AllCo – Phillip
Refinancing Concern Addressed
Allco REIT announced it had received extension on the maturity date of S$550 million of its debt, which was due in July 2008 to 31 Dec 2009. The balance of S$70 million will be repaid with the proceeds from the redemption of AWPF. With the announcement, we believe the clout over refinancing worries has been dispelled and thus will not lead to any force-sale of its properties.
Earlier, Moody’s downgraded Allco’s credit rating for the second time within a span of two months. Allco’s credit rating was downgraded from Baa3 to Ba1 on 31st Jan 2008 and was further downgraded one level to Ba2 on 18 Mar 2008. The latest revision centers on concerns of Allco refinancing progress as well as outcome of the possible divestment undertaken by Allco REIT of its Australian properties.
With regard to the strategic review, the manager of Allco Commercial REIT announced that it is investigating a potential divestment of its Australian properties. The decision stems from the strong Australian property market that has resulted in substantial capital gains as well as to redeploy capital to higher growth assets.
AWPF has stated its intention to dispose of its entire portfolio and Allco REIT expects to receive its proportionate share in AWPF in the 3rd quarter of 2008.
With the latest guidance from Allco, we believe a likely scenario would be Allco manages to refinance at a cost of 4%., while keeping both the Central Park and Centrelink properties and AWPF will be fully redeemed.
Scenario Analysis
We conducted a scenario analysis study of possible outcomes from Allco’s refinancing talk as well as the strategic review on the impact of DPU.
Scenario 1: AWPF fully redeemed, sold off Central Park to realise capital gain. Proceeds from sale used to reduce debt, gearing reduced to 26%.
Scenario 2: Proceeds from AWPF redemption reduces debt marginally to 42%
Valuation and recommendation. The downgrading of Allco’s credit rating has hurt the dividend payout, although fundamentally we believe Allco’s portfolio will continue to do well. Allco is a victim of bad sentiment surrounding the sector that resulted in a tight credit market making refinancing more difficult and most costly. The double credit rating downgrade stems from rating agencies taking a more cautious stance in their methodology after the sub-prime fiasco. Our analysis study indicates that under different assumptions, FY08F DPU ranges from 5.44 cents to 7.35 cents. This translates to a yield range of 7.8%-8.7%. We note the contrast to the 6.73 cents paid out in FY07 and represents a yield erosion of 19.1% in the worst case while a yield accretion of 9.2% in the best case. Fair value estimation ranges from S$1.00 to S$1.14. Our base case valuation is premised on the assumptions that Allco will refinance at 4%, which represents a margin of 200 basis points over SIBOR and Allco will retain the Central Park and Centrelink buildings. Fair value is lowered from S$1.21 to S$1.07. Maintain Buy.
Office REITs – UOBKH
Leveraging on positive rental reversion
Blessed are the office landlords. Rentals for prime office space within Raffles Place and Marina Centre has shoot up from S$8.60 in 1Q07 to S$15.00psf pm in 4Q07. Rentals for Grade A office space is even higher at S$17.15psf pm in 4Q07 (source: CB Richard Ellis). Rentals surged as tenants chased after limited pockets of vacant space within the Central Business District. There is strong demand from financial institutions (wealth management, hedge funds, insurers and commercial banks) and oil & gas companies. Average occupancy for Grade A office space at Raffles Place, Shenton Way and Marina/City Hall micro-markets reach unprecedented levels of 99%, 97.5% and 99.6% respectively (source: Colliers International).
Supply of office space is expected to remain constrained in 2008. Only 959,000sf of new office space will come on stream, the majority in fringe suburban locations. According to CB Richard Ellis, rentals for Grade A office space could average S$19.00psf pm by end-2008, a further increase of 10.8%.
New supply well taken up. The strength of the leasing market can be seen from healthy take ups at Marina Bay Financial Centre (MBFC). Phase 1 with 1.6m sf and Phase 2 with 1.3m sf of office space will be completed in 2010 and 2012. Both phases are more than 50% pre-committed by major financial institutions. Standard Chartered has signed a 12-year lease for 508,300sf at MBFC Phase 1 with option to extend for another eight years. DBS Bank has signed a 12-year lease for 700,000sf occupying 22 floors at MBFC Phase 2.
Capital values supported by keen foreign interest. Investors’ interest in office properties remains strong, especially from foreign funds. Foreign investors accounted for the majority of large transactions in 2H 2007. Capital value for prime office space in Raffles Place is estimated at 3,100psf, an increase of 6.9% qoq and 106.7% yoy (source: CB Richard Ellis).
