FrasersCT – BT
FCT to buy $480m malls from parent
FRASERS Centrepoint Trust (FCT) , which owns suburban malls, said yesterday that it would buy three properties worth $480 million in two years, funded mostly through loans as investor appetite for new equity dries up. ‘Right now, the capital market is not there unfortunately, but the banks are still lending and I’ve got the debt headroom to go much higher,’ Christopher Tang, CEO of Fraser Centrepoint Asset Management, told Reuters.
FCT is acquiring the three suburban malls from parent Frasers Centrepoint, the property arm of conglomerate Fraser and Neave, and is prepared to raise its debt gearing from 29 per cent to 45 per cent to do so, he said. ‘Our long-term target is always about 30-35 per cent but we’re now prepared for short periods of time to go as high as 40-45 per cent, until the capital market works through its issues.’
FCT’s share price rose up to 3.3 per cent in late session trading before ending 0.9 per cent up in line with the broader market. Rival retail Reits CapitaMall Trust was up 1.2 per cent, while Suntec Reit lost 0.7 per cent.
Poor market conditions have caused Reits such as MacarthurCook Industrial and Allco Commercial to scrap plans for fund-raising by issuing new shares. With the Reits’ ability to fund their growth and repay existing debts squeezed, analysts such as Goldman Sachs and UBS are predicting that smaller Reits such as MacarthurCook will become acquisition targets.
Mr Tang said that FCT’s balance sheet remained strong with most debts due in 2011, and FCT had an A3 corporate rating from Moody’s. He declined to say if he was planning to acquire another Reit, but did not rule it out. ‘I think, as a strategy, it’s something that most people would not rule out. It’s obviously another way of growing. M&A will probably be an area that will have more activity in the Singapore Reit market in the future. Like in the United States and Australia, it’s an inevitable phase for the market that there will be consolidation from time to time.’
Mr Tang remains bullish about the outlook for suburban malls, despite concerns that consumers would cut expenses amidst fears of a slowing global economy and surging inflation. ‘Even in the worst of times, during the Sars period in 2003, our occupancy never dropped because suburban malls are non-discretionary spending and it rides economic cycles very well,’ he said. — Reuters
CCT – CIMB
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%.
CCT – JPMorgan
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.
CCT – Nomura
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.