CCT – UOBKH
2Q08: Benefitting from positive rental reversion
CapitaCommercial Trust (CCT) reported gross revenue of S$74.4m in 2Q08, an increase of 25.2% yoy. Notable growth drivers were 6 Battery Road, Robinson Point and Capital Tower, where revenue contributions increased 99.3%, 35.4% and 15.5% yoy respectively. CCT benefitted from positive rental reversion with renewed and new leases committed in 1H08 at 193% higher than preceding rental rates. Net property income increased 18.6% yoy to S$51.5m while distributable income gained 23.2% yoy to S$36.1m. CCT announced DPU of 2.60 cents for 2Q08, an increase of 22.6% yoy.
CCT recognised gain of S$445.6m on revaluation of its investment properties. The higher valuation came largely from HSBC Building and 6 Battery Road, which are located within Raffles Place and its 60% stake in Raffles City. Its portfolio has expanded from S$5.7b to S$6.9b after completion of acquisition of One George Street (OGS). The stock is currently trading at a steep discount of 36.5% to NAV/share of S$3.12.
Benefiting from positive rental reversion in 2008 and 2009. Growth in rental rates has moderated as recent escalation in office rentals forced more companies to alternatives such as transitional office space and relocating support functions outside the Central Business District (CBD). Rentals for Grade A office space within Raffles Place increased a mild 1.7% qoq to S$17.82psf pm in 2Q08. Occupancy for Grade A offices dipped slightly from 99.1% in 1Q08 to 98.3% in 2Q08 (Source: Colliers). Nevertheless, CCT will benefit from positive rental reversion as leases expiring in 2009 and 2010 were contracted at rates significantly below current market rentals. For example, 49% of office space at Raffles City will expire in 2009. The current rental rate of S$5.69psf pm is way below prevailing rental of S$11.50psf pm for office space in the vicinity.
Completed financing package for One George Street. CCT utilised a myriad mix of instruments to finance the acquisition of OGS. The package comprises convertible bonds of S$370m, S$150m from its medium term note programme and 2-year term loan of S$650m. The effective interest rate for the package is 3.23% assuming all-in interest rate of 2.86% for the 2-year term loan, which has been lock in for six months, is maintained. The acquisition was completed on 11 Jul 08 and OGS will contribute to earnings from 3Q08 onwards. Gearings has increased to 35.7%, but remains at a manageable level.
CCT provides a diversified exposure to the office market in Singapore. It provides FY08 distribution yield of 5.6%, a spread of 2.2% over 10-year Singapore government bond yield at 3.4%.