Office REITs – OVER WEIGHT. We favour the office market due to positive rental reversion and limited supply coming on stream in 2008 and 2009.
CapitaCommercial Trust (BUY/S$1.90/Target: S$2.45). CCT is well positioned to benefit from positive rental reversion as 56.9% of its leases for office space are up for renewal in 2008 and 2009, when supply coming on stream is fairly limited. It will redevelop Market Street Car Park into a premium Grade A office tower with estimated net lettable area of 680,000sf. CCT’s gearing is low at 24% in Dec 07 and has secured funding for refinancing of short-term borrowings and the acquisition of Wilkie Edge.
K-REIT Asia (BUY/S$1.47/Target: S$1.96). K-REIT Asia has proposed a renounceable rights issue of up to 420m units priced at a discount of up to 20% to the prevailing market price. Keppel Corporation and sponsor Keppel Land own 72.7% of K-REIT in aggregate and have given irrevocable undertaking to take up their respective allocations of rights units. We believe the stock is oversold. Our target price for K-REIT is S$1.96 assuming 372.1m new units were issued at S$1.20 each in a 3-for-2 rights issue.
Suntec REIT (BUY/S$1.40/Target: S$2.10). Suntec REIT will benefit from improved connectivity to Suntec City due to the Esplanade and Promenade MRT stations when the new Circle line is ready in 2010. It has acquired 14,677sf of state land for construction of new extension at Park Mall, which increases gross floor area by 67,810sf or 17.7% to 451,727sf.
Suntec REIT has issued 5-year S$250m convertible bonds, convertible into cash or new units. The conversion price is initially S$1.968/unit. The bonds bear interest rate of 3.25% and yield to maturity of 4.25%. Suntec REIT intends to settle the bonds in cash on conversion to minimise dilution. We have factored in the higher cost of debt in our forecast and lowered our target price from S$2.18 to S$2.10.
MMP – BT
RECENT developments in the S-Reit market suggest that consolidation has begun and more merger and acquisition (M&A) activity is imminent, says Macquarie Capital Advisers executive director and global head of property group Antony Green.
In case there is any doubt, future M&As could turn hostile and will almost certainly grab the headlines. But Mr Green says: ‘History shows the first few deals are always friendly.’
He believes that the current state of the S-Reit market corresponds to that of the Australian market about 10 years ago.
In 1999, the number of Australian-listed property trusts (LPTs) peaked at 46, then slowly dwindled to around 26 today, with the asset pool remaining largely the same.
Consolidation, if or when it is considered by S-Reit players, will be trickier because property assets have surged in value recently, making acquisitions less likely to be yield-accretive.
Mr Green says that although yield-accretiveness ‘is one of the first tests’ when making an acquisition, ‘you have to think of total return’.
‘There is strategic merit in buying something that in several years’ time is going to create more value for you as an investor,’ he adds.
He also says: ‘With a bit of synergy, maybe a management fee waiver of some sort, a bit more or less debt, you can make it positive for both sides.’
Mr Green could, of course, be talking about Macquarie MEAG Prime Reit (MMP Reit), which recently announced a strategic review, on which he is advising.
MMP Reit could be sold in its entirety or have its underlying assets sold piecemeal.
On the attractiveness of MMP Reit, Mr Green says that while it was trading for around $1.05 a unit before the strategic review announcement, its NAV based on the underlying assets had been valued around $1.61 a unit. And at the end of the trading day on Thursday, it closed at $1.19 a unit unchanged.
For current investors, however, MMP Reit has not delivered growth.
‘A lot of S-Reits have traded on the fact that they will provide growth. MMP Reit, given its cost of capital, struggled to provide the acquisitions and the growth,’ Mr Green says.
He has no comment on the details of MMP’s strategic review, but says it is in Macquarie Group’s interest not to sell its 26 per cent independently but to seek an offer for all unitholders instead.
On consolidation of the S-Reit market and the Reit market in Asia in general, he believes this will make it more ‘efficient’. ‘Some Reits will disappear and some will go from strength to strength.’
Mr Green does not think the S-Reit market has matured yet. But the perception that S-Reits are a growth vehicle is changing. ‘Some of that gloss has come off a bit,’ he says.
‘It is not a bad thing that people realise what Reits actually are and not what they think they are supposed to be.’
