CCT – UOBKH

CCT obtained option to acquire One George Street from CapitaLand

Call option to acquire One George Street. CapitaCommercial Trust (CCT) has obtained call option with the right but not obligation to purchase One George Street from CapitaLand at price of S$1.165b or S$2,600psf. One George Street is a 99-year leasehold Grade A office building with net lettable area of 447,999sf (97.2% office, balance retail). It is located within the Central Business District and walking distance to Raffles Place and Clarke Quay MRT stations. Key tenants at One George Street are Royal Bank of Scotland, WongPartnership, Borouge, Lloyd’s London (Asia) and Canadian High Commission.

Structured with 5-year yield protection. CapitaLand will provide yield protection to CCT to ensure minimum net property income of S$49.5m/year (yield of 4.25%) for five years from the date of completion of acquisition till 2013. The yield protection provides insurance against downside risk. We estimated the yield protection to be equivalent to rental of S$11.44psf pm plus other income of S$0.28m/month. Occupancy at One George Street is 100%. According to management, about 50% of the leases are up for renewal in 2008 and 2009. Current asking price for rental at One George Street is S$19psf pm.

CapitaCommercial Trust (BUY/S$2.11/Target: S$2.56)

Already secured committed funding. CCT has already secured committed funding from banks to finance the acquisition. There will not be any equity issue in the form of a placement or rights issue. CCT’s current gearing is low at 24.6%. Gearing is estimated to increase to 40.8% post acquisition of One George Street. CCT has recently secured attractive interest rate at 3.05% for 2-year S$150m medium term note (MTM) and 3.15% for S$100m 3-year MTM. The acquisition of One George Street is expected to complete by Jul 08.

Benefitting from positive rental reversion. CCT is well positioned to benefit from positive rental reversion as 56.9% of its leases for office space are up for renewal in 2008 and 2009, when supply of office space coming on stream is fairly limited. According to management, CCT’s current asking price is S$22.50psf pm for 6 Battery Road and S$17.50psf pm for Raffles City Tower, which is slightly higher compared to 4Q07.

Raise target price to S$2.56. Our target price for CCT is S$2.63 if we assumed acquisition of One George Street is completed in Jun 08. This assumes cost of debt for additional borrowings at 3.5% and contribution from One George Street starting 3Q08. We have assigned a probability of 50% with regards to completion of the acquisition and have, therefore, raised our target price for CCT from S$2.45 to S$2.56.