CCT – CIMB

CCT obtains call option to acquire One George Street

Priced at S$1.165bn, with a 5-year yield protection at 4.25% p.a. CCT has obtained a call option to acquire One George Street, a Grade A office building located in the CBD, from its parent CapitaLand (CAPL SP, S$6.40, Underperform, target price S$6.49). The offer price of S$1.165bn, or S$2,600 psf of net lettable area, comes with a minimum net property income (NPI) guarantee of S$49.5m p.a. for five years from the date of completion of the acquisition. The minimum income represents a yield protection of 4.25% for CCT. The building is currently fully occupied.

Comments

S$6bn acquisition target achieved. CCT intends to hold an EGM before end-Jun 08 to seek unitholders’ approval for this transaction. If the acquisition is completed by end-Jul 08 as scheduled, CCT’s acquisition target of S$6bn by end-2009 would be brought forward. In fact, CCT’s portfolio could reach a size of S$6.5bn at the end of this year.

Reasonable minimum NPI. The minimum NPI of S$49.5m p.a. translates to an average monthly gross rent of S$12.30 psf of net lettable area. This is a reasonable level in view of low signing rents in 2005-06, possibly ranging between S$5 and S$9 psf per month, compared to rents signed in 2007, which could have broken through S$15 psf per month. Thus, current average rent for One George Street is more likely to hover at S$10 psf per month. Additionally, significant commercial supply of some 4.5m sf is expected in the CBD from 2010 to 2011. This excludes potential supply from the Ophir-Rochor area, which the government intends to develop over the next 10 years. In view of the low rental base and continued strong office supply over the next 3-5 years, the minimum NPI looks reasonable

Significant rental reversions expected. One George Street was completed in 2005, with most of its leases signed over 2005-06. With average 3-year lease tenures, most of the leases would be up for renewal in 2008-09, representing good rental reversion opportunities for CCT. Indicative asking rents listed by Corporate Locations show Grade A offices asking for rents of S$15-21 psf per month as at Mar 08.

Full funding by debt. Management said it has secured committed funding for 100% of the purchase price. Hence, there would be no placement of new units or rights issues. With the completion of this acquisition, CCT’s asset leverage is expected to rise to 40% from 27%. This remains within its long-term target of 45% and well below the regulatory limit of 60%.