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.

􀁺 CCT has obtained an option from CapitaLand to acquire the 447,000sf office/retail development One George Street for S$2,600/psf. Under the terms of the deal, CapitaLand will provide “yield protection” for five years (up to 2013), ensuring that CCT obtains a net property yield of 4.25%, equivalent to S$49.5mn pa, or S$10.50/psf.

􀁺 We think the acquisition price is fair, given 1) prevailing market transactions of up to S$2,900/psf; 2) prevailing reversionary yields of about 4.0-4.50% for prime grade A buildings in Raffles Place (Source: Jones Lang LaSalle); 3) the proposed acquisition price of S$2,600/psf reflects a 3.7% discount to the S$2,700/psf paid by CapitaLand on 28 August, 2007 (though this premium was partly due to the marriage value in consolidating CapitaLand’s 100% ownership in the building).

􀁺 The transaction, to be 100% funded by debt, looks likely to be yield accretive. Assuming funding costs of 3.50-3.75% (note: CCT has recently secured funding under its MTN programme — S$150mn at 3.05% due in 2010, and S$100mn at 3.15% due in 2011), we estimate that post debt and management fees (of S$2-5mn), the deal could be yield accretive by 0.7-1.6% in FY08F (six-month contribution) and 1.2-2.9% in FY09F.

􀁺 We estimate the deal would boost gross debt to about S$2,594mn, resulting in gearing rising to 0.40x, from 0.27x now.

􀁺 The option agreement was signed on 26 March. Circulars are expected to be dispatched in May/June, with an EGM before 30 June, and the deal to be completed before end-July.

CCT – UBS

Buying One George St with yield support

􀂄 Option to buy One George Street with minimum yield of 4.25% till 2013
CapitaLand has granted CCT an option to buy One George St (OGS) for S$1.165bn (S$2600psf), and provide yield protection to ensure NPI yield of 4.25% for the next 5 years. Details of the deal will be released after 20 Apr ’08 and an EGM held by 30 Jun ’08 to seek unit holders’ approval for the acquisition.

􀂄 Quality asset, favourable terms
OGS is a 3-year old, Grade A asset that should benefit CCT’s quality portfolio. Including OGS, CCT will be the SREIT with largest asset size (S$6.5bn) and office space (S$4.3bn of office). While current signing rent in OGS is S$19psfpm, we think passing rent is S$5-7psfpm, as many leases were signed in 2004. The yield protection from CapitaLand will likely help bridge the rental gap. CCT has commitments from banks to provide full debt funding for the acquisition. Assuming cost of debt of 3.6%, we expect the deal to be accretive and upgrade our DPU by 0.8-2.5%.

􀂄 Supportive parent should reassure investors on Market Street project
CCT has been trading at 30% below stated NAV due to uncertainty on OGS and Market St redevelopment. We expect the terms of the Market St project to be released beyond Sep 2008, and CCT’s price could be suppressed till then. But support from CapitaLand should assure investors that CCT would undertake the Market St project only if it is yield accretive and approved by unitholders.

􀂄 Valuation
We revise our 12-month price target from S$2.89/unit to S$2.96/unit. Our price target is DCF-derived using beta of 0.65, a risk-free rate of 2.9% and market risk premium of 5%.

CCT – Goldman Sachs

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.

CCT – DBS

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 – UOBKH

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.

CCT – Lim and Tan

A Market Friendly Deal

􀁺 CCT has obtained a call option from CapitaLand, to buy 1 George Street for $1.165 bln or $2,600 psf. Net lettable area = 447,999 sf, of which 97% is office. Major tenants include Royal Bank of Scotland, Lloyd’s of London, and the Canadian High Commission. (C-Land owns 30.5% of CCT.)

􀁺 The expected yield is 4.25% based on the minimum net property income of $49.5 mln pa for 5 years till 2013. Based on the yield protection, the breakeven rental rate is about $10.50 psf per month, which is comfortably below the current rates for Grade A properties in Raffles Place. The acquisition will increase the net property income from Grade A office assets to 55% from the current 43%.

􀁺 The property is at the fringe of Raffles Place and within walking distance to / from the Raffles Place and Clark Quay MRT stations, and completed in 2004, ie after SARS, and tenancies would have been signed at low rentals, hence the need for C-Land to provide income support, albeit not as substantial as in the case of Keppel Land and Cheung Kong selling their respective 1/3 interests in One Raffles Quay to K-Reit and Suntec Reit.

􀁺 Other than being yield accretive, which is a given as far as investors are concerned (CCT’s current blended yield from Grade A office assets is 3.2%), the good thing about this deal is that CCT has secured committed 100% funding, and hence does not have to issue new units (either via placement or rights) to fund the acquisition (as K-Reit has to in a less propitious time). This will raise its gearing to 40% from 27% currently.

