FCOT, CCT and K-REIT.

I got a SMS from the blog master of Time to Huat as I was on my way home. FCOT's volume surged as price action formed at nice white candle, closing at 15.5c, overcoming a many times tested resistance at 15c.

Buy signal seen on the MACD histogram, higher low formed on the MFI, OBV spiked and RSI rose into overbought territory. Momentum is positive, demand is strong, accumulation is strong and buying momentum is positive but it could be overdone.

Any reason for the optimism in FCOT? I did not see any announcement by the management which could have resulted in such an upmove in price today. Should we buy some? Could it go higher in price?  From a technical perspective, it does look promising.  Volume is, after all, the fuel that drives rallies and today's volume was impressive.

Let us look at the fundmentals:

FCOT's NAV/unit stands at 26c.  If all the CPPUs were converted, NAV/unit would be 25c. So, at a price of 15.5c, FCOT's units are trading at a 40% discount to NAV.  That's pretty steep.

Gross borrowings as a percentage of total assets (aka the gearing level) is at 40.4%. This is rather high and there is limited room to leverage up for any yield accretive purchases.  However, the 342,500,000 CPPUs have a conversion price of S$0.2369 per unit.  This would bring down its gearing level marginally and give FCOT more capital (S$81.138m) to fund yield accretive purchases in future in case all CPPUs were converted. 

The 3Q DPU was 0.25c. So, the annualised DPU should be about 1c. Based on today's closing price of 15.5c, the yield is 6.45%.  This is not very attractive if we were to compare to what we could get from AIMS AMP Capital Industrial REIT, for example.  Of course, these two REITs are in different real estate sectors.  Let us compare FCOT with CCT and K-REIT instead. 

CCT closed at $1.47 today. NAV as of 30 Jun 10 at $1.36. CCT is trading at a 8% premium to NAV. Gearing ratio is at 32.8%.  Plenty of room to leverage up for further yield accretive purchases. 1H DPU was 3.9c.  So, the annualised DPU should be about 7.8c.  This means a yield of 5.3% based on today's closing price. The yield might be lower than FCOT's but CCT has a much stronger balance sheet.

K-REIT closed at $1.31 today. NAV as of Jun 10 at $1.47. K-REIT is trading at an 11% discount to NAV. Gearing ratio is at 15.2%.  This is very attractive to me as it gives the REIT plenty of room to leverage up for potential yield accretive purchases. 1Q 2010 DPU at 1.33c.  Annualised DPU should be 5.32c which means a yield of only 4% based on the current price of $1.31.  K-REIT has, arguably, the strongest balance sheet amongst the three office property REITs discussed here.  The low yield might put off investors but its low gearing paves the way for future acquisitions which could bump up its DPU.

I have told my friends before that for me to buy more units in FCOT, it has to offer me a much higher yield. The much higher gearing and lower quality assets compared to CCT and K-REIT are justifications. There is also greater safety in CCT and K-REIT as their interest coverage ratio (ratio of year‐to‐date earnings before interest, tax, depreciation and amortisation to interest expense) are at 3.8x and 3.6x respectively while FCOT's ratio is at 2.74x.  There is little doubt that FCOT's fundamentals are the weakest of the three. So, naturally, a higher yield is necessary to compensate for higher risk.

See FCOT's presentation slides here.
See CCT's presentation slides here.
See K-REIT's presentation slides here.

Saizen REIT: Emphasis of matter.

Emphasis of Matter
 

Without qualifying our opinion, we draw attention to Note 1 of the financial statements. As at 30 June 2010, the Group has interest-bearing borrowings of JPY7.8 billion, which are due for repayment within the next 12 months from the balance sheet date, of which the Group expects
to repay JPY0.7 billion with cash generated from operating activities. The Group is currently in negotiations with financial institutions to refinance JPY7.1 billion of these borrowings, which are held by a subsidiary Yugen Kaisha Shintoku (“YK Shintoku”) and have been in default since November 2009. The Group has also implemented a plan to divest some properties of YK Shintoku to reduce the borrowing amount with approval from the lender.
 

In accordance with the loan agreement of YK Shintoku, the lender has the right to take control of YK Shintoku in the event of default. As at 30 June 2010, the net asset value of YK Shintoku amounts to JPY2.0 billion, which approximates 8.6% of the net assets of the Group.
 

The subsidiary’s ability to continue as a going concern is dependent on the successful outcome of these refinancing negotiations with financial institutions and support from the lender by not seeking foreclosure of the assets of the subsidiary within 12 months from the balance sheet date. These conditions indicate the existence of a material uncertainty, which may cast significant doubt on the subsidiary’s ability to continue as a going concern. If the subsidiary is unable to continue in operational existence for the foreseeable future, adjustments would have to be made to reflect the situation that its assets may need to be realised other than in the normal course of business and at amounts which could differ significantly from the amounts stated in the balance sheet. In addition, the subsidiary may have to provide for further liabilities which may arise. The Group’s financial statements do not include the adjustments that would result if the subsidiary was unable to continue as a going concern.

PricewaterhouseCoopers LLP
Public Accountants and Certified Public Accountants
Singapore, 22 September 2010

Saizen REIT's manager has reiterated that the loan of Yugen Kaisha Shintoku (“YK Shintoku”) is non-recourse loan and is not cross-collateralised, and there is also no cross-default in respect of the loans of the other subsidiaries of Saizen REIT. Given its non-recourse nature, the decrease in the net asset value of Saizen REIT and its subsidiaries (the “Group”), in the worst case scenario of a foreclosure of YK Shintoku, will be limited to the net asset value of YK Shintoku (which amounted to JPY 2.0 billion, or 8.6% of the Group’s net assets, as at 30 June 2010).

In some of my earlier blog posts, I looked at what would happen if YK Shintoku should suffer foreclosure.  

In one blog post, I mentioned: "If YK Shintoku were to suffer foreclosure, the nett effects would be a 22% decrease in nett property income, a 10% reduction in NAV and its gearing level would decline from the current 36.9% to 27.4%.  

"Based on the current number of units in issue, the DPU would reduce from 2c to 1.56c giving us a yield of 9.45%.  The NAV would reduce from 39c to 35c approximately.  With the proforma foreclosure gearing at 27.4%, Saizen REIT would emerge unscathed and, in my opinion, stronger in its balance sheets. So, if YK Shintoku goes through a foreclosure, Saizen REIT remains a great investment as it has high yield, a big discount to NAV and low gearing."

Related posts:
Saizen REIT: 3Q FY2010 Results.
Saizen REIT: Better than expected DPU.