Market Street Car Park Redevelopment finally comes into fruition

1Q11 DPU of 1.84 S-cents. CCT posted its 1Q11 results yesterday, which came in mostly in line with our expectations. Gross revenue met 25.5% of our full-year forecast and was down 10.6% YoY and 1.2% QoQ to S$91m. This was mainly attributed to the reduction in rental income arising from the sale of Starhub Centre and Robinson Point and the lower revenue contribution from Six Battery Road because of expected vacancies to facilitate the asset enhancement works and negative rent reversions. Total distributable income was down 4.1% YoY and 4.7% QoQ at S$52.1m. 1Q11 DPU is 1.84 S-cents, which is 4.7% lower than 1.93 S-cents reported a year ago. On an annualized basis, the latest distribution represents a yield of 5.3%. CCT also repaid the S$100m MTN that was due in Jan 2011 in cash this quarter and brought down its gearing from 28.6% to 27.8%. This gives it comfortable debt headroom of S$663m before hitting the 35% gearing level.

MSCP redevelopment. CCT also announced that it will be jointly developing Market Street Car Park (MSCP) with its sponsor, CapitaLand, into an ultra-modern Grade A office tower. CCT has obtained provisional permission from URA to rezone the premise from “transport facilities” to “commercial use”. The rezoning is subjected to two conditions: (1) payment by CCT of 100% of the enhancement in land value as assessed by the Chief Valuer, and (2) No extension of the existing land lease, which expire on 31 Mar 2073. The total project cost is estimated to be S$1.4b (S$1,944 psf on NLA basis).CCT will have a 40% stake in the JV and capital commitment of S$560m, which will be funded in stages. It will commit S$335m in 2011, and the rest via internal cash resources and debt, keeping pro forma gearing below 31%. The new office tower has a GFA of 887,000 sqft and height of 245m, expected to be completed before end 2014. According to our estimates, CCT’s existing NPI yield in FY10 was approximately 5.46%. CCT has stated that the stabilised yield from the completed development is expected to exceed 6% per annum, which makes the redevelopment yield-accretive.

Reiterate BUY. We are overall positive on the MSCP redevelopment but remain wary that its land lease is only 59 years following completion in end 2014. We also forecast CCT to continue to experience negative rent reversions in 2011 , but this should change in 2012. With its near 100% occupancy and active leasing strategy, CCT is poised to benefit from the rental upside ahead. Reiterate BUY with an increased RNAV derived fair value of S$1.63 (prev: S$1.61).

Redeveloping Market Street Carpark

• Results within street estimates, negative rental reversion kicking in

• Redevelopment of Market Street Carpark provide midterm boost

• Upgrade to BUY with slightly higher TP of $1.59

1Q11 results within expectations. Topline declined by 10.6% yoy and 2.4% qoq to $91m, due to lower revenue contribution from 6 Battery Rd following asset enhancement works as well as negative rent reversions and income vacuum left by the disposal of Starhub Centre and Robinson Point last year. Correspondingly, NPI fell by 9.9% yoy (-1.4% qoq) to S$69.9m. Distributable income dipped a smaller 4.7% yoy to S$52.1m (DPU: 1.84Scts) due to lower borrowing cost.

Negative rental renewals mitigated by healthy leasing activities. Portfolio occupancy remained relatively stable at 98.2% (-1.1% qoq) with the group signing 156,000sf of new office and retail leases in 1Q11. That said, topline will continue to be affected by negative rental reversions for the rest of 2011 with expiring office leases in its 4 major buildings averaging $14.01psf/mth, compared to current market rates of c$8.5-12psf. CCT has a remaining 10.3% of office and 2.1% of retail leases up for renewal in 2011 and another 13% and 6% respectively by 2012.

Redeveloping Market St Carpark gives better returns. The group announced it is jointly redeveloping the Market St Carpark into an office tower with Capitaland and will take a 40% share in the $1.4b project. We believe the projected 6% yield on cost is more accretive than acquiring completed properties at this part of the cycle. Taking into account its share of $560m capital commitments, we expect gearing to remain healthy at c31% when completed. Redevelopment will cut bottomline by 2-4% over FY11-14 on loss of income to DPU yield of 4.7-4.8%. However, earnings will rise by a healthy 24% yoy in FY15 when the development is completed. More importantly, we believe this exercise would be ROE enhancing and lift current BV by 5% based on mark to market value of c$2600psf.

Upgrade to Buy. We upgrade the stock to Buy as we expect this redevelopment to provide share price re-rating catalyst. Our TP is raised slightly to $1.59 and offers 18% total return.

Shimmering with x number of car lots

$1.4b tower coming up on historical parking site; unclear how many lots it will have but a survey finds sufficient parking space in vicinity

CapitaCommercial Trust (CCT) is joining hands with its sponsor CapitaLand to redevelop the historical Market Street Car Park (MSCP) for an estimated $1.4 billion, or $1,900 per square foot of net lettable area (NLA).

The new 245-metre building looks set to stand out. What is unclear though, is the number of parking lots it will provide when the 704 lots at MSCP are gone.

