CCT posts 14.5% rise in Q4 distributable income

CapitaCommercial Trust (CCT) posted distributable income of $32.3 million in last year’s final quarter, an increase of 14.5 per cent from a year previously.

Full-year 2007 distributable income rose 52.7 per cent to $120.4 million on the back of a 54.2 per cent jump in gross revenue to $240.1 million – due mainly to the consolidation of CCT’s 60 per cent interest in the Raffles City complex which was acquired in September 2006. Higher rental income, car park income and other income from the trust’s properties also boosted the bottom line for the year.

The trust reported $1.3 billion fair value gain on revaluation of its investment properties, boosting its total asset size to $5.3 billion as at the end of December.

Currently less than 5 per cent of CCT’s assets are overseas, but in the medium term the overseas share could grow to 20-30 per cent, CapitaCommercial Trust Management Ltd (CCTML) chief executive Lynette Leong said yesterday.

Vietnam is among the promising markets where CCT sees a lot of growth, Ms Leong said.
The trust said that its interest-rate exposure is small, as 86 per cent of total borrowings are on fixed rates and no major refinancing is required until March 2009.

In addition, its low gearing of 23.9 per cent gives it sizeable debt headroom to support any new asset growth strategy.

Assuming the trust decides to gear up to 40 per cent, it could take additional debt of about $800 million, analysts observed. This should come in handy for CCT when competing for acquisitions with some other Reits with much less room for taking further debt.

The stock market slump has raised the distribution yields at which Singapore Reits are trading. That means equity cost has gone up and Reits will need to acquire assets at much higher property yields if they are going to finance them by issuing new equity rather than using debt.

Riding on the spike in office rents, CCT achieved significantly higher rent reversions for offices leases that were renewed as well as new leases signed during 2007. Rents committed for renewals were on average 36.8 per cent higher than preceding rents, while new leases were committed at 130.8 per cent above preceding rents.

And with about 57 per cent of CCT’s office portfolio (by gross rental income) up for renewal and rent review in 2008 or 2009, the trust can look forward to further positive rent reversion given the shortage of offices.

This factor, coupled with limited exposure to interest rate risk, led CCTML to say it expects to perform better than its forecast distribution per unit (DPU) of 10.04 cents for the current financial year. The forecast was made in a circular in November last year.

CCT unitholders will receive a DPU of 4.47 cents for the July 1 to Dec 31, 2007 period.

This works out to 8.87 cents on an annualised basis, reflecting a distribution yield of 4.6 per cent based on CCT’s closing price of $1.91 yesterday. The counter ended four cents lower yesterday.

CCT’s adjusted net asset value (excluding distributable income to unitholders) rose from $1.86 as at Dec 31, 2006 to $2.80 as at Dec 31, 2007.

The trust has secured commitments for more than half of the 9,600-sq-m office space at Wilkie Edge in the Selegie area, ahead of the development’s completion expected in Q4 this year.

Ripe for the picking

• 4Q07 distribution above expectations. Despite lower-than-expected revenue in the quarter, CCT’s distribution was higher than expected due to higher contributions from its associate Quill CapitaTrust, lower interest expenses, and fewer-thanexpected shares issued for the period. Revenue was up 10% yoy to S$62m while distributable profit was up 14.5% yoy to S$32.3m. Full-year revenue was S$240.1m with a distributable profit of S$120.4m and DPU of 8.7cts, which is 1% above consensus and 2% above our estimate. As at 31 Dec 07, CCT’s portfolio reached S$5.1bn with revaluation gains of S$1.3bn.

• Ripe for harvest. Asking rents for offices should peak this year before a large supply of office space floods the market from 2009. Some 57% of CCT’s leases (by gross rental income) would be up for renewal over 2008-09. These are expected to enjoy strong rental reversions in the current supply crunch. We also expect occupancy levels to approach 100% from the already-high 99.6% at end-Dec 07. Its mixed development project, Wilkie Edge, is expected to be completed in 4Q08, and is more than 50% pre-committed for its office space.

• Upgrade to Outperform from Neutral, although target price lowered from S$2.80 to S$2.75. Our DPU estimates for FY08-10 have been raised by 0.6-4.1%, following adjustments to our assumptions for QCT contributions and gearing. CCT’s low debt-to-asset ratio of 24% will allow it to continue with acquisitions without the need for equity fund-raising in the current volatile capital markets. On the other hand, our DDM-derived target price has been lowered marginally to S$2.75 as we increase our cost of equity assumption to 5.6% from 5.3% to reflect more volatile capital markets. Nevertheless, upgrade to Outperform as the current share price offers strong upside potential of 44%.

CBD gem uncovered

Market St Car Park may be redeveloped into offices

The total project cost could range from $1 billion to $1.5 billion

CAPITACOMMERCIAL Trust (CCT) has been granted outline planning permission by the Urban Redevelopment Authority (URA) to redevelop Market Street Car Park into an office tower that could cost up to $1.5 billion.

Lynette Leong, chief executive of CCT’s manager CapitaCommercial Trust Management Ltd, said the viability of the project would depend on the development premium to be paid for changing the use of the 58,964 sq ft site from a car park to an office tower.

