CCT – UOBKH
Organic growth from positive rental reversion
CapitaCommercial Trust (CCT) is the prime beneficiary of the escalation in rental rates for prime office space within the Central Business District (CBD). It owns nine properties in Singapore with 2.3m sf of office space, which accounts for 7% of private office stock within Downtown Core.
Benefiting from positive rental reversion in 2008 and 2009. CCT has 29.4% of its leases for office space up for renewal in 2008 and 2009. We understand that in Jan 08, Standard Chartered renewed leases for 130,000sf at 6 Battery Road at above S$15.00psf pm vs the previous rate of S$5.50psf pm. Another 26% of office space at 6 Battery Road is up for renewal in 2008 and 2009. 50% of office space is up for renewal in 2008 at Robinson Point with existing rent of only S$4.00psf pm. 51% of office space is up for renewal in 2009 at Raffles City Tower with existing rent of only S$5.70psf pm.
CCT has entered into a seven-year lease renewal agreement with HSBC commencing on 30 Apr 2012 (after expiry of existing lease) and expiring on 29 Apr 2019. The contract value of S$143.1m represents an average rental of S$8.50psf pm, much higher than existing passing rent of S$3.63psf pm.
Leasing momentum remains strong. Management expects rental rates for prime office space within the CBD to have further increased in 2Q08 due to high occupancy rates although the pace of growth has moderated.
Call option to acquire OGS. CCT has obtained a call option to purchase One George Street (OGS) from CapitaLand for S$1.165b, or S$2,600psf. Sponsor 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. The company has secured committed debt funding. We estimate that gearing will increase from 24% to 40.8% after the acquisition is completed in Jul 08.
Has refinanced short-term borrowings. CCT has issued S$100m 3-year medium term note (MTN) with fixed interest rate of 3.15% in Jan 08. It has also issued S$150m 2-year MTN with fixed interest rate of 3.05% in Mar 08. CCT has completed the refinancing for short-term borrowings and funding for the acquisition of Wilkie Edge, a mixed development project at Selegie Road. CCT has issued S$370m five-year convertible bond with coupon of 2%, yield-tomaturity of 3.95% and conversion price at S$2.6762. Proceeds from the convertible bond will be utilised to finance acquisition of OGS.
CCT provides a diversified exposure to the office market in Singapore. It provides FY08 distribution yield of 4.90%. We have raised our target price to S$2.87 after incorporating contributions from the acquisition of OGS and lease renewal at HSBC Building into our forecast.