AllCo – BT
Despite downgrade, Allco Reit gets some relief
It manages to secure extension of its debt repayment deadline
Allco Commercial Real Estate Investment Trust (Allco Reit) – which went to court to fend off a ratings downgrade – has succeeded in obtaining an extension of its debt repayment obligations, despite the ratings cut.
The trust had sought to obtain an injunction to prevent Moody’s Investors Service from downgrading its credit rating, as it feared the revision would hurt its efforts to refinance some S$620 million in debt.
But the injunction was set aside this week and Moody’s went ahead to lower Allco Reit’s corporate family rating to ‘Ba2’ from ‘Ba1’ – and retained the ratings on review for further possible downgrade.
The trust, however, still managed to obtain some relief on its debt refinancing obligations.
Allco (Singapore) Limited, the manager of Allco Reit, announced yesterday that the trust had received in-principle approval for the extension of the maturity date of S$550 million of debt from July 31, 2008 to Dec 31, 2009.
Allco Singapore said that it is reviewing the terms and conditions of the extension and will soon execute binding documentation.
It expects to repay the remaining S$70 million of debt, due to mature on Nov 22, 2008, with the proceeds Allco Reit is likely to receive from Allco Wholesale Property Fund – which has interests in several properties in Sydney.
Allco Reit had announced earlier this month that it is considering selling the assets of Allco Wholesale Property Fund – and intends to return the net proceeds to unitholders in the third quarter of this year.
It was this proposed sale of its Australian assets that sparked off the ratings downgrade in the first place.
Moody’s ratings review panel had decided to meet, upon Allco Reit announcing its intention to divest its Australian assets – properties valued at A$483 million (S$603.3 million). The panel agreed to downgrade the trust’s credit rating, on the basis that the sale would affect its credit standing.
Allco Reit felt the agency’s move was ‘precipitous and wholly unwarranted’, as it had not yet sold the assets but was only considering doing so. It sought an injunction to prevent Moody’s from issuing the downgrade, as it felt that would hurt its attempts to obtain credit approvals from bankers for the refinancing of the S$620 million in debt.
But Moody’s battled the injunction, arguing that it undermined the agency’s very purpose and integrity and that it would prevent the public from accurately judging Moody’s assessment of Allco Reit’s credit worthiness.
The High Court set aside the injunction on Tuesday, and Moody’s issued its downgrade.
Shipping Trusts – OCBC
Trust versus Trust
Attractive asset class as a whole. We have BUY ratings on all three shipping trusts – Rickmers Maritime (RMT), Pacific Shipping Trust (PST), and First Ship Lease Trust (FSLT). The asset class as a whole is very attractive – unitholders gain exposure to an attractive sector while sidestepping some of the inherent volatility of the industry thanks to long lease terms and cash flow visibility. The trusts’ shipping income is taxexempt and distributions are also tax-exempt for all investors. All three trusts offer attractive distribution yields of more than 10-12% and potential for DPU accretion.
Payout strategy and asset yields vary. We believe key performance criteria include: 1) asset yields and distribution pay-out strategy, and 2) growth plans and leverage. We estimate that PST’s vessels feature relatively higher asset yields versus the other listed peers. Meanwhile, FSLT is the only trust to distribute 100% of its cash income. Consequently, its DPU consists of a return on unitholders’ investment (net income) and a return of invested principal (depreciation). PST has pegged its debt repayment to its depreciation charge in an effort to preserve NAV. RMT is currently retaining more than 25% of its cash income, which it can utilize for capex. RMT’s future payout strategy has not been explicitly stated.
Big plans for growth. All three trusts plan to aggressively grow through DPU-accretive acquisitions, with RMT growing at the fastest pace and magnitude. PST and FSLT are targeting about US$200 and US$300m in acquisitions yearly. RMT is contracted to acquire US$1.35b worth of vessels over 2008-2010, once approval is finalized in an upcoming EGM. These growth plans are powered through leverage. By the end of this year, we believe the trusts’ debt-to-equity will range from over 1x to 2x. Business trusts have no gearing limit but we believe a sustainable debt-to-equity target is 1x because of the high volatility in vessel values. In our view, the trusts’ growth beyond 1-1.5x can only be sustained by further equity issues. Some of the trusts may have an option to postpone the next issue – for instance, RMT’s debt-to-equity might increase to 3x before the next tranche is raised – but the need for fresh equity is inevitable at this pace.
Our top pick is PST. The reengineering of PST’s debt model over 2008 presents a one-time opportunity of sharply increasing DPU through accretion from leverage and a higher payout strategy.
Source : OCBC Securities