Singapore Reit News

Buying One George St with yield support

Thumbs up to potential S$1.2 bn purchase of 1 George Street

What’s changed
CCT has been granted a call option by CapitaLand (CATL.SI; Buy) to purchase 1 George Street (OGS), an office building located in the heart of Singapore’s CBD, for S$1.165 bn, or S$2,600 psf of NLA. CapitaLand will provide yield protection to ensure minimum NPI of S$49.5 mn pa, or 4.25% of the purchase price for 5 years until 2013. This implies a rental rate of S$10.50 psf per mo. CCT has secured committed funding from banks to finance 100% of purchase price. More details on the lease profile of OGS and the debt facilities will be provided in due course. Deal is subject to approval by CCT’s shareholders and targeted for completion before end July.

Implications
Acquisition is in line with our expectations. In Aug 2007, when CapitaLand upped its stake in OGS to 100% from 50%, we argued that CCT was the biggest winner, as the transaction enhanced CCT’s acquisition pipeline. We see this deal as positive for CCT, as we think OGS can fetch rents of over S$13 psfpm when rents revert to market, which implies potential improvement to NPI yield at purchase price of 100 bps or more. Assuming 4.25% initial NPI yield and 3.7% debt cost, DPU uplift for CCT is 0.22 cents / 0.43 cents for FY08/09E (or +2.0% / +3.3%) respectively, by our analysis. Post acquisition, CCT’s gearing would increase from 26.9% to 40%, which we view as reasonable. Asset size would rise to ~S$6.5 bn. NPI yield of 4.25% for OGS compares favorably with 3.2% for CCT’s Grade A office assets.

Valuation
We like CCT’s strong near-term DPU growth and over 30% discount to RNAV. We maintain our DCF-based 12-mo. TP of S$2.75 and Buy rating. We look for the share price to react favorably to the successful execution of the transaction, and investors gaining confidence that REITs can tap debt facilities at competitive rates.

Key risks
On the downside, a slowdown in office rental demand.

Option for One George St

Story: CCT has been granted a call option to buy One George St from Capitaland for S$1.165b or S$2600psf. The deal comes with a yield protection agreement that guarantees a minimum NPI of S$49.5m p.a. or 4.25% yield for a period of 5 years till 2013. One George St is a building with 447,999sf NLA, of which 435,560sf is office area and 12,439sf retail space. The building is fully leased. The deal is expected to be completed by July 2008 subject to due diligence by CCT, and unitholders’ approval.

Point: The purchase was not unexpected, albeit a little earlier than anticipated given that CCT has a target to grow AUM to S$6b by 2009. The purchase will expand its asset base to S$6.5b, and give the Trust greater exposure to the office leasing market. The deal is expected to be fully funded by debt; this will increase CCT’s gearing from 27% to 40%, still below the allowable 60% limit. There is no information released about the building’s lease expiry profile or funding cost.

Relevance: We view this deal as slightly positive for CCT because it is likely to be earnings accretive, and should limit downside with potential for more upside when average achieved rents at the building exceed S$10.50psf/mth, the level which the yield protection is based on. Our initial assessment, assuming cost of debt of 3.9% – similar to what CCT is currently paying – DPU would be enhanced by 1.0-1.5%. At our adjusted FY08F and FY09F DPU of 10.8cts and 13.1cts, the yields work out to 5.1% and 6.2%, respectively. Maintain Buy with a DCFbacked price target of S$3.08.

CCT obtained option to acquire One George Street from CapitaLand

Call option to acquire One George Street. CapitaCommercial Trust (CCT) has obtained call option with the right but not obligation to purchase One George Street from CapitaLand at price of S$1.165b or S$2,600psf. One George Street is a 99-year leasehold Grade A office building with net lettable area of 447,999sf (97.2% office, balance retail). It is located within the Central Business District and walking distance to Raffles Place and Clarke Quay MRT stations. Key tenants at One George Street are Royal Bank of Scotland, WongPartnership, Borouge, Lloyd’s London (Asia) and Canadian High Commission.

Structured with 5-year yield protection. CapitaLand will provide yield protection to CCT to ensure minimum net property income of S$49.5m/year (yield of 4.25%) for five years from the date of completion of acquisition till 2013. The yield protection provides insurance against downside risk. We estimated the yield protection to be equivalent to rental of S$11.44psf pm plus other income of S$0.28m/month. Occupancy at One George Street is 100%. According to management, about 50% of the leases are up for renewal in 2008 and 2009. Current asking price for rental at One George Street is S$19psf pm.

CapitaCommercial Trust (BUY/S$2.11/Target: S$2.56)

Already secured committed funding. CCT has already secured committed funding from banks to finance the acquisition. There will not be any equity issue in the form of a placement or rights issue. CCT’s current gearing is low at 24.6%. Gearing is estimated to increase to 40.8% post acquisition of One George Street. CCT has recently secured attractive interest rate at 3.05% for 2-year S$150m medium term note (MTM) and 3.15% for S$100m 3-year MTM. The acquisition of One George Street is expected to complete by Jul 08.

Benefitting from positive rental reversion. CCT is well positioned to benefit from positive rental reversion as 56.9% of its leases for office space are up for renewal in 2008 and 2009, when supply of office space coming on stream is fairly limited. According to management, CCT’s current asking price is S$22.50psf pm for 6 Battery Road and S$17.50psf pm for Raffles City Tower, which is slightly higher compared to 4Q07.

Raise target price to S$2.56. Our target price for CCT is S$2.63 if we assumed acquisition of One George Street is completed in Jun 08. This assumes cost of debt for additional borrowings at 3.5% and contribution from One George Street starting 3Q08. We have assigned a probability of 50% with regards to completion of the acquisition and have, therefore, raised our target price for CCT from S$2.45 to S$2.56.