The premium will depend on the enhancement in land value as assessed by the chief valuer, which CCT expects to be made known by May.

Ms Leong said the outline permission is subject to the payment of 100 per cent of the enhancement in land value, instead of the standard 70 per cent, as well as there being no extension of the present lease, which runs to 2073.

Assuming a land value for 99-year commercial land of $900 psf per gross floor area, and adjusting for the shorter leasehold of the site, CCT estimates the land and development premium to be $800 psf.

Including construction and other costs, the project cost would be $1.25 billion.

But CCT said that depending on the development premium, the total project cost could range from $1 billion to $1.5 billion.

Assuming that necessary approvals are granted, a new office tower with an estimated gross floor area of 850,000 sq ft could be built within 36 or 40 months. Ms Leong said that existing tenants, who only moved into Market Street Car Park in end-2006 after a $14 million renovation, will be given notice soon.

Currently, there are 704 car parking spaces, 28 tenants, and 21,205 sq ft of net lettable area. As at June 1, it was valued at $59 million.

Saying that CCT has no plans to divest the office tower if built, Ms Leong added: ‘When completed, the property would augment the core assets in CCT’s portfolio which currently includes landmark office buildings such as Capital Tower and 6 Battery Road.’

She said she was bullish on the office sector. While she did not reveal estimated yields for the development, she said that it was looking at projected rents of $12-$14 psf per month.

The outline planning consent comes years after CCT parent CapitaLand first mooted plans to redevelop both Market Street Car Park and Golden Shoe Car Park.

It was reported that the URA first rejected redevelopment plans for the car parks as earlier as in the mid-1990s when the properties belonged to the now defunct Pidemco.

Ms Leong said there are currently no plans to redevelop Golden Shoe Car Park, although it has also applied for a change of use for the site.

Market Street Carpark approved for conversion

CCT announced yesterday that the Urban Redevelopment Authority (URA) has granted outline planning permission for Market Street Carpark to be rezoned from “transport facility” to “commercial” use. CCT plans to redevelop the carpark into a Grade A office tower, subject to financial viability evaluation.

Potential increase in portfolio. The estimated net floor area of the new development is 640,799 sf, which could add 22% to CCT’s total floor area. The new development would be the second largest property in CCT’s portfolio, after Capital Tower.

Conditions imposed on change in land use. The rezoning of the carpark is subject to CCT paying 100% of the enhancement in land value as assessed by the Chief Valuer, non-extension of the existing land lease (which has 65 years remaining) and restricted use of the redeveloped project for offices only, with activity-generating uses (retail and food and beverage uses) allowed on the first storey.

Potential impact

Potential increase in net property income. With its sizeable plot and location, conversion of the carpark could result in significant net rental income for CCT. Our model assumes that upon completion of the redevelopment, CCT would be able to command a gross rental of S$12 psf per month, representing about one third of our gross revenue estimation for CCT for 2007.

No significant development gains. We estimate that the redevelopment of Market Street Carpark would be worth S$1.65bn, or S$2,575 psf of net lettable area. However, since gains in value would be creamed off by the payment of the development premium, CCT would be effectively purchasing a new development. Furthermore, since CCT is constrained by guidelines for REITs to hold development properties upon completion, it will not be able to enjoy development gains via a sale exit strategy.

Redeveloped project may not be yield-accretive. The redeveloped office tower may not be yield-accretive as the current property yield of Market Street Carpark is high at 9.8% vs. an estimated 5.6% for the proposed office project.

Restrictions on REITs taking on development projects. Property fund guidelines for REITs stipulate that the total contract value of property development undertaken should not exceed 10% of REITs’ deposited properties. CCT’s threshold for development as at 30 Sep 07 was 10% of its deposited property of S$4.7bn, or S$467m. Deducting its prior commitments to projects related to the Malaysia Commercial Development Fund (S$30.5m) and Wilkie Edge (S$182.7m), CCT’s remaining threshold for development projects is only S$254m, or 17% of the development cost of S$1.5bn.

Joint-venture option. One of the options for CCT is to redevelop Market Street Carpark via a JV with a developer, and taking a 17% stake in the development. This is the most straightforward option which would probably see CCT gearing up to fund the development. However, as CCT is constrained by guidelines for REITs to hold the developed property upon completion, it would need some form of buyback mechanism. In view of the significant value of the proposed redevelopment, new units may be issued for the buyback, resulting in some dilution in value.

Business trust option. Another option is development via a business trust stapled to the REIT. The benefit of this option is that the business trust will not be restricted by the 10% cap on development. However, the business trust would be subject to corporate tax.

Valuation and recommendation

Although rezoning the carpark would significantly increase contributions to CCT, it is uncertain if this redevelopment would be yield-accretive, since capark properties are higher-yielding than office properties. In addition, the conversion would likely be completed in 2012, when a large supply of new office space is expected, creating uncertainties in occupancy rates and rentals. Furthermore, the scale of the redevelopment may require complicated JV structures or the addition of a business trust which could potentially dilute distribution from CCT.

Maintain Neutral and target price of S$2.80, based on DDM valuation, pending confirmation of redevelopment plans.