CCT – Goldman Sachs

Thumbs up to potential S$1.2 bn purchase of 1 George Street

What’s changed
CCT has been granted a call option by CapitaLand (CATL.SI; Buy) to purchase 1 George Street (OGS), an office building located in the heart of Singapore’s CBD, for S$1.165 bn, or S$2,600 psf of NLA. CapitaLand will provide yield protection to ensure minimum NPI of S$49.5 mn pa, or 4.25% of the purchase price for 5 years until 2013. This implies a rental rate of S$10.50 psf per mo. CCT has secured committed funding from banks to finance 100% of purchase price. More details on the lease profile of OGS and the debt facilities will be provided in due course. Deal is subject to approval by CCT’s shareholders and targeted for completion before end July.

Implications
Acquisition is in line with our expectations. In Aug 2007, when CapitaLand upped its stake in OGS to 100% from 50%, we argued that CCT was the biggest winner, as the transaction enhanced CCT’s acquisition pipeline. We see this deal as positive for CCT, as we think OGS can fetch rents of over S$13 psfpm when rents revert to market, which implies potential improvement to NPI yield at purchase price of 100 bps or more. Assuming 4.25% initial NPI yield and 3.7% debt cost, DPU uplift for CCT is 0.22 cents / 0.43 cents for FY08/09E (or +2.0% / +3.3%) respectively, by our analysis. Post acquisition, CCT’s gearing would increase from 26.9% to 40%, which we view as reasonable. Asset size would rise to ~S$6.5 bn. NPI yield of 4.25% for OGS compares favorably with 3.2% for CCT’s Grade A office assets.

Valuation
We like CCT’s strong near-term DPU growth and over 30% discount to RNAV. We maintain our DCF-based 12-mo. TP of S$2.75 and Buy rating. We look for the share price to react favorably to the successful execution of the transaction, and investors gaining confidence that REITs can tap debt facilities at competitive rates.

Key risks
On the downside, a slowdown in office rental demand.