allocations of the rights units. Both companies will also make applications for excess rights units that are not subscribed – essentially underwriting the fund-raising exercise. The 420 million share cap ensures that in the worst-case scenario where no other shareholder subscribes to the rights units, KepCorp and KepLand will still end up with less than 90 per cent – allowing K-Reit to avoid delisting.
While the circular helps to allay some concerns in the market with regard to potential delisting and consolidation by parent KepLand, there is a shortfall between how much the trust is hoping to raise (up to $700 million) and how much it could actually raise from a rights issue of 420 million shares.
In the circular, K-Reit used $1.20 (20 per cent off the market price of $1.50) for illustrative purpose. Assuming a rights issue of three new units for every two existing units, K-Reit will be issuing 372.1 million rights units and raising about $446.5 million in gross proceeds. K-Reit will come close to raising $700 million only in the highly unlikely scenario that it issues 413.5 million rights units on a five-for-three basis at $1.68 apiece, which will give it gross proceeds of $694.6 million.
For this to happen, the prevailing market price will have to be $2.10 – assuming a rights issue price which is at a 20 per cent discount to the market price.
K-Reit’s stock closed at $1.47 last Thursday, the last day of trading before the extended weekend break. Analysts believe that it is unlikely that the stock price will cross the $2.00 mark over the next few months amid a generally sluggish market. K-Reit said in its circular that the entire exercise is expected to be completed no later than mid-May.
Looking at the expected shortfall between what the Reit hopes to raise and what it probably could raise, it wouldn’t be wrong to assume that K-Reit might have to look at additional sources of funding. However, it is unclear what K-Reit plans to do if the rights issue falls short of the amount it needs. K-Reit said in its circular that, given current market conditions, a rights issue is the ‘most appropriate’ method of raising equity.
Raising funds from other sources will undoubtedly be hard in a squeezed credit market. Industry players have pointed out that the two upcoming integrated resorts (IRs) have mopped up much of the credit available in the market, making it much harder for smaller players to get loans and refinance debt. Also interesting is the fact that K-Reit seems to be looking to parent companies KepCorp and KepLand to tide it over the current financial crunch. If minority shareholders choose not to take up their rights units, KepCorp and KepLand are ready to step in, even though this might mean that K-Reit could suffer from poor liquidity and low trading volumes in the future.
Buying up all unwanted units will also raise KepLand’s stake in K-Reit. KepLand has said it intends to go asset light by divesting all its investment properties. By increasing its stake in the Reit, it is doing the opposite. Perhaps then it is time for KepLand to reconsider plans to keep K-Reit listed; going private will probably allow K-Reit to raise funds more easily in a tight credit market.
As for K-Reit, the rights issue will lower its gearing from the present 53.9 per cent (which is approaching the maximum allowable limit of 60 per cent) to 32.7 per cent – assuming the trust issues 372.1 million rights units at $1.20 each. But raising funds for future acquisitions may continue to be a problem if the Reit has to go back to the market once again.