Month: March 2008
CCT – BT
CCT gets option to buy 1 George Street for $1.17b
Deal comes with income support from seller CapitaLand till 2013
Big office investment sales deals have not ground to a complete halt. CapitaCommercial Trust announced yesterday that it has an option from sponsor CapitaLand to buy 1 George Street for $1.165 billion or $2,600 psf of net lettable area, showing that income support may be the way to make acquisitions palatable to Reits.
This is especially so when it comes to office blocks with a substantial portion of leases signed a few years ago when rentals were weak. Never mind that income support for such deals may once have been frowned upon.
The deal for 1 George Street involves a five-year rental guarantee, with seller CapitaLand ensuring a minimum net property income of $49.5 million per annum, translating to a net property yield of 4.25 per cent per annum on the purchase price till 2013.
This means that CapitaLand will top up any shortfall in net property income to ensure that the $49.5 million floor is achieved every year for the period. The acquisition will be funded entirely through debt; there will be no equity raising.
1 George Street is a 23-storey Grade A commercial building that was completed three years ago. It is fully leased and its tenants include The Royal Bank of Scotland, WongPartnership and Lloyd’s of London (Asia).)
Most of the leases were signed around 2004/2005, when office rents were weak, which is why CapitaLand is providing yield protection for the asset’s acquisition by CCT. The $49.5 million annual minimum net property income implies gross monthly rentals of $10.50 psf. Given that the current average market rental in the Raffles Place area is about $16.30 psf, this spells upside for 1 George St as leases are renewed, CapitaCommercial Trust Management CEO Lynette Leong said.
Leases for about 50 per cent of the net lettable area in the property will come up for renewal in 2008 and 2009. Recently, a new lease for a small space in the building was signed for $19 psf, Ms Leong revealed.
‘With the yield-protection given by CapitaLand, CCT will be able to attain minimum returns from this asset. The five-year yield protection eliminates all the downside risk and whatever upside there is from the asset, it will all flow through to CCT. That’s a pretty compelling offer,’ Ms Leong said.
The deal drew an inevitable comparison with K-Reit Asia’s acquisition of a one-third stake in One Raffles Quay from its parent, Keppel Land. The two deals have similarities – they involve income support and are at prices seen as lower than market.
However, Ms Leong, at a media and analyst briefing yesterday, argued that there were important differences between the two deals.
For one, CCT will get 100 per cent direct ownership of 1 George Street, and the asset will enjoy full tax transparency as a result of being owned by a Reit. This means that CCT would not have to pay tax on income from this asset, unlike K-Reit Asia’s acquisition of a one-third stake in ORQ which is being effected through the purchase of shares in the company that owns ORQ. Hence, the income that K-Reit will receive from the asset would be net of 18 per cent corporate tax.
Another difference is that KepLand will provide income support only till 2011 whereas CapitaLand is doing so till 2013, beyond the 2011/2012 timeframe when a spike in Grade A office space is expected.
CapitaLand Commercial CEO Wen Khai Meng explained that the reason for ‘providing the floor for five years is to address the view that there will be a huge supply in 2011/2012’.
Another difference: CCT has secured 100 per cent committed debt funding for its proposed acquisition of 1 George Street and will not have any equity raising exercise. K-Reit, on the other hand, is seeking unitholders’ approval for a rights issue to help partly refinance a bridging loan taken from Keppel Corp to complete the acquisition of the one-third stake in ORQ.
The $2,600 psf of net lettable area at which CapitaLand is proposing to sell 1 George St to CCT is lower than the $2,700 psf at which the asset was valued at in a deal last August when CapitaLand bought the remaining half share in the asset to gain full ownership of the award-winning property.
CapitaLand expects to book a gain of about $47.1 million after taking into account the yield protection and the company’s 30.5 per cent interest in CCT.
Mr Wen said that the group had to pay $2,700 psf in last August’s deal for control premium. ‘We feel $2,600 psf, plus income support, is a good deal given that CapitaLand still has about 30 per cent stake in CCT and given that we are the manager of the Reit and have a certain responsibility to help our sponsored-Reit to grow.
‘I personally dislike income support, because it conjures up all sorts of wrong impressions. But it would be challenging for a Reit to justify non-yield accretion for the first few years in an acquisition. Based on current rental rates at 1 George Street, the yield would be below 4.25 per cent, but we are seeing very strong rental reversion,’ he said
‘The yield-protection arrangement of 4.25 per cent pa for five years makes the acquisition compelling, given the current blended yield of CCT’s Grade A office assets is 3.2 per cent,’ Ms Leong said.
Even with 100 per cent debt funding for the acquisition, CCT’s gearing will rise to only about 40 per cent from the current 27 per cent, the trust’s manager highlighted.
The deal will be subject to CCT unitholders’ approval at an extraordinary general meeting to be held by June 30, as it is deemed an interested party transaction. CapitaLand is not allowed to vote. The acquisition is slated for completion by end-July.
AREIT – BT
$484m gain in value of A-Reit properties
The trust attributes the 14.2% surge to improving industrial property market
ASCENDAS Real Estate Investment Trust (A-Reit) said yesterday the book value of its investment properties rose $483.6 million – about 14.2 per cent – during the latest annual valuation exercise.
A-Reit attributed the increase – from the previous book value at Feb 29, 2008 – to an improving industrial property market, which has led to higher occupancy and higher rents across its portfolio.
The latest valuations will be reflected in A-Reit’s financial statements for the year ending March 31, 2008, the trust said.
Valuations were revised upwards across all sectors, with the business & science parks sector registering the largest appreciation of $244.4 million.
