Buys Wilkie Edge

Flat sequentially. CapitaCommercial Trust (CCT) released its 2Q07 on Friday. Revenue came in at S$S$59.4m (+91.1% YoY and +2.5% QoQ) with distributable income at S$29.28m (+84.7% YoY and +0.1% QoQ). Distributable income per unit (DPU) came in at 2.12 cents (+19.8% YoY and 0.5% QoQ), slightly below OIR’s estimate of 2.17 cents. The strong annual numbers were attributed to the inclusion of Raffles City (RC), higher rental and car-park rates as well as investment income.

Buys Wilkie Edge from CapitaLand. CCT also announced the proposed acquisition of Wilkie Edge, a 12-storey mixed development from CapitaLand (CapLand) for S$262.0m. Completion is expected by end 2008. With this, CCT appears to be changing its strategy by going for pre-completed and untenanted assets. This raises the risk profile and reflects the difficulty in acquiring accretively. As part of the agreement, CCT has granted CapLand a 99-year lease for the service apartments for S$79.3m. We estimate the GFA of the apartments at about 160,350 sq ft, which means selling price of about S$495psf. This appears a little low considering that residential units are going for substantially higher in the area.

Expect divestment gains. Separately, Quill Capita Trust, the Malaysian associate of CCT, will be buying CCT’s interest in Wisma Technip. The acquisition price of RM125m will result in CCT recognizing a divestment gain of RM4.4m (about S$2.0m), but the transaction is not expected to complete until 4Q07.

Raffles City asset enhancement. CCT is presently enhancing Raffles City. It is decanting space used for mechanical and engineering equipment and this in turn will release about 41,000 sq ft of space for retail use. The new space will be spread over 3 levels and will encompass building a 3-storey island podium. The estimated capex is about S$56m and funding will be via debt. We see no issues with respect to debt funding. Construction has started and completion is expected by end 2007.

Maintain HOLD. The outlook for the office sector remains good for the next two years due to limited supply. CCT is the key beneficiary of this macro trend. Hence we anticipate strong organic earnings growth. However, at present trading level, we see limited upside potential. We thus maintain our HOLD rating with a fair value estimate of S$2.62, based on a target asset size of S$5.5bn.

Acquisition ahead of time

1H07 results in line. CCT reported 1H07 results with DPU registering y-o-y growth of 21.2% to 4.23 cents. This translates to annualised DPU of 8.53 cents, in line with expectations.

Rising capital values. On the back of rising capital values, CCT’s portfolio has been revalued upwards by S$730m (+19%). This raises NAV by 28.5% to S$2.39, which in turn raises debt headroom with gearing lowered from 30% to 25%. Notably, as evident of strong reversions experienced for assets along fringe locations in CBD, Capital Towers and Robinson Point enjoyed highest revaluations with +35% and +36% respectively.

Wilkie Edge acquisition. Along with the results, CCT announced an acquisition from Sponsor, Capitaland, marching towards AUM target of S$5bn-S$6bn by FY09. The asset is named “Wilkie Edge”, a 12-storey mixed development consisting of office, retail and service apartments currently under construction and targeted for completion by 4Q08. This asset was acquired at S$262m based on market cap rates. There is, however, an option by Capitaland to withhold the service apartment portion, which would bring down the value of acquisition to S$182.7m. After missing out on the Temasek Towers acquisition understandably due to aggressive bidding by private property funds, this piece of acquisition reaffirms the developer’s sponsor tieup relationship with Capitaland and commitment to grow CCT.

Hold recommendation and TPS$ 2.97 maintained. With results and acquisitions momentum on track, we are maintaining our Hold recommendation and target price unchanged at S$ 2.97.

CapitaCommercial Trust to buy Wilkie Edge from CapitaLand

Proposed acquisition comes as CCT posts 84.7% rise in Q2 income to $29.3m

CapitaCommercial Trust (CCT), which yesterday posted an 84.7 per cent jump in Q2 group distributable income to $29.3 million, is buying Wilkie Edge, a mixed development coming up on the former Selegie Complex site, from parent CapitaLand.

And the trust is not ruling out buying over CapitaLand’s stakes in other Singapore office buildings to grow its local portfolio, David Tan, CEO of CapitaCommercial Trust Management Ltd (CCTML), indicated yesterday.

CapitaLand owns 55 per cent of Chevron House (formerly Caltex House), 50 per cent of Hitachi Tower and 50 per cent of 1George Street (the last through the Eureka Office Fund) here.

The proposed acquisition of Wilkie Edge also reflects an extension of CCT’s strategy, from buying only completed buildings to acquiring buildings under development on a pre-commitment basis and taking direct stakes in development projects, both in Singapore and abroad, CCTML chairman Richard Hale said.

