CCT obtains call option to acquire One George Street

Priced at S$1.165bn, with a 5-year yield protection at 4.25% p.a. CCT has obtained a call option to acquire One George Street, a Grade A office building located in the CBD, from its parent CapitaLand (CAPL SP, S$6.40, Underperform, target price S$6.49). The offer price of S$1.165bn, or S$2,600 psf of net lettable area, comes with a minimum net property income (NPI) guarantee of S$49.5m p.a. for five years from the date of completion of the acquisition. The minimum income represents a yield protection of 4.25% for CCT. The building is currently fully occupied.

Comments

S$6bn acquisition target achieved. CCT intends to hold an EGM before end-Jun 08 to seek unitholders’ approval for this transaction. If the acquisition is completed by end-Jul 08 as scheduled, CCT’s acquisition target of S$6bn by end-2009 would be brought forward. In fact, CCT’s portfolio could reach a size of S$6.5bn at the end of this year.

Reasonable minimum NPI. The minimum NPI of S$49.5m p.a. translates to an average monthly gross rent of S$12.30 psf of net lettable area. This is a reasonable level in view of low signing rents in 2005-06, possibly ranging between S$5 and S$9 psf per month, compared to rents signed in 2007, which could have broken through S$15 psf per month. Thus, current average rent for One George Street is more likely to hover at S$10 psf per month. Additionally, significant commercial supply of some 4.5m sf is expected in the CBD from 2010 to 2011. This excludes potential supply from the Ophir-Rochor area, which the government intends to develop over the next 10 years. In view of the low rental base and continued strong office supply over the next 3-5 years, the minimum NPI looks reasonable

Significant rental reversions expected. One George Street was completed in 2005, with most of its leases signed over 2005-06. With average 3-year lease tenures, most of the leases would be up for renewal in 2008-09, representing good rental reversion opportunities for CCT. Indicative asking rents listed by Corporate Locations show Grade A offices asking for rents of S$15-21 psf per month as at Mar 08.

Full funding by debt. Management said it has secured committed funding for 100% of the purchase price. Hence, there would be no placement of new units or rights issues. With the completion of this acquisition, CCT’s asset leverage is expected to rise to 40% from 27%. This remains within its long-term target of 45% and well below the regulatory limit of 60%.

Buys 1 George St with yield protection

Event

One George Street option: raising the risk profile – ALERT

• CapitaCommercial Trust (CCT) granted an option to buy One George Street (OGS) from CapitaLand for S$1,165million, or S$2,600psf capital value. OGS is a prime grade A office building with 447,999sq ft of net lettable area at the edge of the Raffles Place CBD micro-market. As the property is currently significantly under-rented (average base rents are around S$7.40psf per month on our estimates, compared with current spot rents of S$15psf), the prospective vendor CapitaLand will provide yield support to ensure a minimum net property income of S$49.5million per annum, or a 4.25% yield at the purchase price.

• Few details available; more information when circular to unitholders is released in May/Jun 08. CCT intends to fully finance the acquisition with debt and has committed funding lines in place already, according to the REIT manager. Assuming a cost of debt of around 3.5%, we estimate DPU accretion to CCT of about 1.4% resulting from this acquisition, with the trust’s gearing rising from 27% currently to 40%. Our DDM-based net present value for CCT would drop post-acquisition however as the amount of accretion would not compensate sufficiently for the increased leverage on our initial calculations.

• CapitaLand raising another S$1.1billion divestment proceeds in this proposed sale. The OGS transaction is a connected party transaction and CCT’s unitholders will get to approve the acquisition (CapitaLand cannot vote its 30% stake). If approved, the divestment proceeds would raise CapitaLand’s consolidated cash position to over S$5billion on our estimates, putting them in a prime position to tap investment opportunities in an increasingly capital-constrained Asian real estate sector.

Option to buy One George St

First look
CapitaCommercial Trust has obtained an option to acquire One George Street for S$1.165bn, equivalent to S$2,600/sf. The deal is underscored by the vendor’s income guarantee of S$49.5mn pa, ensuring that the deal will deliver a yield of 4.25%. We view the acquisition price as fair given recent comparables. We expect the 100% debt financed deal to be yield accretive by about 1.2-2.9% for FY09F, though the level of accretion is sensitive to funding costs.

Buying One George St with yield support