CCT signs up leases for 77,900 sq ft in 2 office towers

CAPITACOMMERCIAL Trust (CCT) says 77,900 sq ft of office space at Capital Tower and One George Street has been renewed or newly committed for between two and three years.

Three companies account for the leases – JPMorgan Chase & Co, BHP Billiton and Shinhan Bank.

CCT did not reveal the rents.

But a spokesman said: ‘Given the Grade A quality of Capital Tower and One George Street, they are in line with rates achieved at comparable Grade A office buildings – between $16 to $20 per sq ft per month (psf pm) – in the respective micro-markets.’

In July, CCT said it expected 4 per cent of leases at Capital Tower to expire in 2008.

Separately, CCT said yesterday that CapitaLand, which has a 30.92 per cent stake in the Reit, will lease 1,313.2 sq ft of office space at Capital Tower for three years for a total sum of $449,125.92.

CCT described the space as an ‘unconventional office unit located on the ninth storey’.

It said the terms of the lease were reviewed by CB Richard Ellis, which confirmed the rent is at market level.

Based on the total rent, the monthly rent works out to about $9.50 psf pm.

JPMorgan Chase & Co is one of CCT’s top-10 blue chip tenants, contributing about 3.3 per cent of the trust’s gross rental income. It will now occupy an extra one-and-a-half floors at Capital Tower.

BHP Billiton, which has several offices in the CBD, will renew its lease at Capital Tower.

This follows a recent report last month that said BHP Billiton is leasing about 150,000 sq ft at Tower 2 of the upcoming Marina Bay Financial Centre, slated for completion in the second quarter of 2010.

At One George Street, new tenant Shinhan Bank has taken space to grow its business footprint in Singapore.

Lynette Leong, CEO of CCT’s manager said: ‘The lease commitments are definitely encouraging news.’

She said she is confident the trust will delivering its forecast distribution per unit of 10.61 cents and 12.34 cents for the financial years ending 2008 and 2009 respectively.

Following the completion of the acquisition of One George Street on July 11, CCT’s asset size is close to $7 billion, which is ahead of the $6 billion target it set itself by 2009.

Steady growth

Story: CCT’s 23% yoy jump in Q2 distribution income to $36.1m was in line with expectations. This was achieved through a 25% rise in revenue to $74.4m on the back of strong organic rental growth. NPI increased by a slightly lower 19% to $51.5m, eroded by higher property taxes. On a qoq basis, bottomline rose a modest 0.6%, despite a 4.5% hike in topline due to higher interest expense. The group revalued its properties by an average 9% to $5.6b, translating to a book NAV of $3.07.

Point: With portfolio occupancy at a high 99%, the uplift to bottomline came largely from positive rental reversions across its buildings. About 10.7% of portfolio office space was renewed in 1H08 at rents 193% above preceeding levels while retail rents were up 52% over previous rates. For eg, leases at 6 Battery Rd were contracted at $21.6psf/mth while at Robinson Pt, rents reached $12psf/mth. Looking ahead, we believe the pace of office rental growth is likely to moderate in 2008 given the slower global economic growth. Nonetheless, CCT should still enjoy positive earnings growth given the significant spreads between average passing and new rents and the tight near term supply of prime office space. 2H08 earnings will be driven by organic growth as well as new contributions from One George St (OGS). CCT has a remaining 3% and 2% of office and retail space respectively to be renewed. Going into 2009-10, an estimated 26% of office and 16% of retail space is up for reversions.

Relevance: We have tweaked our FY08 and FY09 DPU up slightly to 10.5cts and 12.2cts respectively. Our price target is adjusted down to $2.23 based on higher risk free rate assumption of 3.9%. The stock is currently trading at 0.6x P/Bk NAV and is offering DPU yields of 5.3% and 6.2% respectively over FY08-09.