Properties in the high-tech industrial sector appreciated $116.5 million, while those in the light industrial sector (including flatted factories) and logistics & distribution centres registered gains of $60.2 million and $63.2 million respectively.
A-Reit’s third development property – HansaPoint@CBP, which was completed in January 2008 – appreciated by $43.2 million, or 166 per cent, from its development cost. Post-revaluation, the annualised net property income yield of the property portfolio is about 6.4 per cent, which is in line with the prevailing market, A-Reit said.
The adjusted net asset value, based on the Dec 31, 2007 balance sheet, will be $1.85 per unit.
The valuations were done by DTZ Debenham Tie Leung, CB Richard Ellis, Chesterton and Jones Lang LaSalle, A-Reit said.
The trust said the increases in valuation are testament to the ‘manager’s proactive asset management strategies in maintaining high occupancy rates and the manager’s ability to deliver value to unit-holders by pursuing attractive acquisitions and development opportunities while maintaining a disciplined approach to ensure risks are mitigated’.
A-Reit’s shares closed nine cents higher at $2.29 yesterday. The stock price has shed 6.9 per cent since the start of the year.
FrasersCT – BT
FCT to buy $480m malls from parent
FRASERS Centrepoint Trust (FCT) , which owns suburban malls, said yesterday that it would buy three properties worth $480 million in two years, funded mostly through loans as investor appetite for new equity dries up. ‘Right now, the capital market is not there unfortunately, but the banks are still lending and I’ve got the debt headroom to go much higher,’ Christopher Tang, CEO of Fraser Centrepoint Asset Management, told Reuters.
FCT is acquiring the three suburban malls from parent Frasers Centrepoint, the property arm of conglomerate Fraser and Neave, and is prepared to raise its debt gearing from 29 per cent to 45 per cent to do so, he said. ‘Our long-term target is always about 30-35 per cent but we’re now prepared for short periods of time to go as high as 40-45 per cent, until the capital market works through its issues.’
FCT’s share price rose up to 3.3 per cent in late session trading before ending 0.9 per cent up in line with the broader market. Rival retail Reits CapitaMall Trust was up 1.2 per cent, while Suntec Reit lost 0.7 per cent.
Poor market conditions have caused Reits such as MacarthurCook Industrial and Allco Commercial to scrap plans for fund-raising by issuing new shares. With the Reits’ ability to fund their growth and repay existing debts squeezed, analysts such as Goldman Sachs and UBS are predicting that smaller Reits such as MacarthurCook will become acquisition targets.
Mr Tang said that FCT’s balance sheet remained strong with most debts due in 2011, and FCT had an A3 corporate rating from Moody’s. He declined to say if he was planning to acquire another Reit, but did not rule it out. ‘I think, as a strategy, it’s something that most people would not rule out. It’s obviously another way of growing. M&A will probably be an area that will have more activity in the Singapore Reit market in the future. Like in the United States and Australia, it’s an inevitable phase for the market that there will be consolidation from time to time.’
Mr Tang remains bullish about the outlook for suburban malls, despite concerns that consumers would cut expenses amidst fears of a slowing global economy and surging inflation. ‘Even in the worst of times, during the Sars period in 2003, our occupancy never dropped because suburban malls are non-discretionary spending and it rides economic cycles very well,’ he said. — Reuters
CCT – CIMB
CCT obtains call option to acquire One George Street
Priced at S$1.165bn, with a 5-year yield protection at 4.25% p.a. CCT has obtained a call option to acquire One George Street, a Grade A office building located in the CBD, from its parent CapitaLand (CAPL SP, S$6.40, Underperform, target price S$6.49). The offer price of S$1.165bn, or S$2,600 psf of net lettable area, comes with a minimum net property income (NPI) guarantee of S$49.5m p.a. for five years from the date of completion of the acquisition. The minimum income represents a yield protection of 4.25% for CCT. The building is currently fully occupied.
Comments
S$6bn acquisition target achieved. CCT intends to hold an EGM before end-Jun 08 to seek unitholders’ approval for this transaction. If the acquisition is completed by end-Jul 08 as scheduled, CCT’s acquisition target of S$6bn by end-2009 would be brought forward. In fact, CCT’s portfolio could reach a size of S$6.5bn at the end of this year.
Reasonable minimum NPI. The minimum NPI of S$49.5m p.a. translates to an average monthly gross rent of S$12.30 psf of net lettable area. This is a reasonable level in view of low signing rents in 2005-06, possibly ranging between S$5 and S$9 psf per month, compared to rents signed in 2007, which could have broken through S$15 psf per month. Thus, current average rent for One George Street is more likely to hover at S$10 psf per month. Additionally, significant commercial supply of some 4.5m sf is expected in the CBD from 2010 to 2011. This excludes potential supply from the Ophir-Rochor area, which the government intends to develop over the next 10 years. In view of the low rental base and continued strong office supply over the next 3-5 years, the minimum NPI looks reasonable
Significant rental reversions expected. One George Street was completed in 2005, with most of its leases signed over 2005-06. With average 3-year lease tenures, most of the leases would be up for renewal in 2008-09, representing good rental reversion opportunities for CCT. Indicative asking rents listed by Corporate Locations show Grade A offices asking for rents of S$15-21 psf per month as at Mar 08.
Full funding by debt. Management said it has secured committed funding for 100% of the purchase price. Hence, there would be no placement of new units or rights issues. With the completion of this acquisition, CCT’s asset leverage is expected to rise to 40% from 27%. This remains within its long-term target of 45% and well below the regulatory limit of 60%.