CCT – JPMorgan

One George Street option: raising the risk profile – ALERT

• CapitaCommercial Trust (CCT) granted an option to buy One George Street (OGS) from CapitaLand for S$1,165million, or S$2,600psf capital value. OGS is a prime grade A office building with 447,999sq ft of net lettable area at the edge of the Raffles Place CBD micro-market. As the property is currently significantly under-rented (average base rents are around S$7.40psf per month on our estimates, compared with current spot rents of S$15psf), the prospective vendor CapitaLand will provide yield support to ensure a minimum net property income of S$49.5million per annum, or a 4.25% yield at the purchase price.

• Few details available; more information when circular to unitholders is released in May/Jun 08. CCT intends to fully finance the acquisition with debt and has committed funding lines in place already, according to the REIT manager. Assuming a cost of debt of around 3.5%, we estimate DPU accretion to CCT of about 1.4% resulting from this acquisition, with the trust’s gearing rising from 27% currently to 40%. Our DDM-based net present value for CCT would drop post-acquisition however as the amount of accretion would not compensate sufficiently for the increased leverage on our initial calculations.

• CapitaLand raising another S$1.1billion divestment proceeds in this proposed sale. The OGS transaction is a connected party transaction and CCT’s unitholders will get to approve the acquisition (CapitaLand cannot vote its 30% stake). If approved, the divestment proceeds would raise CapitaLand’s consolidated cash position to over S$5billion on our estimates, putting them in a prime position to tap investment opportunities in an increasingly capital-constrained Asian real estate sector.