􀁺 We believe CCT will still want to issue new units when market conditions improve, as 40% is high even though within the statutory limit. Besides, it will make a decision by May ‘08 whether to proceed with the redevelopment of the Market Street Multi-Storey carpark, which if it is to go-ahead, is estimated to involve development cost of $1.0 – 1.5 bln.

􀁺 We continue to like CCT, although K-Reit is a bit more attractive during the current cum-rights period.

Office REITs – UOBKH

Leveraging on positive rental reversion

Blessed are the office landlords. Rentals for prime office space within Raffles Place and Marina Centre has shoot up from S$8.60 in 1Q07 to S$15.00psf pm in 4Q07. Rentals for Grade A office space is even higher at S$17.15psf pm in 4Q07 (source: CB Richard Ellis). Rentals surged as tenants chased after limited pockets of vacant space within the Central Business District. There is strong demand from financial institutions (wealth management, hedge funds, insurers and commercial banks) and oil & gas companies. Average occupancy for Grade A office space at Raffles Place, Shenton Way and Marina/City Hall micro-markets reach unprecedented levels of 99%, 97.5% and 99.6% respectively (source: Colliers International).

Supply of office space is expected to remain constrained in 2008. Only 959,000sf of new office space will come on stream, the majority in fringe suburban locations. According to CB Richard Ellis, rentals for Grade A office space could average S$19.00psf pm by end-2008, a further increase of 10.8%.

New supply well taken up. The strength of the leasing market can be seen from healthy take ups at Marina Bay Financial Centre (MBFC). Phase 1 with 1.6m sf and Phase 2 with 1.3m sf of office space will be completed in 2010 and 2012. Both phases are more than 50% pre-committed by major financial institutions. Standard Chartered has signed a 12-year lease for 508,300sf at MBFC Phase 1 with option to extend for another eight years. DBS Bank has signed a 12-year lease for 700,000sf occupying 22 floors at MBFC Phase 2.

Capital values supported by keen foreign interest. Investors’ interest in office properties remains strong, especially from foreign funds. Foreign investors accounted for the majority of large transactions in 2H 2007. Capital value for prime office space in Raffles Place is estimated at 3,100psf, an increase of 6.9% qoq and 106.7% yoy (source: CB Richard Ellis).

Office REITs – OVER WEIGHT. We favour the office market due to positive rental reversion and limited supply coming on stream in 2008 and 2009.

CapitaCommercial Trust (BUY/S$1.90/Target: S$2.45). 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 coming on stream is fairly limited. It will redevelop Market Street Car Park into a premium Grade A office tower with estimated net lettable area of 680,000sf. CCT’s gearing is low at 24% in Dec 07 and has secured funding for refinancing of short-term borrowings and the acquisition of Wilkie Edge.

K-REIT Asia (BUY/S$1.47/Target: S$1.96). K-REIT Asia has proposed a renounceable rights issue of up to 420m units priced at a discount of up to 20% to the prevailing market price. Keppel Corporation and sponsor Keppel Land own 72.7% of K-REIT in aggregate and have given irrevocable undertaking to take up their respective allocations of rights units. We believe the stock is oversold. Our target price for K-REIT is S$1.96 assuming 372.1m new units were issued at S$1.20 each in a 3-for-2 rights issue.

Suntec REIT (BUY/S$1.40/Target: S$2.10). Suntec REIT will benefit from improved connectivity to Suntec City due to the Esplanade and Promenade MRT stations when the new Circle line is ready in 2010. It has acquired 14,677sf of state land for construction of new extension at Park Mall, which increases gross floor area by 67,810sf or 17.7% to 451,727sf.

Suntec REIT has issued 5-year S$250m convertible bonds, convertible into cash or new units. The conversion price is initially S$1.968/unit. The bonds bear interest rate of 3.25% and yield to maturity of 4.25%. Suntec REIT intends to settle the bonds in cash on conversion to minimise dilution. We have factored in the higher cost of debt in our forecast and lowered our target price from S$2.18 to S$2.10.

CCT – UOBKH

Leveraging on positive rental reversion

CapitaCommercial Trust (CCT) invests in income producing real estate used for commercial purposes. It owns nine properties in Singapore with 2.3m sf of office space, which accounted for 7% of private office stock within Downtown Core. CCT has a 30% stake in Quill Capita Trust (QCT), a commercial REIT listed on Bursa Malaysia. It has a 7.4% stake in Malaysia Commercial Development Fund (MCDF), which is the largest private real estate fund in Malaysia focusing on investments in Kuala Lumpur and the Klang Valley. CCT was assigned corporate rating of A3 with stable outlook by Moody’s Investors Services.

