CCT – DBS

Option for One George St

Story: CCT has been granted a call option to buy One George St from Capitaland for S$1.165b or S$2600psf. The deal comes with a yield protection agreement that guarantees a minimum NPI of S$49.5m p.a. or 4.25% yield for a period of 5 years till 2013. One George St is a building with 447,999sf NLA, of which 435,560sf is office area and 12,439sf retail space. The building is fully leased. The deal is expected to be completed by July 2008 subject to due diligence by CCT, and unitholders’ approval.

Point: The purchase was not unexpected, albeit a little earlier than anticipated given that CCT has a target to grow AUM to S$6b by 2009. The purchase will expand its asset base to S$6.5b, and give the Trust greater exposure to the office leasing market. The deal is expected to be fully funded by debt; this will increase CCT’s gearing from 27% to 40%, still below the allowable 60% limit. There is no information released about the building’s lease expiry profile or funding cost.

Relevance: We view this deal as slightly positive for CCT because it is likely to be earnings accretive, and should limit downside with potential for more upside when average achieved rents at the building exceed S$10.50psf/mth, the level which the yield protection is based on. Our initial assessment, assuming cost of debt of 3.9% – similar to what CCT is currently paying – DPU would be enhanced by 1.0-1.5%. At our adjusted FY08F and FY09F DPU of 10.8cts and 13.1cts, the yields work out to 5.1% and 6.2%, respectively. Maintain Buy with a DCFbacked price target of S$3.08.