Category: CCT
CCT – BT
CCT expects financing to get more expensive
CAPITACOMMERCIAL Trust (CCT) expects financing to become more expensive after it raised US$1.2 billion to fund an acquisition of an office tower this year.
The manager of about three million square feet of commercial space in Singapore agreed in March to buy a 23-storey office block known as 1 George Street in Singapore’s business district for $1.17 billion. The trust said it will fund the acquisition with debt such as convertible bonds and medium-term notes.
‘We raised the debt at the right time before the increase in rates, but going forward, we see that as a greater challenge,’ chief executive officer Lynette Leong said at a real estate conference in Singapore this week.
CapitaCommercial Trust’s shares have fallen 21 per cent this year on concern that borrowing costs for the trust may rise, prompting Citigroup to downgrade the stock earlier this month.
Asia’s real estate funding costs are likely to remain high over the next 12 months after rising as much as 700 basis points in the past year, Sameer Nayar, head of real estate finance at Credit Suisse Group, said this week.
CapitaCommercial said in April it plans to sell $280 million of bonds, with an option to raise another $90 million. It also issued $150 million of medium term notes and took on loans for the acquisition. — Bloomberg
SREIT – UOBKH
Accumulating bargains after steep correction
Correction was fast and furious. Share prices for Singapore REITs have corrected 6-7% over the past four days. Large cap REITs bear the brunt of selling with steep correction for CapitaCommercial Trust (-7.1%), CapitaMall Trust (-7.5%), Ascendas REIT (-4.1%) and CDL Hospitality REIT (-7.2%). Frasers Centrepoint Trust also fell 6.8%. MacQuarie Meag Prime REIT, KREIT Asia and Parkway Life REIT were relatively unchanged.
On average, the magnitude of correction was in line with the quantum in cut to our target prices. Average distribution yield for Singapore REITs is 5.5%, in line with five-year average. Average yield spread above 10-year government bond at 2.2% is below five-year average of 2.5%.
Lock in the yields. While markets will continue to be shaken by twin fears of inflation and higher interest rates, we are starting to see value in some of the REITs. We have selected a diversified basket of three REITs, Frasers Centrepoint for retail, CapitaCommercial Trust for office and Ascendas REIT for industrial.
Frasers Centrepoint Trust (BUY/S$1.24/Target: S$1.55)
• FCT focuses on suburban retail malls, which provide defensive qualities. Revenue contribution from its largest mall Causeway Point gained 11% yoy to S$14.6m in 2QFY08, benefitting from strong rental reversion and higher turnover rent. 20,816sf of retail space at Causeway Point representing 5% of total net lettable area (NLA) was renewed at 16% above preceding rental rates in 2QFY08.
• Ready pipeline of acquisitions. FCT has a ready pipeline of acquisitions that will double NLA to more than 1.2m sf when fully completed. It has entered into a put and call option agreement with sponsor Frasers Centrepoint Limited for the purchase of Northpoint 2 at between S$139.5m and S$170.5m. Northpoint 2 is expected to obtain temporary occupation permit (TOP) by Aug 08 and is on schedule to be injected into FCT in 1QFY09. We expect YewTee Point and Bedok Mall with net lettable area (NLA) of 80,000sf each to be injected in 3QFY09 and 2QFY11 respectively. We estimate the three new malls to contribute 28.6% of total revenue in FY12.
• FCT provides attractive FY08 distribution yield of 6.24%, a spread of 2.55% over 10-year government bond.
Ascendas REIT (BUY/S$2.34/Target: S$3.00)
• A-REIT has benefitted from strong demand for suburban office space as Business & Science Park accounted for 25% of its portfolio by property value. Renewal rate for Business & Science Park was S$3.76psf pm in 4QFY08, 68.8% higher on a yoy basis.
• A-REIT had a portfolio of 84 properties and total assets of S$4.2b as at Mar 08. The weighted average lease to expiry is 5.9 years. A-REIT has a well-diversified tenant base of over 790 international and local companies.
• A-REIT provides attractive FY08 distribution yield of 6.88%, a spread of 3.19% over 10-year government bond.
CapitaCommercial Trust (BUY/S$2.08/Target: S$2.63)
• CCT owns nine properties in Singapore with 2.3m sf of office space (excluding Wilkie Edge and One George Street), which accounts for 7% of private office stock within Downtown Core. CCT is well positioned to benefit from positive rental reversion as 29.4% of leases for office space are up for renewal in 2008 and 2009.
• Market Street Car Park and Golden Shoe Car Park is strategically located at the heart of Raffles Place and represents latent potential to be redeveloped into Grade A office towers.
• CCT trades at a 25.4% discount to book NAV of S$2.79/share.
Related Post – Table
CCT – UOBKH
Organic growth from positive rental reversion
CapitaCommercial Trust (CCT) is the prime beneficiary of the escalation in rental rates for prime office space within the Central Business District (CBD). It owns nine properties in Singapore with 2.3m sf of office space, which accounts for 7% of private office stock within Downtown Core.
Benefiting from positive rental reversion in 2008 and 2009. CCT has 29.4% of its leases for office space up for renewal in 2008 and 2009. We understand that in Jan 08, Standard Chartered renewed leases for 130,000sf at 6 Battery Road at above S$15.00psf pm vs the previous rate of S$5.50psf pm. Another 26% of office space at 6 Battery Road is up for renewal in 2008 and 2009. 50% of office space is up for renewal in 2008 at Robinson Point with existing rent of only S$4.00psf pm. 51% of office space is up for renewal in 2009 at Raffles City Tower with existing rent of only S$5.70psf pm.
