CCT – UOBKH
1Q08: Benefiting from positive rental reversion
CapitaCommercial Trust (CCT) reported gross revenue of S$71.2m in 1Q08, an increase of 22.8% yoy. Notable growth drivers were 6 Battery Road, Robinson Point and Capital Tower, where revenue contributions increased 81.5%, 23.1% and 16.3% yoy respectively. CCT benefited from strong demand for office space from banks and financial institutions and supporting business services such as legal and IT firms. Renewed and new leases committed in 1Q08 were 195.1% over preceding rental rates. CCT was able to sign leases above S$20psf pm during the quarter. Net property income increased 15.6% yoy to S$49.6m while distributable income gained 22.6% yoy to S$35.9m. CCT announced DPU of 2.59 cents for 1Q08, an increase of 22.7% yoy.
Benefiting from positive rental reversion in 2008 and 2009. Rentals for prime office space within Raffles Place and Marina Centre shot up from S$8.60 in 1Q07 to S$15.00psf pm in 4Q07 (source: CB Richard Ellis). Rentals for prime office space surged a further 6.7% qoq to S$16.00psf pm in 1Q08 as tenants chased after limited pockets of vacant space within the Central Business District. Overall occupancy rate for Grade A and B offices at 96.9% is above the technical full occupancy rate of 95% (Source: Colliers International).
Supply of office space remains constrained in 2008. Only 959,000sf of new office space will come on stream, the majority in fringe suburban locations. According to CB Richard Ellis, rentals for prime office space could average S$17.00psf pm by end-08, an increase of 13.3% in 2008. Supply of 1,275,000sf of office space in 2009 is also lower than projected take-up of 1.6m sf per annum. CCT is well positioned to benefit from positive rental reversion as another 29.4% of its leases for office space are up for renewal in 2008 and 2009.
Call option to acquire One George Street. CCT has obtained a call option to purchase One George Street from CapitaLand for S$1.165b, or S$2,600psf. One George Street is a 99-year leasehold Grade A office building within walking distance from Raffles Place MRT station with a net lettable area (NLA) of 447,999sf. CapitaLand will provide yield protection with minimum net property income of S$49.5m p.a. (yield of 4.25%) for five years from the date of completion of acquisition till 2013. This is equivalent to rental of S$10.50psf pm. CCT’s asset size will expand to S$6.5b if the acquisition is approved and completed. The company has secured committed debt funding and will not require placement of new units. Gearing is estimated to increase from 24% to 40.8% post acquisition of One George Street.
Has refinanced short-term borrowings. CCT has issued S$150m 3-year medium term note with fixed interest rate of 3.05% in Mar 08. This has largely satisfied funding requirements for refinancing short-term borrowings and the acquisition of Wilkie Edge, a mixed development project at Selegie Road. CCT has also launched a S$280m 5-year convertible bond with coupon of 2%, yieldto- maturity of 3.95% and conversion price at S$2.6762.
CCT provides a diversified exposure to the office market in Singapore. It provides FY08 distribution yield of 5.29%, a healthy spread of 2.94% over 10- year Singapore government bond yield at 2.35%. Our target price is S$2.63, assuming the acquisition of One George Street is completed by Jun 08.