But market watchers say that probably the most compelling growth story for the trust, which is one of Singapore’s biggest office landlords, is that it is poised to take advantage of the robust office rental growth over the next two years, with more than half of its office portfolio up for renewal in 2008-2009.

CCT owns Capital Tower, 6Battery Road, Raffles City complex (60 per cent), HSBC Building, Robinson Point and StarHub Centre.

The buoyant office market helped the group to chalk up a $730.2 million increase in valuation of its properties in six months, from $3.8 billion as at Dec1, 2006, to $4.6 billion as at June1, 2007. ‘As the prospects of office market rentals in Asia remain positive, CCT will look at acquiring commercial assets in Asia including Vietnam,’ CCT said.

The acquisition of Wilkie Edge, which is under construction, will boost CCT’s portfolio to about $4.8 billion.

The 12-storey development, being built on a 99-year leasehold site, will comprise about 103,200 sq ft net lettable area of offices, 36,500 sq ft of retail space, and 154 serviced apartments when it is completed late next year.

CCT said the purchase consideration for Wilkie Edge is $262 million. CCT is granting CapitaLand and/or its nominee an option to lease the serviced apartments for the remainder of the 99-year leasehold tenure less one day, for a $79.3 million consideration. If the option is exercised, the purchase consideration to CCT will be reduced to $182.7 million or about $1,313 per square foot of net lettable area for the office, and retail components as well as the common areas including car parks.

In September last year, CapitaLand’s serviced residences arm The Ascott Group inked a memorandum of understanding to manage Wilkie Edge’s serviced residences for an initial 10-year term with an option for a further 10 years.

Market watchers say they would not be surprised if either Ascott or its associate Ascott Residence Trust exercises the option to purchase Wilky Edge’s serviced residence component.

The 85 per cent year-on-year rise in the trust’s distributable income for Q2 ended June30, 2007 was due to the yield-accretive acquisition of Raffles City in September 2006 and higher office rents. Renewals and new leases in the group’s office portfolio in the first half of this year were at 99.8 per cent and 124.3 per cent respectively higher than preceding rental rates.

Gross revenue (at group level) for Q2 rose 91.1 per cent from $31.1 million to $59.4 million. Net property income increased 82.7 per cent to $43.5 million. Distribution per unit (DPU) for Q2 was 2.12 cents, up from 1.77 cents in the same year-ago period.

The latest Q2 DPU works out to an annualised figure of 8.50 cents, reflecting an annualised distribution yield of 2.9 per cent based on CCT’s closing price of $2.95 yesterday.

For the first half of this year, DPU was 4.23 cents, reflecting an annualised figure of 8.53 cents, surpassing the 7.60 cents forecast for the whole of 2007 based on CCT’s circular in August last year.

2Q07: In Line With Expectations

Net profit up 54.0% yoy, distributable income up 84.7% yoy. CCT’s Q2 results came in line with expectations. Its net profit for 2Q07 was up 54.0% yoy to S$28.0m, while distributable income increased 84.7% yoy to S$29.3m, implying a DPU of 2.12 Scts (8.50 Scts on an annualised basis). Total return for the quarter swelled 3,137.4% qoq to S$758.5m, boosted by a net surplus of S$730.2m on revaluation of properties. For the first half results, net profit increased 40.8% yoy to S$51.4m while DPU increased 21.2% yoy to 4.23 Scts (8.53 Scts on an annualised basis).

Well-positioned to benefit in office, retail and hospitality segment. CCT is well-position in the office, retail and hospitality segment through its portfolio comprising of 74.5% by NLA of prime offices, and 60% stake in Raffles City which consists of office, retail and hotels (Swisshotel and Raffles De Plaza). The exposure allows CCT to benefit from the office rental upside through its substantial lease expiries in the next few years, improved retail yields from rigorous asset enhancement programs to Raffles City shopping area, as well as rising hotel rates.

Acquisition of Wilkie Edge. CCT has signed an agreement to purchase Wilkie Edge, a proposed 12-storey mixed development comprising office, retail and serviced apartments units for S$262.0m. Cap rates for the office and retail space are 4.5% and 5.75% respectively, while the serviced apartment units will follow the market cap rate. The development will have a GFA of 29,812 sqm and is targeted to complete in 4Q08. With the yield accretive acquisition of Wilkie Edge, CCT is on track to meet its target portfolio of S$5.0b-6.0b by FY09.

Re-iterate BUY, target price at S$3.72. We re-iterate a BUY on CCT with a target price of S$3.72, based on our DCF valuation which assumes a WACC of 5.97% derived from a market risk premium of 6.5% and beta of 0.7, and terminal growth rate of 2.0%. We also factored in acquisitions of S$500m-800m p.a. over the next few years. CCT is currently trading at a yield of 2.91%.