CCT has no plans in pipeline to raise equity

CAPITACOMMERCIAL Trust (CCT), Singapore’s largest office trust, has no immediate plans to raise equity.

‘We don’t intend to increase debt in any significant way,’ said Lynette Leong, chief executive of CCT’s manager, at the trust’s Q4 results briefing yesterday. ‘If we are not making any acquisitions, we have no need to do that (raise equity).’

CCT shares gained 1.5 cents, or 1.7 per cent, on the news to close at 87.5 cents yesterday, even as the benchmark Straits Times Index fell. Some industry players have said that CCT could issue equity to reduce its gearing ahead of expected falls in asset values during upcoming revaluation exercises.

‘CCT has unequivocally stated that it is not planning to raise equity. That provides a lot of differentiation with the other Reits (real estate investment trusts) in the market,’ said UOB- Kay Hian analyst Jonathan Koh.

The trust’s gearing now stands at 37.6 per cent, and will be maintained at around that level, Ms Leong said. Total debt as at end-December 2008 was about $2.6 billion. By contrast, gearing was 23.9 per cent as at end-December 2007, while total debt then stood at about $1.26 billion.

For the short-term, CCT has some $116 million of debt due in June 2009, but the trust remains confident that it will be able to secure refinancing as it has some eight unencumbered assets worth $2.7 billion in its portfolio. The Reit on Jan 6 announced that it had secured refinancing for $580 million of loans due in March 2009.

CCT also recently abandoned a plan to redevelop the Market Street Car Park, citing the uncertain market outlook and tight credit conditions.

In Q4 2008, CCT saw its distributable income rise 17.4 per cent to $38 million – from $32.3 million a year ago – on higher rental income.

Distribution per unit (DPU) for the three months ended Dec 31, 2008 rose to 2.71 cents, from 2.33 cents for the same three months in 2007. Net property income also rose 47.8 per cent to $65.6 million, from $44.4 million previously.

Revenue in Q4 2008 was boosted by the acquisition of 1 George Street, a 23-storey office block, as well as higher rental income from other properties.

For the full 2008 financial year, CCT’s distributable income rose 27.1 per cent to $153 million, from $120.4 million in 2007. DPU climbed from 8.7 cents to 11 cents, while net property income rose 34.2 per cent to $233.5 million.

CCT also wrote down about 3 per cent of its portfolio value to $6.7 billion, from June 2008’s $6.9 billion. This translated into a 1.3 percentage point increase in gearing. The lower valuation assumes a fall of about 10 per cent in rentals this year, CCT said.

Analysts said that the results were within expectations and reiterated their positive calls on the stock. ABN Amro and Citigroup issued fresh ‘buy’ calls, while Macquarie Research rated the stock as an ‘outperform’. ‘We believe CCT remains a deep value play on the office sector,’ said Macquarie analysts Tuck Yin Soong and Elaine Cheong.

Looking ahead, CCT expects to face challenging times due to the adverse economic climate, said Richard Hale, chairman of the trust’s manager. ‘Our focus continues to be on retaining our tenants and on being proactive in cost containment,’ he said.

CCT is forecasting a DPU of 12.34 cents for 2009. The trust’s manager is actively engaging tenants for forward lease planning and 79 per cent of the 2009 forecast gross rental income has been locked in with committed leases.

Parentage Sure Counts

Refinancing Fog Cleared

Near-term refinancing fog cleared. CapitaCommercial Trust (CCT) has secured a 3-yr term loan of S$580m from DBS, UOB, Standard Chartered and Bank of Tokyo-Mitsubishi UFJ to fully refinance its S$580m CMBS (a 5-yr & 4-tranche loan issued in Mar 04) due in Mar 09. Following this successful refinancing exercise, CCT’s next major loans will be due in 2010 (S$885m) and 2011 (S$633m). We reckon the remaining ST Loan of S$76m due this year should not pose too much of a problem, given CCT’s 3Q08 cash position of S$72.4m.

Higher funding costs implied. Including this club loan, CCT’s latest all-in cost of debt is estimated to fall well within 4.4%, which is 80 bps higher than its current 3.6%. However, we note that it is still reasonably more attractive than the 6.6% Cambridge Industrial Trust obtained a month ago for its S$390m refinancing facility. Given the ongoing credit squeeze, we are not surprised by the widening spreads, which have ranged between 200 – 400 bps since 2H08. Through a weighted average method of CCT’s current outstanding loans and interest rates, we estimate the club loan’s effective cost of debt to be in the range of 3.6 – 4.9%. Taking the 5-yr SOR (which has been quoted at an average of ~ 2% for the past one month) as the base rate, this implies a credit spread of 160 – 290 bps.