CCT unveiled the redevelopment proposal yesterday with its first quarter results. This is what the market can expect by end-2014: an ‘ultra-modern’ Grade A office tower designed by renowned Japanese architect Toyo Ito, with a gross floor area (GFA) of some 887,000 square feet spread across an estimated 40 storeys.

The commercial real estate investment trust (Reit) is in discussions to form a joint venture with CapitaLand Commercial for the project. The former could hold a 40 per cent stake – translating to a capital commitment of $560 million.

CCT needs a partner because under official guidelines, the total contract value of property development activities and investments in uncompleted property developments undertaken by a Reit should not exceed 10 per cent of its total asset size. The Reit had $6 billion of assets as at March 31.

CCT had in early 2008 obtained outline planning permission for the redevelopment, but was forced to drop the project in 2009 because of the financial crisis.

Industry watchers have been expecting CCT to pick up from where it left off as it looks for ways to invest its cash hoard after selling two properties last year. Speculation heightened when it returned to the authorities and won provisional permission for the project.

CCT said that it recently received ‘an indication’ from the Singapore Land Authority on the differential premium (DP) payable for the change of land use. The DP makes up about 45-50 per cent of the total project cost of $1.4 billion.

MSCP’s site will be rezoned for commercial use subject to two conditions: CCT has to pay 100 per cent of the enhancement in land value as assessed by the Chief Valuer in a spot valuation, and there will be no extension of the existing land lease. The site has a remaining lease of 62 years.

CCT expects the new tower’s stabilised yield to exceed 6 per cent per year. Analysts from Standard Chartered forecast a 3-5 per cent accretion to distribution per unit in 2015, assuming rents reach $14 psf by then.

Lynette Leong, CEO of CCT’s manager, laid out the case for the investment: ‘Having considered the unexpired land lease, estimated project cost, potential office market rent and there being no other new Grade A office building completing in 2014 in the core Central Business District area, we believe that a Grade A office tower is the best use for the site.’

The estimated development cost of $1,900 psf of NLA ‘is considerably lower’ than recently transacted prices of Grade A office buildings, she added.

As at March 31, CCT had cash and cash equivalents of $448.5 million. Ms Leong said that it would be able to fund the redevelopment using internal cash resources and debt, keeping pro forma gearing below 31 per cent, which leaves room for other acquisition opportunities.

MSCP was built in 1964 and has 704 parking lots. Despite this, the supply of lots in the CBD is currently tight, said Colliers International director of research and advisory Chia Siew Chuin.

CCT is working with the authorities to determine the number of parking lots in the new building. Going by Land Transport Authority (LTA) rules for the zone that MSCP is in, it should have at least one lot for every 450 square metres of GFA. A rough calculation based on the building’s estimated GFA shows that there has to be a minimum of 184 lots.

LTA told BT that the new building’s design is being finalised, and that a recent survey showed that there are sufficient spare parking spaces in the vicinity within a 5-10 minute walk from MSCP.

‘With the improvement of public transport coverage in the CBD over the years, the need to rely on private transport to get into the CBD has gradually reduced,’ LTA said. ‘In 2013, when the DTL 1 (Downtown Line 1) is operational, there will be three new MRT stations within the CBD and Telok Ayer Station will only be about 100 metres from MSCP’s current location.’

CCT’s distributable income for Q1 dips to $52.1m

CAPITACOMMERCIAL Trust (CCT) yesterday posted weaker results for the first quarter ended March 31 as the sale of Robinson Point and Starhub Centre last year, asset enhancement works at Six Battery Road, and negative rental reversions affected earnings.

The results were largely within market expectations, but there were bright spots for unit-holders. The commercial Reit secured higher pre-commitment rates for upgraded space at Six Battery Road. It is also pursuing growth by proposing to redevelop Market Street Car Park.

In Q1, net property income dropped 9.9 per cent to $69.9 million. Distributable income dipped 4.1 per cent to $52.1 million.

As a result, distribution per unit was down 4.7 per cent to 1.84 cents. Based on CCT’s closing unit price of $1.42 on Monday, the distribution yield is 5.3 per cent.

‘The portfolio continues to perform well, except for Six Battery Road which contributed lower revenue due to expected vacancies to facilitate the asset enhancement works and negative rent reversions given lower market rental rates compared with the expired rentals,’ said Lynette Leong, CEO of CCT’s manager.

At Six Battery Road, CCT has completed the first phase of upgrading works and officially opened the building’s indoor vertical garden last month.

It now expects to enhance 76,100 square feet of office space and new and existing tenants have pre-leased 64 per cent of this. It said previously that it could upgrade 65,600 sq ft of space, and the pre-commitment rate was 52 per cent.

Richard Hale, chairman of CCT’s manager, said that negative rent reversions will occur for most of the leases expiring this year. They were mainly signed at the peak of the market in 2008. ‘Current office market rentals, though increasing, have not recovered to that level yet. We will continue our proactive leasing and cost management strategies to mitigate the expected fall in distributable income,’ he said.

CCT’s gearing ratio in Q1 was 27.8 per cent, down from 28.6 per cent in Q4 last year.

CCT lost one cent on the stock market yesterday to end trading at $1.41.