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ƒ Developers trading at steep discounts to book on default fears
ƒ DLF, UT, PEPL and Sobha could face funding shortfall
ƒ Funding options: Asset sales / dilution / PE / Refinance
ƒ IBREL, HDIL and ARCP are better placed than others
Default or No-Default?
Why are developers trading at steep discounts to book?
A majority of the real estate stocks in our coverage universe are trading
at steep discounts to their respective book values. We believe there
could be three reasons for this: 1) there is a high probability of an asset
write-down; 2) there is a high probability of a company default; or 3) value
destruction (ROE’s are less than cost of equity). Landbanks for most
companies are recorded at cost as compared to current market value,
which, on average, is higher by at least 20-30%. Of the other two
reasons, in the current tightening liquidity environment, we believe it is
the fear of default instead of value destruction which is causing the real
estate developers to trade at such steep discount to book.
Which are the developers that could be affected the most?
We have tried to assess the funding situation of the real estate
companies based on their debt service coverage ratios (DSCR) –
including capex, which is effectively (EBITDA ex taxes) by (Interest +
debt repayment + capex), and net funding shortfall (Debt repayment +
interest obligation + capex on office or retail assets) – Cash flow from
operations. In our coverage universe, UT / DLF / Prestige and Sobha fail
to achieve a DSCR of even 1x and also face a funding shortfall. DSCR
for all four of them is comfortably below 1 (Sobha being the worst at
0.4x). Prestige could be better off ex CAPEX but in that case street and
our estimates + NAV for PEPL would be at risk. A delay of one year can
impact NAV by more than 10%.
What happened in 2008?
In 2008, most of the developers did go through a similar situation (Lower
DSCR and net funding shortfall) (Refer to Exhibit 4 & 5). Debt
restructuring, equity dilution and asset sales were the sources of funding
for most developers (refer to Exhibit 5). Significant portion of funds were
raised through equity dilution route (USD3.4b - 29% of current market
cap or 11% of Enterprise value).
Possible funding options? Asset sales/dilution/PE/refinance
We believe there are essentially four options with the real estate
developers: 1) asset sales; 2) equity dilution; 3) private equity infusions;
and 4) refinancing. In 2008, when companies were in a similar position
they resorted to asset sales and equity dilution. Given the current equity
funding scenario, we believe such funding will be difficult to come by, and
hence asset sales/refinancing are the only options with real estate
developers. Also, in the case of Unitech – because of the ongoing court
case related to the telecom business, refinancing is likely to be at harsher
terms.
Companies with cash/comfortable DSCR remain better plays
In the current liquidity tightening and uncertain environment, we
recommend investors stick to developers with net cash positions or better
DSCR. Among our listed universe we recommend Indiabulls Real Estate
(IBREL IN), HDIL (HDIL IN) and ARCP (ARCP IN)
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ƒ Developers trading at steep discounts to book on default fears
ƒ DLF, UT, PEPL and Sobha could face funding shortfall
ƒ Funding options: Asset sales / dilution / PE / Refinance
ƒ IBREL, HDIL and ARCP are better placed than others
Default or No-Default?
Why are developers trading at steep discounts to book?
A majority of the real estate stocks in our coverage universe are trading
at steep discounts to their respective book values. We believe there
could be three reasons for this: 1) there is a high probability of an asset
write-down; 2) there is a high probability of a company default; or 3) value
destruction (ROE’s are less than cost of equity). Landbanks for most
companies are recorded at cost as compared to current market value,
which, on average, is higher by at least 20-30%. Of the other two
reasons, in the current tightening liquidity environment, we believe it is
the fear of default instead of value destruction which is causing the real
estate developers to trade at such steep discount to book.
Which are the developers that could be affected the most?
We have tried to assess the funding situation of the real estate
companies based on their debt service coverage ratios (DSCR) –
including capex, which is effectively (EBITDA ex taxes) by (Interest +
debt repayment + capex), and net funding shortfall (Debt repayment +
interest obligation + capex on office or retail assets) – Cash flow from
operations. In our coverage universe, UT / DLF / Prestige and Sobha fail
to achieve a DSCR of even 1x and also face a funding shortfall. DSCR
for all four of them is comfortably below 1 (Sobha being the worst at
0.4x). Prestige could be better off ex CAPEX but in that case street and
our estimates + NAV for PEPL would be at risk. A delay of one year can
impact NAV by more than 10%.
What happened in 2008?
In 2008, most of the developers did go through a similar situation (Lower
DSCR and net funding shortfall) (Refer to Exhibit 4 & 5). Debt
restructuring, equity dilution and asset sales were the sources of funding
for most developers (refer to Exhibit 5). Significant portion of funds were
raised through equity dilution route (USD3.4b - 29% of current market
cap or 11% of Enterprise value).
Possible funding options? Asset sales/dilution/PE/refinance
We believe there are essentially four options with the real estate
developers: 1) asset sales; 2) equity dilution; 3) private equity infusions;
and 4) refinancing. In 2008, when companies were in a similar position
they resorted to asset sales and equity dilution. Given the current equity
funding scenario, we believe such funding will be difficult to come by, and
hence asset sales/refinancing are the only options with real estate
developers. Also, in the case of Unitech – because of the ongoing court
case related to the telecom business, refinancing is likely to be at harsher
terms.
Companies with cash/comfortable DSCR remain better plays
In the current liquidity tightening and uncertain environment, we
recommend investors stick to developers with net cash positions or better
DSCR. Among our listed universe we recommend Indiabulls Real Estate
(IBREL IN), HDIL (HDIL IN) and ARCP (ARCP IN)
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