CCT – BNP

One George Street – Not a sweet deal

Option to acquire One George Street
CCT has obtained an option to acquire One George Street (OGS) building from CapitaLand at SGD1.17b. OGS is a Grade A office located in Raffles Place. The offer price works out to SGD2,600/sqft of NLA, which includes income support from CapitaLand for a period of five years. The minimum NPI guarantee of SGD49.5m pa represents a 4.25% yield and an implied rental rate of SGD10.50/sqft.

To be 100% debt funded
CCT intends to fund OGS with 100% debt. It has secured committed funding for the entire purchase price. However, no covenant agreement has been established for the interest rates, leaving it exposed to interest rate fluctuations between now and its EGM at end-June 2008. With this acquisition, CCT’s gearing will rise from 27% to 40%.

Not quite a sweet deal
CCT has been successful in its recent fund raising, securing competitive interest rates at 3.1% for two of its MTN tranches, which amounted to SGD250m. In view of the high cost of long-term debt (in excess of 4%), we believe CCT will likely embrace a short-to-medium term debt capital structure to justify any immediate accretion to this acquisition. Taking into account the one-off 1% acquisition fee and assuming a 3% borrowing cost, the acquisition of OGS will be mildly yield accretive.

Weak positive carry could deteriorate credit metrics
The outright drawback from this deal is the risk of a ratings downgrade by Moody’s from A3 to Baa1. While OGS may enhance CCT’s asset quality profile and income diversity, we believe this deal could potentially deteriorate its credit metrics as the relatively low yield from OGS compared with its interest cost is likely to drag down its overall portfolio interest cover from our FY08 estimate of 4.1x. Given the low inherent rents from OGS existing tenants (about SGD4-5/sqft) and only 50% NLA expiry over 2008-09, it may take well over three years for OGS’ intrinsic rents to exceed the SGD10.50/sqft mark, hence any recovery in its interest cover. Should this deal transpire, we project CCT’s interest cover to fall to about 3.74x, assuming a borrowing cost of 3%. We remain neutral on this deal but maintain our BUY and TP of SGD2.56.