KUALA LUMPUR, April 9 ― Perennial China Retail Trust (PCRT) has not reached 0.70SGD (RM1.81), despite CEO Pua Seck Guan and others offering to buy the units at the IPO price, almost three years after the Trust went public.
Pua, who was once the CEO of CapitaMall Trust, launched the bid March 14 together with OSIM’s Ron Sim, and palm oil company Wilmar International and its CEO Kuok Khoon Hong.
Through another listed company, St James Holdings Limited, they are offering new units in St James Holdings, valuing PRCT at 0.70SGD per unit.
St James Holdings would then be renamed Perennial Real Estate Holdings Ltd (PREHL).
The offer comes at a critical time for PCRT.
Earn-out arrangements, that have supported its dividend, will dry up by the end of this year.
Earn-out money is nothing but other name of income support comes that is received from Shanghai Summit (Group) under a deed.
Shanghai Summit is a partner and co-owner of Perennial Dongzhan Mall.
The logic of deed is to provide dividend to shareholders as the assets were not complete at the time of IPO.
Its new properties are not yet operational to the extent where it will transition smoothly once earn-out support ends.
There is a glut of supply in its key market of Shenyang, where its only completed mall operates, with a 54 per cent increase in Gross Lettable Area becoming available in the market at a time when almost 2-in-5 leases (by Net Lettable Area) are falling due.
Properties worth 3SGD billion are in the acquisition pipeline, but it cannot afford them unless it takes on much more debt.
And with the spectre of higher interest rates, and a falling loan coverage ratio, 235SGD million worth of debt is due soon.
PCRT was touted as Singapore’s first pure play China retail development.
The IPO was marketed based on an attractive pipeline of at least 3SGD billion of commercial developments.
But only one property was operational at the time of listing.
PRCT units never regained their IPO price of 0.70SGD, since listing in June 2011.
Assets were valued based on “as if complete and fully leased basis”.
Upon completion, the four main shareholders will collectively own more than 70 per cent of the PREHL.
The below shows what the new organisation will look like.
After giving an OUTPERFORM rating at the time of IPO with a target price of 0.69SGD, CIMB Research was most recently NEUTRAL on the stock with a target price of 0.57SGD.
The analyst wanted to see how the Trust’s assets perform after the earn-out period expires by end 2014.
On the balance sheet front, it saw risk from increased borrowing to make progressive payments and a relatively low debt service ratio of 1.94.
However, PCRT was downgraded to REDUCE by CIMB Research due to potential overhang post the announcement of the Reverse Takeover.
The target price now is 0.50SGD.
It says investors can buy PCRT at 0.7x price-to-book (P/B) value to be exchanged for PREHL shares at 0.9x price-to-net tangible asset (P/NTA).
But it believes PREHL’s shares may de-rate to an average 0.74x P/BV as Singapore developers are trading at this level.
CapitaMalls Asia is trading at 0.87x P/BV, but 75 per cent of its assets are operational, while 77 per cent of PREHL’s assets are under development.
As PCRT has never traded above 0.70SGD, the analyst believes this would have been a fair deal if it was a cash offer.
The expected slowdown in China will influence the spending patterns of consumer and therefore affect the near-term performance of its malls, says the Trust.
However, China’s plans announced in the Third Plenum could make the economy more consumer-driven in the long run.
While these reforms continue take shape, PCRT will stabilise its assets in Shenyang and Foshan.
The company just announced earnings for FY13:
Earnings: -39.4 per cent to 51.3SGD million
Distributable income: +97 per cent to 43.6SGD million
Distribution per unit (DPU): 3.80 cents vs 3.86 cents
Distribution yield: 7.17 per cent vs 7.28 per cent
Cash flow from operations: (4.6SGD million) vs 16.3SGD million
As PCRT holds only a 50 per cent stake in the Shenyang assets, it does not recognise income as revenue from it.
Gross revenue comprised rental revenue generated by Perennial Jihua Mall, 100 per cent owned by PCRT, which commenced operations in Q3.
Profit was driven by an earn-out amount of 43.6SGD million and net fair value gain of 32.5SGD million.
1. What if St James Holdings’ takeover offer fails?
Given all the headwinds, from immature malls to a glut in supply, to debt and interest rates — can shareholders afford not to sell into the offer?
