Month: July 2010
CCT – BT
StarHub Centre ties its lot to the trump card next door
LAST week, CapitaCommercial Trust (CCT) sold its StarHub Centre at Cuppage Road, a 10-storey predominantly office building, to Frasers Centrepoint Ltd for $380 million, a whopping 42.5 per cent above the most recent valuation of the asset as at June 30, 2010.
In January, the trust’s manager had already revealed that it had obtained outline planning permission (OPP) from the Urban Redevelopment Authority to change the use of the property to residential (capped at 80 per cent of gross floor area) and commercial use from its current zoning of purely commercial use. The StarHub Centre site has a balance lease term of about 85 years.
The sale took place after an expression of interest exercise followed by a private tender.
Besides Frasers Centrepoint, other parties that took part in the bidding process are said to have included GuocoLand.
What was probably the deal clincher for Frasers Centrepoint is that it did not make major conditions or seek provisions which would give it the right to rescind the purchase of the property. CCT’s manager in its release last Friday said StarHub Centre’s sale was not subject to any additional planning or redevelopment approval of any kind following the OPP.
Also, the transaction was not subject to approval for a top-up of the site’s lease, although it revealed that on July 13, Singapore Land Authority gave in-principle lease upgrade approval to top up the site’s lease to 99 years. Frasers Centrepoint also did not require that CCT fulfil the conditions of the in-principle lease upgrade approval.
More options
Frasers Centrepoint could afford not to demand such conditions because of its trump card – majority ownership of the next-door Centrepoint Shopping Centre. The latter fronts the Orchard Road shopping belt and gives Frasers Centrepoint more options than any other bidder that had vied with it for StarHub Centre, which is tucked behind Orchard Road and faces the Central Expressway.
With or without a lease upgrade for StarHub Centre and a redevelopment to a mostly-residential scheme, Frasers Centrepoint can tap more synergies from owning the two properties.
Currently, there is already a second-storey link between the two properties. If SLA proceeds to top up StarHub Centre’s lease to 99 years and URA gives the formal nod for the redevelopment of the property into a mainly residential scheme (60 to 80 per cent of gross floor area or GFA) with some commercial space, Frasers Centrepoint can do retail for the balance commercial component (which has to be 20 to 40 per cent of GFA according to the OPP) and integrate it better with Centrepoint Shopping Centre in front.
The residential component could be in the form of apartments – perhaps smallish units that can be sold at relatively high per square foot prices to help fund the retail portion of the redevelopment.
Who knows, the group could even seek and get permission from the authorities and build serviced apartments for the residential component since it has a serviced residences arm.
Frasers Centrepoint can also endure the risks in the event that the authorities don’t give the final approval for a lease top-up or if the lease upgrading premium Frasers Centrepoint has to pay the state does not make the lease extension an economically viable option. It may not even be too perturbed if URA does not give further planning approvals for the residential-commercial scheme stated in the OPP. If such a scenario materialises, Frasers Centrepoint may still find it worthwhile to redevelop StarHub Centre into a new full-retail project as an extension to Centrepoint Shopping Centre, which fronts Orchard Road.
Deal waiting to happen
Any other developer would be stuck if a lease upgrade is not granted since it would be difficult to redevelop and build a residential component and hope to sell apartments with 80-plus years’ remaining lease. Redeveloping StarHub Centre on the balance lease term into a full-commercial project may not be workable either. As a shopping centre, it is unlikely to do well because of its location, hidden behind the main shopping belt.
Building offices may also not be an attractive venture as office rents in the location are below those in the financial district. As a DMG & Partners Research report notes, ‘at the peak of the office market StarHub Centre had an average passing rent of below $5 psf a month, significantly lower than most schemes in the Raffles Places and Tanjong Pagar vicinity’.
That was probably why CCT came to the conclusion that StarHub Centre had reached its optimal stage of life cycle as an office building.
CCT’s manager was not keen on exposing the trust to the risks in the residential market by undertaking, either solo or on a joint-venture basis, a redevelopment of StarHub Centre into a predominantly residential project.
Even if the trust had sold the asset to its parent, CapitaLand, the latter would not have had as many options as Frasers Centrepoint does. Put simply, CCT’s sale of StarHub Centre to Frasers Centrepoint was a deal just waiting to happen.
K-REIT – Daiwa
KREIT acquires another Australian office building
What has changed?