CCT open to sale of Market Street Car Park

Reit reports 23% rise in Q2 distributable income to $36m

CAPITACOMMERCIAL Trust (CCT) says it is ‘open to all options’ when it comes to plans for Market Street Car Park (MSCP), and these include selling the site.

The update was given at CCT’s results briefing yesterday. Supported by strong rental reversions, the trust reported distributable income of $36.06 million for the second quarter ended June 30, 2008, up 23.2 per cent from the same period last year. Q2’s distribution per unit (DPU) of 2.6 cents is 22.6 per cent higher than in Q2 2007.

CCT has obtained outline planning permission from the Urban Redevelopment Authority to redevelop MSCP into an office tower for $1 billion to $1.5 billion.

In April, CCT manager CapitaCommercial Trust Management Limited (CTML) said that it was evaluating the project’s financial viability and funding structure, and would not decide on redevelopment anytime before mid-2009. It cited the project’s size, rising construction costs, financial market volatility and the uncertain development premium as reasons for the deferment.

Responding to a query on whether CCT would consider selling MSCP instead, CTML’s chief executive Lynette Leong said: ‘We are open to all options.’

According to her, the development premium remains uncertain, and construction costs are still rising.

Ms Leong pointed out that the redevelopment decision may still be subject to unitholders’ approval. Even if they were to reject the proposal, MSCP’s value has risen because of its redevelopment potential. ‘If it makes sense to sell it, why not? We will not rule out that option,’ she said.

For H1 2008, CCT’s distributable income of $71.92 million also outperformed the year-ago period’s by 22.9 per cent. This translates to a DPU of 5.19 cents, which is 22.7 per cent more than in H1 2007 and exceeds the manager’s forecast by 4.2 per cent.

The annualised H1 2008 DPU of 10.44 cents represents a distribution yield of 5.5 per cent based on Tuesday’s closing unit price of $1.91.

‘The outstanding numbers were largely driven by strong organic growth due to the prime quality of our assets augmented by our proactive leasing and the high standard of our property management,’ said Ms Leong.

Lease renewals and new leases contracted in H1 2008 for CCT’s office space registered an average rental rate increase of 193 per cent over last contracted rates, and there is still potential upside. ‘Many of our expiring leases have rentals that are significantly below market and are being reviewed to market as they renew,’ she said.

CCT’s gearing ratio as at July 11 was 35.7 per cent, and this took into account the acquisition of 1 George Street. The property will contribute to CCT’s income from Q3 2008, and brings its asset size close to $7 billion today.

In its latest asset valuation exercise, CCT’s portfolio as at June 1 stood at $5.57 billion, about $463 million higher than at Dec 1, 2007. The portfolio comprised CCT’s existing properties, its 60 per cent interest in Raffles City through RCS Trust, and excludes 1 George Street.

‘Given Singapore’s attractiveness as a global city and tight office supply, we are confident of exceeding our forecast DPU of 10.61 cents for the financial year ending 2008,’ said CTML’s chairman Richard Hale.

CCT will continue to seek quality and yield accretive assets, though at a more deliberate pace, given the current market environment.

CCT units rose 3.7 per cent or seven cents yesterday to close at $1.98.

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%.

Forum takeaways
From the Nomura Asia Equity Forum: CCT confirmed that it sees significant rental reversionary potential in the portfolio. While credit markets are tight, management expects no significant refinancing to be needed until March 2009, and is looking to agree terms by end of this year. We see inherent value in the office portfolio and retain our STRONG BUY rating on CCT.

Anchor themes
Assuming office supply will remain tight through 2008F, we expect office rents to peak during 2H08-1H09F, before entering a cyclical decline in 2010F (down 13.7%) and 2011F (down 19.0%), amid increased new supply.

Strong rental reversions are likely to underpin REIT cashflows. That said, growing concern over their ability to refinance debt have seen REITs trade below book. In such conditions investors need to focus on underlying asset values, while REITs with well-located assets should benefit from expectations of rising M&A activity.

Rental reversions, low gearing