Management Reply: Trustee-Manager: As there is an ongoing pre-conditional voluntary general offer for the Trust, Perennial Real Estate Holdings Pte. Ltd. and the Trustee-Manager are subject to restrictions under the Singapore Code on Takeovers and Mergers in relation to the disclosure of information. While we are unable to address some of your queries in this forum, do note that further information in relation to the transactions will be provided in the circular to be issued by St James in due course. We thank you for your understanding and patience.
2. How was the Trust, the Trustee Manager or the Sponsor related to St James Holdings prior to RTO?
It makes us wonder how St James Holdings came up with a RTO, and not any other company, as it has been incurring losses since FY07.
Listed on the SGX, St James is in the business of hospitality and night entertainment business.
The press release from PCRT says St James will be “transformed into a sizeable integrated real estate owner, developer and manager”.
Management Reply: Trustee-Manager: Neither the Trust, the Trustee-Manager or the Sponsor (Perennial Real Estate Holdings Pte. Ltd.) holds any shares in St James.
3. Why is the RTO actually required?
The press release states the rationale of the offer price at a premium is to provide the unit holders to participate in diversified real estate platform at a premium.
Three years back the Trust came up with the IPO with an intention to focus only on China.
Why not just change direction, rather than go through this RTO?
Management Reply: Perennial Real Estate Holdings Pte. Ltd.: As there is an ongoing pre-conditional voluntary general offer for the Trust, Perennial Real Estate Holdings Pte. Ltd. and the Trustee-Manager are subject to restrictions under the Singapore Code on Takeovers and Mergers in relation to the disclosure of information. While we are unable to address some of your queries in this forum, do note that further information in relation to the transactions will be provided in the circular to be issued by St James Holdings Ltd in due course. We thank you for your understanding and patience.
4. How will it maintain its dividend after it uses up the earn-out amount in FY14?
PCRT’s dividend pay-out has been supported by the earn-out arrangements since it listed in 2011.
The earn-out amount has translated to a dividend yield of about 6 per cent.
The additional earn-out of 342RMB million (RM178 million) is set to expire by the end of 2014, and 242.1RMB million is left to support its distribution for FY14.
The future dividend payment depends on how quickly it can fully lease its existing assets, especially the Shenyang Longemont Office, which is only 45 per cent occupied.
The two malls, Jihua Mall which commenced operation in August 2013 and the Qingyang Mall, which is expected to open in April 2014, have a key role to play this year in terms of performance.
Management Reply: Perennial Real Estate Holdings Pte. Ltd.: As there is an ongoing pre-conditional voluntary general offer for the Trust, Perennial Real Estate Holdings Pte. Ltd. and the Trustee-Manager are subject to restrictions under the Singapore Code on Takeovers and Mergers in relation to the disclosure of information. While we are unable to address some of your queries in this forum, do note that further information in relation to the transactions will be provided in the circular to be issued by St James Holdings Ltd in due course. We thank you for your understanding and patience.
This leads to many more questions.
5. What is the committed occupancy at the Qingyang Mall?
PCRT highlighted in the Q4 presentation that leasing continues to strengthen with occupancy levels advancing to 85 per cent ahead of opening.
New tenants secured include Lego KTV, Muji, Vero Moda, Selected, ANTA and Hola.
In fact, tenants have commenced fitting out their shop units in preparation for the opening.
However, the footnote explained that lease percentage includes committed leases, leases for which documentation is pending execution by the prospective tenants, as well as potential leases under serious negotiations.
Therefore, we would like to know about the committed occupancy only.
Management Reply: Trustee-Manager : Perennial Qingyang Mall’s committed occupancy based on executed tenancy agreements stood at approximately 85% as at 7 February 2014. The mall is on track to open in April 2014.
6. Will marketing expenses at Qingyang and Jihua reduce earnings?
The group spent 6.5SGD million on Jihua Mall which was related to leasing commissions of 1.2SGD million, higher expenditure incurred on marketing, advertising and promotion, pre-operation costs, utilities and maintenance expenses, and staff costs.
1.3SGD million was spent on Qingyang Mall arising from marketing, advertising and promotions, and staff costs.