But positive news nonetheless, for CCT and S-REITs. As this term loan will only need to be secured by a single property (Capital Tower) as compared to seven for the CMBS, CCT now has S$2.8b worth of unencumbered assets, thus ratcheting up its financial flexibility in capital and balance sheet management. More importantly, we conjecture that this is very positive news for the S-REITs sector, as it goes to show that credit is still available (albeit at higher costs) if needed, provided the REIT has quality assets, a strong sponsor, good track record and management. Further, we draw comfort from the fact that capital raising has taken the form of straight debt instead of equity issuance, which could bring about potential dilutive effects.

Redevelopment of Market Street Car Park shelved. Given the credit squeeze and the importance of capital preservation, we side with management’s decision to shelve the redevelopment of Market Street Car Park into a commercial building. From our view, other viable reasons could be the uncertainty on the demand front given the global macroeconomic slowdown, coupled with the substantial supply of office space coming onstream in 2010 – 11.

Maintain NEUTRAL at lower target price of S$1.05. In our opinion, the apparent availability of credit would serve to reinvigorate investors’ sagging belief in the credit-dependent REIT model, at the same time assuaging their concerns over possible recapitalisation through other avenues such as distressed asset sales and rights offerings. For CCT, while we cannot deny the positive impact from the successful refinancing, we hold the view that in the near term, its performance will be vulnerable to the macroeconomic weakness given its direct proxy to the weakening domestic office sector. Our FY09 – 10 DPU estimates have now edged down by 3.2 – 6.3% to 10.86¢ (previously 11.60¢) and 11.07¢ (previously 11.44¢) respectively, in light of assuming a higher all-in funding costs of 4.4% (previously 4.0 – 4.2%). That say, the all-in funding cost could still edge lower as the interest cost for its S$650m term loan would be re-fixed in Jan 09. As such, we are lowering our DDM-pegged target price for CCT to S$1.05 (previously S$1.08), with cost of equity at 10.0%. Maintain NEUTRAL.

Refinancing secured

S$580m refinancing secured on 3-year term loan

All-in cost of debt estimated within 4.5%. CCT announced last night that it had secured refinancing for its S$580m loan that will be due in March 2009 with a 3-year loan term. Bankers involved were DBS, Standard Chartered, United Overseas Bank and The Bank of Tokyo-Mitsubishi UFJ. Cost of debt for this refinancing was not revealed but all-in interest cost was “well within the projections assumed in CCT’s circular” on One George Street, which was 4.4% for 2009. (This assumption excludes debt taken for Raffles City which is 4.2%). We estimate all-in cost of debt within 4.5%. S$390m of the S$580m, or about 67% of the loan is on fixed rates due to earlier interest swaps put in place till 2011.

Only one asset secured with the refinancing. Additionally, the refinancing was only secured on one asset, Capital Tower, vs the existing debt which was secured on seven properties (ie Capital Tower, 6 Battery Road, Robinson Point, Starhub Centre, Bugis Village, Golden Shoe Car Park and Market Street Car Park)

No redevelopment for Market Street Car Park. CCT also announced that it would abort its plan to redevelop Market Street Car Park into a office development, “in line with the need to conserve cash in such turbulent economic times”. CCT will also be moving on to enter into longer term leases with the retail tenants in the property, most of which are on short leases. Asking retail rents for the property range between S$12-16psf/mth.

Comments

Positive view, in line with expectations. The announcement is in line with our earliere xpectations that CCT will be able to refinance with a bank financing, rather than a rights issue. We take a positive view of the refinancing as (1) estimated all-in cost of debt for CCT remains within 4.5%, marginally lower than our more conservative assumption of 5%; (2) only one asset secured vs. seven from the existing debt; and (3) ability to secure a simple bank loan rather than a dilutive rights issue. The appearance of two local bankers (DBS and UOB) lends a sense of certainty and stability to the deal. The refinancing is likely to have a positive effect on the Reit sector as a whole. However, this announcement is likely to be the last price catalyst for CCT this year as we expect more negative news flow on falling office rents and declining office space demand. The decision to abort Market Street Car Park development did not come in as a surprise, and this had not been factored in our earlier assumptions.

Valuation and recommendation

Maintain Outperform at unchanged target price of S$1.08 (unchanged discount of 10.4%). We maintain our view that CCT is fairly valued at our target price of $1.08, which reflects a bear scenario. However, this announcement is likely to be the last significant price catalyst for CCT this year as we expect more negative news flow on falling office rents and declining office space demand.