CCT has entered into a seven-year lease renewal agreement with HSBC commencing on 30 Apr 2012 (after expiry of existing lease) and expiring on 29 Apr 2019. The contract value of S$143.1m represents an average rental of S$8.50psf pm, much higher than existing passing rent of S$3.63psf pm.
Leasing momentum remains strong. Management expects rental rates for prime office space within the CBD to have further increased in 2Q08 due to high occupancy rates although the pace of growth has moderated.
Call option to acquire OGS. CCT has obtained a call option to purchase One George Street (OGS) from CapitaLand for S$1.165b, or S$2,600psf. Sponsor CapitaLand will provide yield protection with minimum net property income of S$49.5m p.a. (yield of 4.25%) for five years from the date of completion of acquisition till 2013. This is equivalent to rental of S$10.50psf pm. The company has secured committed debt funding. We estimate that gearing will increase from 24% to 40.8% after the acquisition is completed in Jul 08.
Has refinanced short-term borrowings. CCT has issued S$100m 3-year medium term note (MTN) with fixed interest rate of 3.15% in Jan 08. It has also issued S$150m 2-year MTN with fixed interest rate of 3.05% in Mar 08. CCT has completed the refinancing for short-term borrowings and funding for the acquisition of Wilkie Edge, a mixed development project at Selegie Road. CCT has issued S$370m five-year convertible bond with coupon of 2%, yield-tomaturity of 3.95% and conversion price at S$2.6762. Proceeds from the convertible bond will be utilised to finance acquisition of OGS.
CCT provides a diversified exposure to the office market in Singapore. It provides FY08 distribution yield of 4.90%. We have raised our target price to S$2.87 after incorporating contributions from the acquisition of OGS and lease renewal at HSBC Building into our forecast.
Office REITs – UOBKH
Positive news from MBFC
There are several positive developments for the office market. Just last month, Commerz Real, subsidiary of Germany-based Commerzbank, bought 71 Robinson Road for a record S$743.8m or S$3,125psf. The latest positive news relates to the new downtown and Marina Bay Financial Centre (MBFC).
Office space at MBFC is well taken up. The strength of the office leasing market can be seen from healthy take-ups at MBFC. Phase 1 with 1.6m sf and Phase 2 with 1.3m sf of office space will be completed in 2010 and 2012 respectively. Both phases are more than 50% pre-committed by major financial institutions. Standard Chartered has signed a 12-year lease for 508,300sf at MBFC Tower 1 with an option to extend for another eight years. DBS Bank has signed a 12-year lease for 700,000sf occupying 22 floors at MBFC Tower 3 (Phase 2). Other notable financial institutions include Wellington Investment Management, American Express, Barclays and Pictet.
More leases likely to be signed soon. According to industry sources, Standard Chartered and DBS signed at S$8 to S$10psf pm. This is a discounted rental rate due to the huge space taken and the long duration of lease terms exceeding 10 years. Most other tenants signed at between S$12 to S$15psf pm for 3-year leases. Smaller plots were even signed at S$18psf pm. According to industry source, an additional 15% of space at MBFC is in advance stage of negotiation. We see this as an important development. If successfully closed, this will bring the level of commitment at MBFC above 70%, bringing a boost to confidence in the office market. We estimate MBFC accounts for 34% of office supply coming on stream over the next four years.
CapitaCommercial Trust (BUY/S$2.39/Target: S$2.63)
• CCT is well positioned to benefit from positive rental reversion with 29.4% of its leases for office space up for renewal in 2008 and 2009.
• We estimate that the lease for HSBC Building was renewed at an average rental of S$8.50psf pm in early May, much higher than existing passing rent of S$3.63psf pm.
• CCT is the largest office REIT and provides a diversified exposure to the Singapore office market. It provides FY09 distribution yield of 5.66%.
K-REIT Asia (BUY/S$1.45/Target: S$1.81)
• K-REIT achieved average gross rent increase of 14% qoq to S$6.86psf pm in 1Q08 due to positive rental reversion from existing properties and full-quarter contribution from ORQ. It is well positioned to ride the upswing in office rentals with 24.2% of net lettable area (NLA) due for expiry and another 15.5% of NLA due for rent review in 2008 and 2009.
• K-REIT provides attractive 2009 distribution yield of 6.05%. This assumes that the balance of the bridging loan from Kephinance Investment is refinanced at a steep interest rate of 4.2%.
Suntec REIT (BUY/S$1.64/Target: S$2.10)
• Suntec Office Towers achieved committed occupancy of 100% with recent new leases signed at between S$11.50 and S$13.50psf pm. It is well positioned to benefit from positive rental reversion with 9.5% and 44.1% of its leases for office space up for renewal in 2HFY08 and FY09.
• Suntec REIT provides FY09 distribution yield of 6.16%.
CCT – UOBKH
Renew long-term lease with HSBC
CapitaCommercial Trust (CCT) has entered into a 7-year renewal lease agreement commencing 30 Apr 2012 (after expiry of existing lease) and expiring on 29 Apr 2019 for total contract value of S$143.1m. The lease agreement involves capex of S$7m to be incurred by CCT for improvement work on HSBC Building, which is expected to commence in late-2008. We estimate that the contract value of S$143.1m represents average rental of S$8.50psf pm, much higher than existing passing rent of S$3.63psf pm from HSBC Building. HSBC will bear most property operating expenses such as maintenance, utilities and property tax for HSBC Building. We view the renewed contract as a positive development although HSBC Building contributes only 3.1% of revenue in 1Q08.