Of course, it needs to spend to achieve higher foot traffic.
But CIMB Research believes that earnings will be reduced by higher marketing expenses and rent-free periods for the first year.
In addition, it makes us wonder whether higher occupancy will continue to come at the expense of lower rents.
Management Reply: Trustee-Manager : Higher marketing and promotional expenses and provision of certain rent free periods in the first year are market norms for newly-opened malls. Both Perennial Jihua Mall and Perennial Qingyang Mall are achieving their target average rent and their net property income yield is expected to grow steadily to stabilise within two to three years from the commencement of operations.
7. When will Qingyang and Jihua malls mature?
Given that the malls are the newest in its portfolio, they will take time to mature.
How long will this take?
Management Reply: Trustee-Manager : Typically, it would take between three to five years for a mall to stabilise, although there are instances where it could be quicker. We expect Perennial Jihua Mall and Perennial Qingyang Mall to stabilise within two to three years.
8. Can it achieve positive rental reversions for leases expiring in 2014?
292 out of a total of 441 leases or 39.1 per cent of net lettable area (NLA) will expire in 2014.
This is about 48.4 per cent of gross rental income.
The slowdown in China makes us wonder whether PCRT would be able to revise its leases on meaningful terms.
Management Reply: Trustee-Manager : The leases in Shenyang Longemont Shopping Mall make up the bulk of the leases that are expiring in 2014. We have received offers for more than 80 per cent of these expiring leases at indicative positive rental reversions of between 8 per cent to 10 per cent.
9. Why did the value of the Shenyang Red Star Macalline Furniture Mall decline this year?
The value of Shenyang Red Star Macalline Furniture Mall declined by 7.4 per cent to 1,252RMB million.
In fact, it fell 2.6 per cent below its purchase price per GRA of 9,293RMB per square metre.
Separately, supply-led pressure on rents, the Shenyang Red Star Macalline Furniture Mall was affected by uncertainty in the property market as households delay bulk furniture purchases.
To improve occupancy, management has master-leased the mall but had to sacrifice in terms of rental income.
Although the rental structure has a gross turnover (GTO) component, CIMB Research says existing tenant sales need to almost double for the effect to kick in.
It expects the effect of the GTO component to be slow and start in FY15-FY16.
Management Reply: Trustee-Manager : The value of the Shenyang Red Star Macalline Furniture Mall declined due to the entry into two master leases which take up about 92.8 per cent of the mall’s total leasable area. Although the two master leases provide a lower rental contribution, they strengthen the income stability for the Trust. The GTO component will provide PCRT with further income upside as the performance of the master lease tenants improve overtime.
10. Is Shenyang facing weaker rental income?
According to CIMB Research report dated October 9, 2013, Savills, expects Shenyang’s mid to high end retail market to experience an average supply of 718,000 sqm per annum between 2012 and 2014, increasing its total stock by 54 per cent.
The supply pressure has translated into higher vacancy and weaker rental income.
Management Reply: Trustee-Manager: The operating performance of Shenyang Longemont Shopping Mall has started to stabilise with its committed occupancy reaching about 88 per cent as at 7 February 2014. The mall’s footfall also doubled to about 17 million in FY2013 from a year earlier. With its strategic location and direct connectivity to a major transportation hub, extensive range of offerings, as well as its immediate customer catchment from the Shenyang Longemont Offices and other developments in the precinct, the mall is well-poised to become a popular one-stop dining, shopping and entertainment destination.
11. Will debt service coverage ratio continue to stay at levels seen in FY13?
PCRT’s gearing has increased from 7.95 per cent in FY11 to 27.19 per cent in FY13 as it continued to acquire properties.
However, its debt service coverage ratio has dropped significantly from 28.8 to 1.94 in the same period.
If we exclude the income support, debt ratios seem to be weak because debts are drawn to invest in the underdeveloped projects while most of the completed income generating properties are yet to stabilise.
Management Reply: Trustee-Manager : As development assets complete construction and commence operations, they will start contributing to the Trust’s revenue stream and grow steadily overtime. Concurrently, monetisation of assets through either partial or complete sale of assets to unlock value may also be considered if it is in the best interest of the Trust. We will continue to proactively management our debt service coverage ratio as part of our capital management strategy.
