Pricing in the rights issue

• 1-for-1 rights issue announced to raise S$828.3 million. CCT announced that it will issue 1.4 billion new shares through a 1-for-1 rights issue, priced at S$0.59/rights unit to raise S$828.3 million. The rights issue is fully underwritten, and CapitaLand will take up their prorata share of 31.4%. The proceeds from the rights issue will be primarily used to reduce the borrowings. In addition to the rights issue announcement, the trust has revalued its investment property down by 10.1% to S$6billion. Assuming debt is reduced by S$760million, gearing will be 30.7% post rights issue and devaluation.

• Adjusting our estimates for rights, Dec-09 price target of S$0.85. We have revised down our DPU estimates for FY09/FY10 by 41%/38% to account for the rights issue, and book value has been reduced by about 40% to S$1.52/unit for 2009. Based on a discount rate of 8.0% (8.6% previously), our new Dec-09 DDM-based price target is S$0.85/unit (S$0.81/unit previously).

• Short-term risk biased on the upside, but operating fundamentals remain challenging. The announcement of the fully underwritten rights issue would, in our view, remove the EFR overhang on CCT, and we do see some short-term upside risk to the share price. That said, we believe that operating fundamentals are still challenging in the medium term and that the current share price largely reflects the income stream from the underlying portfolio based on post rights NPV. We therefore retain our Neutral rating on CCT.

• Key risks to our rating and price target on the upside include 1) market’s increasing risk appetite for relatively higher beta stocks; 2) a quicker-than-expected bottoming out and recovery of the rental market. Key downside risks include a worse than expected rental reversion.

Shock Absorbers Not Required

Quick Comment: CCT is raising S$828.3mn via a 1-for-1 rights issue at an issue price of S$0.59/unit, priced at a 44% discount to its last closing price of S$1.06. The move to raise equity is in line with our expectations, whereby with the current asset devaluation cycle, S-REITs would be pressured to reduce their leverage by retiring outstanding debt. The 29% absolute performance of the stock in the last month presented management with an opportunity to raise equity in the market. CCT is the third-largest S-REIT to raise equity in the market after CMT and A-REIT. Similar to CMT’s case, CapitaLand is commitment in taking up its entitlement to maintain its 31.4% stake in CCT. We maintain our view that for 2009, we see the S-REITs as better investments within the Singapore property space. CCT remains our sector top pick given its high dividend yield of 7.3% post the equity raising.

Asset devaluation gaining pace, 2009 still bearable: CCT’s recent asset revaluation has led to a 10% decline (S$681mn) in asset values from the valuation done in December 2008. Based on our estimates, the asset decline effectively raises CCT’s leverage from 37% to 41%, the higher band of management’s target leverage level of 30-45%. Approximately S$760mn of the gross proceeds would be used to partially retire its debt due in 2010, which would reduce CCT’s leverage from 41% to 36% and even 28% for F2009-10 assuming no further asset devaluations from current levels. According to CCT, the May revaluation was lower due to valuers’ imputing office rental declines through to 2012 while maintaining the same level of cap rates as the December valuation (Office: 4.5-4.75%, Retail: 5.5%, Raffles City: 5.6%, Hotel: 5.85%). However, we maintain our view that with total costs of debt currently at 4.5-4.75%, at best, cap rates are likely to expand further. Applying cap rates of 6% and 7% for office and retail, respectively, to our 2009 average rents estimate for its portfolio, another 25% decline in asset values or S$1.5bn is possible, in our view, raising leverage to 46%, which is a risk in 2010,

One-for-one rights issue: 37% dilution on FY10 DPU

● As widely expected, CCT has announced a fully underwritten renounceable one-for-one rights issue to raise gross proceeds of S$828.3 mn at a rights price of S$0.59, a 44.3% discount to the closing price of S$1.06. CAPL, which owns 31.4% of CCT, has underwritten to subscribe for its pro-rata S$260 mn.

● The net proceeds will primarily go towards paying down CCT’s existing borrowings, which is likely to be the expiring S$885 mn in 2010.

● Also, adjusting for a 10.1% asset write-down to S$6.0 bn due mainly to sharp rent declines since the last revaluation in December 2008; pro forma gearing will fall to 30.7% from 38.3% as of March 2009. Pro forma NAV will fall 52% to S$1.51 from S$2.91.

● After adjusting for interest and manager fee savings, we estimate FY09-11E DPU to be diluted 27-37%, implying FY10E yield of 7.3% on TERP S$0.825 versus S-REIT sector’s 10%. While the rights should alleviate share overhang concerns, we expect the office sector to remain challenging on negative demand and 16% new office supply by 2012. We maintain our target price of S$1.00 cum-rights.

Overhang concern on gearing removed

1-for-1 Rights issue at S$0.59. Last Friday, CapitaCommercial Trust (CCT) announced that it will be doing a 1-for-1 Rights issue at an issue price of S$0.59 per rights unit. Issue price is at a steep discount of 44.3% to its closing price of S$1.06 prior to the trading halt. Approximately 1.4b units will be offered, raising gross proceeds of S$828.3m from the exercise. Of the proceeds raised, approximately 85%-95% (S$704.1m-S$786.9m) will be used to reduce borrowings. CapitaLand, which has a 31.4% stake in CCT, has committed to subscribe its proportionate share of the Rights units, which will require capital commitment of ~S$260m.