• K-REIT Asia (KREIT) announced its 2Q FY10 results on 19 July 2010. The DPU of 1.64 cents was 2.5% above our estimate, while net-property income (NPI) of S$18.4m was 18.9% above our estimate.
Impact
• Gross revenue of S$ 22.7m was 11.8% above our estimate. We attribute the difference to higher-than-expected rental revenue from Prudential Tower and 275 George Street. This was offset largely by a lower-than-expected income contribution from ORQ and higher-than-expected trust expenses. As a result, total distribution of S$21.97m was 2.4% above our estimate.
• In the same briefing, the manager announced the acquisition of 77 King Street for A$120m. 77 King Street is a prime commercial building located in Sydney’s central business district (CBD). The building is fully occupied currently with a weighted-average lease expiry of 5.8 years. The building will add a net leasable area (NLA) of 147,250 sq ft to KREIT’s current property portfolio of about 1.5m sq ft. KREIT will have a total exposure (in terms of NLA) of about 22% to Australia after this acquisition.
• Management expects the acquisition to have DPU accretion of 6.6% on a proforma basis. This acquisition will be funded by a combination of debt and equity. We expect KREIT’s aggregate leverage to increase to 20.4% from 15.2% (at 30 June 2010) after the acquisition is completed in the 4Q10.
Valuation
• We maintain our six-month target price of S$0.99, based on our RNG valuation (a finite-life Gordon Growth model) at S$0.99. We have not changed our midcycle core revenue assumptions or our effective cap assumptions of 5.44% (consisting of a discount rate of 6.94% and an internal growth rate of 1.5%). We have assumed that the acquisition should be value-neutral.
Catalysts and action
• We maintain our 5 (Sell) rating on KREIT and believe its DPU yields are unattractive relative to those of other office S-REITs.
K-REIT – DBSV
Deepens presence in Australia
• Results lifted by Brisbane contributions
• Acquiring Sydney CBD office building for A$120m
• Maintain Hold, TP $1.20
Performance boosted by Brisbane asset. Kreit reported a 27.6% sequential rise in topline to $23.2m in 2Q10 while NPI improved 32.4% to $18.4m, thanks largely to a full quarter’s income from the Brisbane office building and better performance from its S’pore properties. The S’pore portfolio enjoyed higher occupancies of 97.6%, which more than offset the dip in average rents to $8.19psf/mth as Kreit locked in some forward leases that carry higher existing rents. Distribution income rose 23.3% qoq to $22m, translating to a DPU of 1.97Scts.
Acquires Sydney office building. At the same time, Kreit announced the purchase of a 170,662sf Grade A office/retail property at 77 King St in the Sydney CBD for A$120m (S$145m) or at a 7.6% cap rate. The property has a WALE of 5.8 years and existing leases have inbuilt annual rental escalation clauses. As the property is currently 76.8% occupied, there is a 24-month rental guarantee of A$2m for any rental shortfall due to vacancies and a further A$4m income support for 6 years as the property is relatively under-rented compared to market rents in the vicinity. Major tenants include Fitch Australia, CapGemini, Herbert Greer and Expedia Australia. The deal is accretive and the long leases are likely to provide another stable income source to partially offset the expected dip in earnings when ORQ’s income support expires in FY12. The new buy will be funded by the remaining rights proceeds and new debt. Gearing is expected to increase from 15.2% to 20.4%.
Lifting FY11F earnings, TP raised to $1.20. FY11 DPU raised by 10.6% to 7.3Scts to factor in the additional income from the new purchase. The S’pore office rental market has bottomed out and will continue to benefit from increased demand as GDP is projected to grow by a strong 13-15% this year. This will underpin Kreit’s income. The stock is trading at FY10-11 yield of 5.6-6%. Maintain Hold with revised DCF-backed TP of $1.20.
K-REIT – CIMB
Acquisition potential but fairly valued
• In line; upgrade to Neutral from Underperform with higher target price of S$1.21 (from S$1.01). 2Q10 DPU of 1.64 Scts met our expectation and consensus, forming 26% and 24% of the respective full-year forecasts. K-REIT took the opportunity to announce its acquisition of 77 King Street in Sydney. We raise our FY10-12 DPU estimates by 4-22% after raising portfolio occupancy and rental assumptions for 275 George Street and factoring in contributions from the newly acquired Sydney property. Accordingly, our DDM-based target price rises to S$1.21 (discount rate: 7.2%) from S$1.01. Upgrade to Neutral as K-REIT’s strong financial position presents opportunities for acquisition growth, though we prefer a Neutral rating on a lack of concrete details. Re-rating catalysts could come from increased clarity on yield accretion from asset injections like Phase 1 of Marina Bay Financial Centre and positive rent reviews for One Raffles Quay.