12. How does it intend to repay its debt obligation due this fiscal year?
Total debt stood at 435.2SGD million as at FY13, out of which 235.2SGD million is due this fiscal year.
It gearing stood at 27.2 per cent.
Under the Trust Deed, its leverage limit is 60 per cent.
In future, it may raise money to acquire its three pipeline assets consisting the retail component of Beijing Tongzhou Integrated Development, a 50 per cent interest in Xi’an North High Speed Railway Integrated Development and a 50 per cent interest in Changsha Longemont High Speed Railway Commercial Development.
The acquisition cost is well above 2SGD billion for these three pipeline assets, as per the information provided by the group.
So, refinancing seems to be the only option.
Management Reply: Trustee-Manager : We are at an advanced stage of discussion to refinance the Trust’s S$285 million credit facilities to optimise the Trust’s debt capacity and maturity profile. Details on the refinancing will be provided at an appropriate juncture.
13. How will it manage interest costs when rates rise?
It makes us wonder whether PCRT would be escape the impact of developed economies starting to normalise their interest rates, which could lead to higher interest rates in Asian markets as well.
Also, the recent default by Shanghai Chaori Solar Energy Science & Technology Co. on interest payment has prompted a Bank of America analyst to comment that Chaori could become China’s “Bear Stearns moment”.
The group annual report highlights that it does not use derivative financial instruments to hedge its interest rate risk.
Its FY12’s annual report states that every 1 per cent movement in interest rates equates to a 300,000SGD change in PCRT’s profit before tax.
Management Reply: Trustee-Manager : The management of interest cost is part and parcel of our proactive capital management strategy. If necessary, we will explore the use of interest rate swap to minimise the impact of interest rate movements on the Trust’s cashflow position.
14. Does it foresee any risk from weak Renminbi?
The weakness in the Renminbi (RMB) has reversed the consistent appreciation against the US Dollar and other major currencies during the last eight years.
It has been weakened from an all-time low of 6.04 seen in January to 6.15 in March.
In fact, the China’s central bank has doubled the currency’s trading band from 1 per cent to 2 per cent.
The intention is to squeeze out speculators betting on the currency’s steady rise and to introduce volatility.
Its FY12’s annual report states that a 5 per cent strengthening or weakening of the Singapore Dollar (SGD) against the RMB would cause a corresponding increase or decrease of about 3.3SGD million in profit before tax.
SGD/CNY is currently trading at 4.83 which is 2 per cent up from low of 4.72 in 2014.
Management Reply: Trustee-Manager : We take a long term view on China and correspondingly on the Trust’s RMB equity exposure. Our strategy is to achieve a natural hedge through local RMB financing to match against future RMB-denominated revenue streams. We will continue to proactively manage the Trust’s foreign exchange exposure as part of our risk management and capital management strategies.
15. What will drive its share price?
PCRT’s has never seen its stock price touch its IPO price of S$0.70.
It has seen a high of 0.66SGD and a low of 0.40SGD in 2011 and is currently trading at 0.55SGD.
Its price-to-book value is about 0.7x.
This is despite ample information about its strategy, and updates on assets provided in its annual reports.
Therefore, it makes us wonder whether PCRT is a hidden gem or it has operational issues.
Management Reply: Trustee-Manager : A company’s share price is a function of varied factors. On our part, we will continue to focus on driving the operating performance of our assets to create value for Unitholders.
16. Was the reverse takeover already planned a year back?
Perennial China Retail Trust Management Pte. Ltd. (PCRTMPL), the trustee-manager of PCRT had announced in April 2012 that Pua Seck Guan, its Executive Director and CEO, Kuok Khoon Hong, a Director of the trustee-manager and CEO of Wilmar International, and other parties had established Perennial Real Estate Holdings Pte. Ltd. (PREHPL), a joint-investment vehicle with a target capital size of 500SGD million.
Pua has an interest of 20 per cent and Kuok an interest of 49.5 per cent.
The remaining interest in PREHPL is held by other investors, including Martua Sitorus, Co-founder of Wilmar International, a deemed substantial unit holder in PCRT.