Huge room for rental reversions. Rentals for prime office space within Raffles Place and Marina Bay area has shoot up from S$8.60 in 1Q07 to S$15.00psf pm in 4Q07, a result of supply crunch coupled with strong demand from financial institutions and oil & gas companies. Rentals for Grade A office space is even higher at S$17.15psf pm in 4Q07. According to CB Richard Ellis, rentals for Grade A office space could average S$18.50psf pm by end-2008, a further increase of 7.9%. 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 coming on stream is fairly limited.

54% of office space at 6 Battery Road is up for renewal in 2008 and 2009. We understand that Standard Chartered has renewed leases for 130,000sf at average rate of S$14.95psf pm for three years in Jan 08 compared to previous rate of S$7.00psf pm. 53% of office space is up for renewal in 2008 at Robinson Point with existing rent at only S$4.00psf pm. 53% of office space is up for renewal in 2009 at Raffles City Tower with existing rent at only S$3.40psf pm. Positive rental reversion from these prime office buildings provides revenue growth of 14.8% in FY08 and 12.4% FY09.

Redevelopment for Market Street Car Park. CCT has secured Outline Planning Permission for the redevelopment of Market Street Car Park into a premium Grade A office tower with estimated net lettable area (NLA) of 680,000sf. Management estimated that the site cost between S$1b to S$1.5b to be redeveloped, depending on the amount of development premium imposed. Construction is likely to commence in late-08/early-09 and completion by 1H2012. The project is likely to be undertaken by a JV with option for CCT to repurchase at a later stage when rentals have stabilised. Sponsor CapitaLand is the most likely JV partner. We believe a 50:50 JV is possible, particularly if the project is developed in phases.

No risk from refinancing. CCT’s current gearing is low at 24% in Dec 07. The company issued S$150m 3-year medium term note with attractive fixed interest rate of 3.05% in Mar 08. This has largely satisfied its funding requirements for refinancing short-term borrowings and the acquisition of Wilkie Edge, a mixed development project at Selegie Road.

CCT plans to expand asset size from current S$5.3b to S$6b by 2009. Potential pipeline of acquisitions from sponsor CapitaLand includes One George Street with NLA of 448,000sf. There is also latent potential to redevelop Golden Shoe Car Park. CCT provides FY08 distribution yield of 5.12%, a healthy spread of 3.04% over 10-year Singapore government bond yield at 2.08%.

CCT – BT

CCT MTN issues $150m fixed rate notes due 2010

CAPITACOMMERCIAL Trust (CCT) has announced that CCT MTN Pte has issued $150 million of fixed rate notes due in 2010.

CCT MTN is a wholly- owned subsidiary of HSBC Institutional Trust Services (Singapore) Ltd, which in turn is the trustee of CCT.

The notes were issued under the $1 billion multi- currency medium-term note programme established by CCT MTN on Nov 20 last year.

DBS Bank Ltd has been appointed as dealer of the notes.

The notes will mature on March 17, 2010 and will bear a fixed interest rate of 3.05 per cent per annum payable semi-annually in arrears.

CCT MTN will lend the proceeds to HSBC Institutional Trust Services, which will use the funds to refinance short-term borrowings; finance the acquisition of the Wilkie Edge property in the Selegie area as well as asset enhancement works; and for general working capital purposes. After the issuance of the notes, CCT’s gearing will be 26.9 per cent – still one of the lowest amongst Singapore real estate investment trusts (Reits), the statement said.

The Singapore Exchange (SGX) has given in-principle approval for the listing of the notes.

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

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.

The trust also reported $1.3 billion fair value gain on the revaluation of its investment properties, boosting its total asset size to $5.3 billion as at the end of December 2007.

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

SREIT – Kim Eng

REITs Sector

♦ Defensive and high-yielding SREITs in the limelight amid stock market volatility

• REITs offer varying yields and geographical exposure. Attractive yields from industrial REITs, offering spreads over Government bonds of about 4%.

♦ M&A theme in focus

• Strategic review of MMP REIT signals possibility of privatization or M&A, in view of the relatively attractive P/B ratio.

♦ Watch out for retail REITs which have potential strong organic and inorganic growth

• Fraser Centrepoint Trust with several acquisitions from the Sponsor’s pipeline. Likewise for CapitaCommercial Trust and CapitaMall Trust for the strong management and direct benefit from CapitaLand’s capital recycling model.

♦ Inflation-hedged REIT

• Parkway Life REITs has an in-built rental mechanism that is hedged against increases in the consumer price index (CPI)

♦ Hospitality-centric REITs to benefit from higher room rates

• CDL Hospitality Trust (CDLHT) and Ascott REITs are well-positioned to enjoy higher RevPAR, given the rising hotel room rates. CDLHT could be best proxy to Singapore’s hospitality sector.

Tables here