Sale of Starhub Centre; one-off gain of 4¢/share

Sale of Starhub Centre; one-off gain of 3.9¢ per share. As part of CCT’s portfolio reconstitution strategy, CCT entered into an S&P with Frasers Centrepoint Limited to sell Starhub Centre for S$380m. This comes at a 42.5% gain over its last appraised value of S$267m. After adjusting for divestment fee and other costs, the net gain works out to S$109m, a one-off gain of 3.9¢ per share. Management has no intentions of paying special dividends but to pursue possible acquisition opportunities and/or to repay debt. Maintain NEUTRAL.

Rationale for property sale instead of redevelopment. In January, management alluded that their portfolio reconstitution strategy plans would include the divestment or redevelopment of properties that has reached the optimal stage of their lifecycle. They have evaluated the alternatives and have decided against redeveloping Starhub Centre into a residential property in view of exposing the group to undue residential development and market risks.

Best possible way of unlocking value. We are in favour of this divestment as Starhub Centre is nestled away from the main financial district and, in our view, will struggle to command reasonable market rents, in the long-term. At the peak of the office market, Starhub Centre had an average passing rent of below S$5/sqft, significantly lower than most schemes in the Raffles Place and Tanjong Pagar vicinity.

Stronger balance sheet; maintain NEUTRAL. The sale of Starhub Centre will have no material impact on DPU as it contributes to only 4% of CCT’s net property income. Management has reiterated that they will use the proceeds to pursue possible acquisition and/or repay debt. Recall, CCT has S$85m debt due for expiry in 2010 and a further S$658m in 2011. CCT has a cash holding of S$173m as of Mar 2010, which will likely increase to over S$550m after this sale. This puts it in good stead for greater financial flexibility. We reduce our FY10 DPU estimate by 3.2% to 7.2¢. Maintain NEUTRAL and TP of S$1.24.

Frasers Centrepoint buys StarHub Centre for $380m

CapitaCommercial Trust will book a net gain of about $109.1m from the divestment

FRASERS Centrepoint Ltd has inked a deal to buy StarHub Centre at Cuppage Road for $380 million from CapitaCommercial Trust (CCT).

CCT will book a net gain of about $109.1 million from the divestment. The transaction price is 42.5 per cent or $113.3 million above the asset’s latest valuation of $266.7 million at June 30, 2010.

CB Richard Ellis brokered the sale of StarHub Centre.

Frasers Centrepoint CEO Lim Ee Seng said that StarHub Centre has ‘great redevelopment potential for a high-end mixed residential and retail development’. The asset will continue to be leased out as an office/retail property until such time as redevelopment options and designs are firmed up by the company, and planning approvals are obtained, Mr Lim added.

The group’s Centrepoint Shopping Centre already has a second-storey link bridge to StarHub Centre and a new project on the StarHub site will better integrate the two properties, market watchers say.

The sale by CCT will provide it with net proceeds of about $375.8 million – after taking into account divestment fee and other related costs – which will provide the trust with greater financial flexibility to pursue other attractive acquisition opportunities and/or to repay debt, the trust’s manager, CapitaCommercial Trust Management Ltd (CCTML) said.

It also revealed that on July 13 it received in-principle approval from Singapore Land Authority (SLA) for a top-up of the StarHub Centre site’s lease to 99 years. The site currently has a balance lease term of about 85 years. However, the lease upgrading premium payable to the state will be determined upon formal application.

In January, Urban Redevelopment Authority granted outline planning permission (OPP) for a change of the site’s use, from pure commercial use currently – to a residential (60-80 per cent of gross floor area or GFA) and commercial use (20-40 per cent of GFA). However, the current gross plot ratio of 4.9+ remains unchanged.

‘After evaluating various asset options and Singapore’s property market conditions, the manager believes that the property has reached its optimal stage of life cycle as an office building. However, as CCT’s focus is mainly in the office sector, the manager is of the view that CCT should not participate, whether solely or on a joint-venture basis, in the redevelopment of the property into a predominantly residential project and expose CCT to undue residential development and market risks.

‘Hence, the manager considers that the best option to unlock the maximum value of the asset for CCT is to divest it to another party for potential redevelopment,’ CCT’s manager said.

It also stressed that the sale to Frasers Centrepoint is not subject to any additional planning or redevelopment approval of any kind being obtained, following the OPP. It is also not a condition of the sale that CCT fulfils the conditions of the in-principle lease upgrade approval from SLA.

CCT also explained the process of picking the buyer.

‘After an exercise to gather formal expressions of interest from a long list of prospective bidders to purchase the property, the sale of the property was conducted by way of a private tender with the parties which had expressed an interest to purchase the property. The purchaser was one of the bidders which offered to purchase the property and whose offer and terms for the purchase (a) did not introduce any new provisions which would give rise to the right of the purchaser to rescind the purchase, thus offering more certainty in the completion of the sale, and (b) met most closely with the requirements of the manager and the trustee,’ CCTML said.

Frasers Centrepoint said the acquisition of StarHub Centre will boost its landbank to 2.2 million square feet.