• NPI grew 49.3% yoy. Net property income of S$18.4m was up 49.3% yoy on additional stakes in Prudential Tower and 275 George Street. Qoq, NPI grew 32.4%, thanks to increased recognition of 275 George Street acquired in Mar 10. 2Q10 DPU of 1.64 Scts was, however, down 37.9% yoy due to an enlargement in the share base following its rights issue in Nov 09.
• Portfolio occupancy improved to 97.9%. 2Q10 portfolio occupancy jumped 1.9% pts qoq and 3.0% pts yoy. Average rentals for its Singapore portfolio edged lower to S$8.19 from S$8.30 as at Mar 10, though management believes rentals had bottomed in the quarter.
• Acquisition of 77 King Street in Sydney. K-REIT announced its agreement to acquire 77 King Street, a Grade A commercial building in Sydney for A$120m (S$145m). The acquisition will be made on a fully-leased basis with income top-up of up to A$2.0m (S$2.4m) will be provided to make up for any shortfall in rent for any space not fully-leased within a period of two years. Completion of the acquisition is expected in 4Q10. We raise our FY11-12 DPU estimates marginally as increased NPI contributions are partially offset by higher borrowing costs and withholding tax.
K-REIT – BT
K-Reit net property income up 49% in Q2, but DPU falls 38%
It buys office, retail space in Sydney building for A$120 million
K-REIT Asia has acquired office and retail space at 77 King Street in Sydney, Australia, for A$120 million (S$145 million).
The trust announced the move yesterday – as well as improved results for the second quarter ended June 30. Boosted by recent acquisitions, net property income (NPI) jumped 49 per cent from a year back to $18.4 million. This raised distributable income to unit-holders 26 per cent to $22 million.
Distribution per unit (DPU) was 1.64 cents, falling 38 per cent from 2.64 cents a year ago as the unit base expanded due to a $620 million rights issue last November.
Adjusting for the rights issue, DPU in Q2 last year would have been 1.32 cents. Based on this, DPU would have risen 24 per cent year-on-year.
K-Reit’s latest purchase at 77 King Street comes hot on the heels of two other deals. It bought a 50 per cent stake in 275 George Street in Brisbane early this year, and an additional 29 per cent interest in Singapore’s Prudential Tower late last year.
77 King Street is in Sydney’s central business district and is owned by Kingvest Pty. K-Reit bought an 18-storey office block with 130,394 sq ft of space, and part of a retail component with 16,856 sq ft of space.
Rents at the property are around A$570 per sq metre a year – at the lower end of market rates – but the seller will provide K-Reit with an NPI guarantee of up to A$4 million for six years. The leases also come with fixed annual rental escalations.
The space will be fully leased by the time the acquisition is complete in Q4. Key tenants include CapGemini Australia and Fitch Australia.
K-Reit will fund the purchase with equity from its rights issue and debt. Its aggregate leverage at June 30 was 15.2 per cent, and is expected to rise to 20.4 per cent after the Sydney deal is done.
For the first half ended June 30, K-Reit’s NPI surged 40 per cent year on year to $32.3 million. Distributable income to unit-holders rose 20 per cent to $39.8 million.
DPU was 2.97 cents, down 41 per cent from five cents a year ago – also because of the rights issue. Adjusting for that, DPU last year would have been 2.49 cents, reflecting a 19 per cent year-on-year rise.
For the period Jan 1 to June 30, unit-holders will receive a distribution of 2.97 cents on Aug 26.
The chief executive of K-Reit’s manager, Ng Hsueh Ling, is upbeat. The Singapore office market is likely to have ‘passed the trough’ and the Reit has seen more sign-ons, she said at a briefing yesterday.
As at June 30, K-Reit’s portfolio occupancy rate was 97.9 per cent, up from 96 per cent a quarter earlier.
But the portfolio’s average gross monthly rent dipped slightly to $8.19 psf from $8.30 psf. According to Ms Ng, this was the result of a lease restructuring. K-Reit had negotiated for the extension of some leases and offered slightly lower rents in return, so lease expiries would be spread out better.