Monday, June 22, 2009

BTO: Starhill is latest Reit to take rights route

Business Times - 23 Jun 2009

Starhill is latest Reit to take rights route

$337m rights issue will cut gearing further; Reit may add retail space to Wisma Atria


(SINGAPORE) Starhill Global Reit, which owns stakes in Wisma Atria and Ngee Ann City in Singapore, yesterday said it will raise $337.3 million through a rights issue - making it the fifth real estate investment trust (Reit) this year to raise funds by issuing new units.

Together, the five property trusts have said that they will raise some $2.5 billion in all.

Two of property giant CapitaLand's trusts account for the bulk of the amount. The group's retail Reit CapitaMall Trust (CMT) said it will raise $1.23 billion in a rights issue in February this year, while office trust CapitaCommercial Trust (CCT) announced plans to raise $828 million last month.

The two other Reits which have announced rights issues so far are Ascendas Real Estate Investment Trust, or A-Reit (which in January said it will raise $400 million, including $108 million via a preferential offering) and Saizen Reit, which announced a much smaller $41 million rights issue.

Starhill Global Reit's announcement took the market by surprise.

'This rights issue was not expected as Starhill Global Reit's gearing was one of the lowest in the sector at 31.3 per cent prior to this rights issue,' said Macquarie Research analysts Elaine Cheong and Tuck Yin Soong yesterday.

The Reit does not have any refinancing requirements in 2009, although the bulk of its $670.1 million of borrowings are due in 2010.

The trust also had the option of refinancing its debt through traditional bank loans as banks are now more willing to lend than 12 months ago. 'Financing conditions have definitely eased up,' noted one analyst.

DMG & Partners Securities analyst Brandon Lee said that Reits seem to be going ahead with rights issues - even in cases where they have secured refinancing - in a bid to boost their balance sheets.

For Starhill Global Reit, the rights issue will substantially reduce gearing. Gearing would have climbed to 33.4 per cent following a 7.1 per cent fall in the value of the property portfolio at latest revaluation exercise - where the trust's property portfolio saw its value fall from $2.1 billion at end-2008 to $1.95 billion as at June 15, 2009.

With the rights issue and the repayment of some debt, Starhill Global Reit's gearing will be reduced to 20.7 per cent.

Likewise, CCT's rights issue last month came as the office trust saw the value of its portfolio fall 10.15 per cent in the latest valuation exercise. The fall in portfolio value - which came about as the valuers factored in falling market rents - would have pushed the Reit's gearing from 38.3 per cent to 43.1 per cent. But with the rights issue, the gearing instead fell to 30.7 per cent.

'There could be more devaluations when they (Reits) do their year-end revaluations,' said CIMB analyst Janice Ding.

Undertaking rights issues now to reduce gearing therefore provides some kind of 'safety margin' in case property values drop further and push gearing levels higher, she said.

The market reaction to rights issues has been positive so far, which is another incentive for Reits to go ahead with rights issues, Ms Ding added.

Two of Singapore's biggest Reits, A-Reit and CMT, saw their share prices rally after they announced rights issues.

For Starhill Global Reit, the rights issue is part of its long term proactive capital management strategy, said Franklin Heng, chief executive of the trust's manager. The lower gearing, for one, will put the trust's management in a better bargaining position when it comes to seeking refinancing for remaining loans.

The trust might also need to seek fresh funds as it is on the lookout for new properties to buy in both the markets it now has a presence in - Singapore, Japan and China - as well as in Malaysia and Australia, where the Reit is eyeing properties.

The Reit also said that plot ratio at Wisma Atria is not fully utilised and will look at adding up to 40,000 square feet of retail space, although the maximum allowed is up to 100,000 square feet. This could cost the trust another $100 million or so.

The rights issue is priced at 35 cents for each unit, which represents a discount of about 45.3 per cent to the trust's closing price of 64 cents per unit on Friday, June 19. The stock was suspended from trading yesterday.

Looking ahead, more rights issues by Reits could be in the works, market watchers said.

Analysts identified Frasers Commercial Trust (FCOT) as one Reit that could soon make a cash call. The trust's gearing rose to 58 per cent at end-Q1 2009 as its property portfolio booked a net revaluation deficit.

The write-downs FCOT has made to date may still not be enough, warned Nomura analyst Tony Darwell in a June 12 note. 'On our numbers, we expect FCOT to book a further revaluation deficit of $247 million, pushing gearing to 0.73 times,' he said.

While FCOT is looking to divest assets, 'we believe the Reit will need to do more; consequently, we believe a rights issue or asset injection from the parent is likely,' Mr Darwell added.

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