Steep decline in asset value warrants the need for capital raising. Latest valuation report of CCT’s properties revealed a sharp decline in the valuation of CCT’s assets. Valuation of its combined asset portfolio (as at 22nd May) has declined by S$681m (10.2%) from its December valuation to S$6,029.6m and the lower valuation was due to independent valuers using more conservative rental rates in their forecasts despite keeping their cap rate assumptions largely unchanged. Decline in asset value has pushed CCT’s gearing level up from the reported 38.3% at the end of 1Q09 to 43.1% now, which is close to the upper band of CCT’s target gearing level of 30%-45%.

Financial impact. Following the Rights issue, CCT’s gearing level will decline from 43.1% to 30.7%, which is near the lower bound of its target gearing range. Net asset value will also decline from the reported S$2.94 per unit at the end of 1Q09 to ~S$1.52 per unit after adjusting for the decline in asset value and dilution impact. Our DPU forecast for FY09 will also be diluted by 46.4% to 6 S-cents, translating to a DPU yield of 7.3% base on the theoretical ex-Rights price of S$0.825 per unit.

Maintain BUY. The weak office market outlook is already a well-known fact and with declining office asset values, CCT’s move to tap on the equity market is within our expectation. Depending on new debt for refinancing is unlikely to be sustainable as declining asset value would reduce the amount of loan obtainable through encumbering of assets and cost of borrowing could increase with the higher gearing. With the overhanging concern on its gearing removed, we think that this should be a positive catalyst to CCT’s share price. We keeping our fair value of S$1.33 and maintain our BUY recommendation on CCT. Our ex-Rights fair value will be S$0.96.

CCT raising $828.3m via 1-for-1 rights issue

Exercise will reduce gearing to 30.7% despite fall in value of portfolio in latest revaluation

CAPITACOMMERCIAL Trust (CCT) plans to raise $828.3 million in a rights issue as it seeks to reduce its gearing, it said yesterday.

The move comes as the office real estate investment trust (Reit) saw the value of its portfolio fall 10.15 per cent in the latest valuation exercise. CCT said that the value of its Singapore properties fell from $6.71 billion in December 2008 to $6.03 billion yesterday.

The fall in CCT’s portfolio value – which came about as the valuers factored in falling market rents – would have pushed the Reit’s gearing from 38.3 per cent to 43.1 per cent. But with the rights issue, the gearing will instead fall to 30.7 per cent. The Monetary Authority of Singapore has set a 60 per cent threshold for a Reit’s gearing.

‘It (the rights issue) will reduce CCT’s gearing to the low end of our target gearing range of 30 per cent to 45 per cent through property market cycles,’ said Lynette Leong, chief executive of the Reit’s manager. The cash proceeds from the rights issue will also enhance CCT’s financial flexibility by boosting its balance sheet and improving its credit profile, she said.

Daiwa Institute of Research analyst David Lum told Bloomberg: ‘It seems CapitaCommercial is building up capacity to refinance debt, and creating a buffer against potential asset writedowns.’

CCT said in April that it has no more refinancing requirements for this year.

Ms Leong said yesterday: ‘We have achieved our refinancing objectives for 2009 by securing refinancing for borrowings in advance of debt maturity dates.’

The rights issue is being done from a ‘position of strength’, she added.

The proceeds will be used to repay future debt, and priority will be placed on debt due next year, Ms Leong said yesterday. CCT has some $885 million of debt due in 2010.

To raise the cash, CCT will sell 1.4 billion shares at 59 cents each in a one-for-one rights issue. The offer price represents a 44 per cent discount to the the stock’s last traded price of $1.06. The offer price is also a discount of 61 per cent to CCT’s net asset value per unit of $1.51 after taking into account the revaluation of CCT’s properties and completion of the rights issue.

CapitaLand, which has a 31.4 per cent stake in CCT, will take up its full entitlement of rights issue worth some $260 million in all.

The trust also revealed yesterday that the value of its property portfolio fell from December 2008 to May this year as market rents declined. The three most valuable wholly-owned properties in CCT’s portfolio – Capital Tower, Six Battery Road and One George Street – saw their values fall by 9.4 per cent, 13.8 per cent and 11.9 per cent respectively. Raffles City, which CCT co-owns with another CapitaLand unit CapitaMall Trust (CMT), also saw its value fall by 5.3 per cent.

Analysts have said that office rents could fall by up to 70 per cent from their peaks in 2008 to their trough sometime in 2011 or 2012. Office rents fell 11 per cent in in the first quarter of 2009, according to data from the Urban Redevelopment Authority.

CCT is the latest Singaporean listed company to raise funds via a rights issue, joining companies such as DBS Group Holding and Keppel Land in turning to investors for cash.

CCT’s parent company CapitaLand earlier this year raised $1.84 billion in a rights offer while CMT raised another $1.23 billion. Market rumours of a rights issue have dogged CCT since.

CapitaLand shares gained 1.2 per cent to $3.43 yesterday as trading resumed following the announcement. Trading of CCT shares remained suspended.

CapitaLand has risen 34 per cent and CCT has gained 18 per cent this year.