Rising anticipation of Starhub Centre sale

Closer to selling StarHub Centre? Business Times reported late last month that CapitaCommercial Trust (CCT) could be close to selling StarHub Centre. GuocoLand and Frasers Centrepoint group were said to have participated in the expression of interest exercise. CCT has already obtained outline planning permission from URA to redevelop StarHub Centre into a residential (capped at 80% of GFA) and commercial property but has yet to receive approval from SLA for the lease of the site to be reset to 99 years. CCT is still evaluating all options with regard to the asset plan for StarHub Centre and no decision has been made yet.

Share price outperformed since the news report. Based on our earlier estimates, we believe that StarHub Centre could fetch between S$301.2m and S$361.9m if the buyer intends to redevelop it into a residential/commercial property. This would translate to a gain of S$33.2m (S$0.01 per share) to S$93.9m (S$0.03 per share) over its last appraised value of S$268m at the end of FY09. Since the report was published on Business Times on 24 Jun, the price of CCT gained 4.2%, outperforming its closest peer, K-REIT (up 1.8%), and the FTSE ST REIT index (up 1.2%) over the same period. We believe that the market is already anticipating the divestment of StarHub Centre in the near future.

Reinvestment of proceeds an uncertainty. Even though CCT could make a one-off gain from the divestment of StarHub Centre, DPU will be affected by the loss of income stream from StarHub Centre, which constitutes ~5% of CCT’s FY09 Net Property Income (NPI). And with CCT’s realigning its focus on Grade A office building investments, there is no assurance of a quick reinvestment of the divestment proceeds in incomegenerating assets at attractive prices to replace the loss income from StarHub Centre.

Downgrade to HOLD on valuation. With its 3Q10 results just around the corner, we are keeping our estimates unchanged for now. Our fair value remains at S$1.26, which is pegged at parity to our RNAV. Current share price of S$1.23 translates to an upside potential of 2% and with an estimated FY10 DPU yield of 5.9%, our projected FY10 total return for CCT is now 7.9%. With a lower upside potential now, we are downgrading CCT to HOLD on valuation ground. We also note that operationally, rental growth is still a concern, given the upcoming supply of new office spaces.

Sector In Favor

• Moody’s has upgraded CCT’s rating outlook to Positive from Stable, although CCT’s corporate family rating and unsecured debt rating are left unchanged at Baa2 and Baa3 respectively.

• At $1.22 yesterday, CCT is at a new post-crisis high, much like Keppel Land ($4.01, up 6). K-Reit is however still below the year’s high.

• The commendable performance of office-related stocks can be attributed to the growing consensus that office rentals have started to recover, as fears of oversupply recede.

• Rents for Grade A office space averaged $8 psf in Q1 ’10, marginally lower (1.2%) than the preceding quarter’s $8. But the rate of decline is way below the 20% drop between Q3 ’08 and Q4 ’08, which coincided with the Lehman Brothers collapse.

• Occupancy, on the other hand, actually rose in Q1 ’10, albeit a marginal 0.8% to 91.9%, vs 97.6% in Q3 ’08.

• As for supply, which is estimated to total 3.7 mln sf till 2016, or 0.6 mln sf a year, it is encouraging to see demand pick up, to 0.24 mln sf in Q1, which was the total for the whole of 2009.

• Performance of new office developments provides much comfort:

– Marina Bay Financial Centre (MBFC):

Towers 1 & 2 (totaling 1.6 mln sf) are fully leased, while Tower 3 (1.3 mln sf and to be anchored by DBS) is now 55% leased;

– Ocean Financial Centre (OFC): 850,000 sf of net lettable space and completion in mid 2011, is >30% committed.

CCT evaluating all options for StarHub Centre

Part of this process is a non-legally binding expression of interest exercise

THE manager of CapitaCommercial Trust (CCT) is evaluating all options relating to its asset plan for StarHub Centre, including the possibility of retaining the property as an office building, and has not made a decision yet.

‘As part of the evaluation process, we conducted a non-legally binding expression of interest exercise to ascertain interest for the sale of the property.

As there is no certainty of any deal materialising, unitholders are advised to exercise caution in trading the units of CCT,’ CCT said in a statutory filing to Singapore Exchange (SGX) yesterday.

Its announcement was in response to a BT article yesterday which, citing sources, said that the trust could be close to selling the 10-storey commercial building.

BT reported that StarHub Centre’s transaction price was expected to be above the Dec 31, 2009, valuation of $268 million.

In its statement yesterday, CCT said that its manager had in January 2010 announced that, as part of its portfolio reconstitution plan for the trust, it had obtained outline planning permission from Urban Redevelopment Authority (URA) to convert StarHub Centre from pure commercial use to up to 80 per cent residential and 20 per cent commercial use.

BT reported yesterday that the expression of interest exercise for StarHub Centre closed last month and that parties had been shortlisted to do due diligence.

The outline permission granted by URA for a mostly residential project is capped at the current 4.9 plot ratio that the existing property is already built up to.

Based on this and the 80 per cent residential limit, a redevelopment scheme can yield about 266,230 sq ft of residential space, sufficient for 212 apartments of an average size of 1,200 sq ft, the BT report estimated.

StarHub Centre received Temporary Occupation Permit in 1998 and stands on a site with 99-year leasehold tenure starting Feb 1, 1996.

On the stock market yesterday, CCT ended one cent lower at $1.17 amid an overall weaker market.