PREHPL holds 49 per cent in Perennial Real Estate Pte Ltd (PREPL), the sponsor of PCRT, with Pua retaining the remaining interest of 51 per cent in PREPL and a 2.55 per cent direct interest in PCRT, currently owned by PREPL.
PREPL holds an interest of 78 per cent in the Trustee-Manager, which, in turn, holds a 1.15 per cent direct interest in PCRT.
PREHPL hold an interest of 100 per cent in Perennial (China) Retail Management Pte Ltd. (PCRMPL), the property manager of PCRT.
Kuok’s deemed interest in PCRT had increased from 5.023 per cent to 16.941 per cent and Sitorus’ deemed interest increased from 3.165 per cent to 5.662 per cent.
On March 14, one year after forming PREHPL, a reverse takeover offer (RTO) of PREHPL through St James Holdings (SJH) is announced.
Hence our question.
Management Reply: Perennial Real Estate Holdings Pte. Ltd.: The current transactions were not contemplated at the time Perennial Real Estate Holdings Pte. Ltd. was established.
17. What can make unitholders not accept new shares of Perennial Real Estate Holdings Ltd?
Phase II of the offer consists of an option for PCRT unit holders to exchange their PCRT shares at 0.70SGD/unit for new shares of PREHL at an issue price of 1.1756SGD/share.
But CIMB Research says the issue price of PREHL, which translates to 0.9x P/NTA and 24x P/E, is pricey.
Gearing for the PREHL will be 51 per cent post the proposed acquisition, and 52 per cent assuming 100 per cent acceptance of the proposed offer on PCRT shares.
This is higher than the 27 per cent gearing of PCRT in its current form.
Future capital requirements may prompt PREHL to issue shares, possibly at a discount, or borrowing more and increase its gearing further.
Management Reply: Perennial Real Estate Holdings Pte. Ltd.:
· Unitholders are free to choose if they want to swap into new Perennial Real Estate Holding Limited shares. If PCRT Unitholders swap into Perennial Real Estate Holdings Limited shares, this can be done via the current offer without any transaction cost.
· There is no certainty on the future trading pattern of Perennial Real Estate Holdings Limited shares or PCRT Units. However, as set out in the pre-conditional offer announcement and the announcement of the proposed acquisition by St James Holdings Ltd, the enlarged entity will have:
· A portfolio with steady income stream in Singapore;
· A portfolio that is well-positioned for growth in first and second tier cities in People’s Republic of China;
· Better access to funding and ability to attract a broader investor base driven by enlarged scale and market capitalisation; and
· Ability to attract wider investor interest and more research coverage, thereby potentially enhancing trading liquidity and shareholder base.
18. Are valuations of PREHL sustainable?
The P/B or PREHL is 0.9x when Singapore developers are trading at an average of 0.74x.
CIMB Research believes PREHL should trade at a bigger discount to CapitaMalls Asia given its higher proportion of assets under development.
As such, it believes PREHL’s shares would come under pressure when listed.
Management Reply: Perennial Real Estate Holdings Pte. Ltd.: As there is an ongoing pre-conditional voluntary general offer for the Trust, Perennial Real Estate Holdings Pte. Ltd. and the Trustee-Manager are subject to restrictions under the Singapore Code on Takeovers and Mergers in relation to the disclosure of information. While we are unable to address some of your queries in this forum, do note that further information in relation to the transactions will be provided in the circular to be issued by St James Holdings Ltd in due course. We thank you for your understanding and patience.
19. Can Perennial Real Estate Holdings Ltd maintain its dividend yield like PCRT?
PREHL will have about 77 per cent its assets under development than PCRT’s 55 per cent.
CIMB Research believes that investors opting to swap their PCRT share for PREHL will have to compromise on yield.
While it expects FY14 dividend yield to be 6.8 per cent, the distributions largely stem from income support that will expire by end-2014.
Thereafter, it expects dividend yield to fall to 3.8 per cent to 4 per cent in FY15 to FY16, at which time investors can easily find higher yielding instruments as Singapore REITs are trading at an average FY15 yield of 7.4 per cent.
As such, it believes yield may not be a draw card for PCRT’s shareholders.
We thank, Ms Tong Ka-Pin, Head of Investor Relations, Corporate Communications & Marketing, for her response. ― Investor Central
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