CAPITALAND plans to launch a real estate investment trust (Reit) in Malaysia in partnership with a local company. The Reit, in which CapitaLand would hold a 30 per cent stake via CapitaCommercial Trust (CCT), would initially comprise a handful of office buildings located in Cyberjaya owned by the Quill group, sources said. Helmed by Michael Ong, Quill group's stronghold is Cyberjaya, the Malaysian purpose-built cyber city, where Quill has attracted a number of multinational corporations (MNCs).

The buildings to be injected into the Reit were purpose-built offices designed, constructed and owned by Quill. These include two DHL data centres, and two other facilities which currently serve as the headquarters of German carmaker BMW Malaysia and HSBC Bank, respectively. The four buildings have a total floor space in excess of 800,000 sq ft.

As one of the top business process outsourcing locations, Malaysia continues to target MNCs to set up their regional headquarters or backroom operations in Cyberjaya. Quill has proven an effective partner in this regard, judging by the MNCs that are its clients. Set up in 1987, Quill group markets itself as a one-stop centre for the financing, fast-track design, construction and lease-back of purpose-built offices in Cyberjaya. Over the years, it has established its own in-house teams of architects, engineers, space planners, builders and interior designers, but a key strength is its expertise in integrating IT infrastructure into the buildings.

Although the Reit appears to be small considering CapitaLand's involvement elsewhere, the Reit is likely to see more buildings injected into it in the foreseeable future. Last year, Mr Ong, who is a chartered architect, revealed plans to construct another five office buildings over a two-year period.

A property heavyweight and established Reit manager in the region, CapitaLand is expected to inject its properties into the Reit in future. In Malaysia, CCT already owns one property - Wisma Technip, in Kuala Lumpur - but CCT chief executive David Tan said last month it was on the lookout for more acquisitions.

In any event, its co-branding in the Reit already adds to the attraction. Some seven Reits have listed on Bursa Malaysia.

Meanwhile, CapitaLand said it is 'constantly on the lookout for good quality properties to augment our portfolio in Malaysia'. 'We will make announcements according to the regulatory requirements of the various jurisdictions at the appropriate time,' it said in response to a BT report yesterday entitled 'CapLand in venture to build prime KL commercial project'.

Extracts fm CIMB Report dated 19-Oct-06, 

Raffles City provided the boost

• In line with forecasts. While CCT’s distributable income jumped 19% yoy to S$19.4m in 3Q06, its DPU was flat at 1.8cts, largely the result of equity fundraising during the quarter to finance its Raffles City purchase. DPU YTD is 5.3cts, or 71% of consensus and our full-year forecast of 7.4cts. We expect greater contributions from Raffles City in 4Q06 to help CCT meet our full-year target.
  
• 3Q06 performance lifted by Raffles City. Gross rental revenue was up 33% yoy to S$38.6m, helped by the consolidation of earnings from Aragorn and CCT’s 60% stake in Raffles City. NPI margin was 3% pts narrower at 73% in 3Q06, compared to a year ago. A higher proportion of retail space from Raffles City resulted in higher marketing and utility costs. CCT’s properties remained close to fully let with an overall committed occupancy rate of 99% in 3Q06.
  
• Raffles City to remain key organic growth driver. Raffles City accounts for 36% of CCT’s S$3.6bn assets. It was announced that 150,000-200,000 sf of NLA will be added in phases over the next few years by converting the basement levels into retail space. About 50% of the existing office space leases at Raffles City are also up for renewal over the next 15 months. Average monthly gross rent of these leases is S$5-5.32 psf, while the asking rent has reached S$8.50 psf. We believe that asset enhancements and rental reversions can drive CCT’s organic growth beyond what we had expected earlier.
  
• Upgrade to Neutral; target price raised to S$2.30. We are keeping our FY06-07 forecasts unchanged but are raising our FY08 DPU forecast by 15% to 9.5cts. This mainly reflects robust rental growth and gains from asset enhancement, which is likely to kick in only in 2008, at Raffles City. CCT plans to expand its portfolio to S$6bn by 2009 and 20-30% of these assets could be located overseas. Potential markets include China and Malaysia. There are also 5% of REIT-able office buildings in the CBD and Orchard Road areas which could be targeted for acquisition. Our Gordon growth model-derived cost of equity has been reduced to 5.1% from 5.4% to arrive at our new DDM-based target price of S$2.30, up 24% from S$1.85 previously. We upgrade the stock to Neutral from Underperform.

Our preferred REIT for office exposure

Completed equity raising exercise. CapitaCommercial Trust (CCT) recently completed its equity raising exercise to part finance the Raffles City (RC) acquisition. CCT's 60% stake is worth S$1.32bn of which its cash call will finance about 60% of the acquisition cost with the balance coming from debt. The average weighted cost of the new units is S$1.677 per unit for the 479m new units issued. We estimate that post this acquisition, CCT's debt level would increase to about S$1.2bn, giving it a portfolio gearing of about 34%. This is well within allowable level for REITs. As a result of the equity raised, we estimate CCT's units in issue have increased by about 53% to 1,396m units.

Raised DPU by 5%. Raffles City's blended property yield is estimated at 4.9% for FY06 and 5.1% FY07. As this yield is higher than the trading yield of CCT, DPU accretion is assured. We estimate that with the addition of Raffles City, our FY06 DPU will increase by about 4.0% (from 7.03 cents to 7.31 cents) and FY07 DPU will rise 5.0% (from 7.20 cents to 7.56 cents). This accretion is lower than our previous estimate of about 10% mainly because the recent volatile market conditions have caused the new CCT units to be priced at a level lower than our previous estimate.

Cyclical sector upturn to benefit CCT. CCT is in a unique position to benefit from the upturn in the office sector driven by strong GDP growth. Over the next two years, there is very limited new supply coming into the market, and since CCT has between 24%-37% of its portfolio space up for renewal during this period, it is well-positioned to benefit from the situation. Hence we anticipate strong organic earnings growth. This is over and above the acquisition growth that CCT is likely to undertake.

Maintain BUY. CCT is our preferred REIT for exposure to the office market. We like CCT as its property portfolio is superior to the other REITs under our coverage. It has good potential for organic earnings growth, continues to have a low price-to-book ratio and finally it is about 13% below our fair value of S$2.11. We maintain our BUY rating on CCT.

It seeks funds to help finance purchase of interest in Raffles City

CAPITACOMMERCIAL Trust (CCT) will raise up to $803.2 million by issuing 478.6 million to 499.5 million new units, to help finance its acquisition of a 60 per cent interest in Raffles City.

There will be a preferential offering of 89.5 million units at an issue price of between $1.60 and $1.67 per unit to Singapore-registered unit holders based on one new unit for every existing 10 units held. The above price range represents a discount of between 7.5 per cent and 3.5 per cent to CCT's last traded price of $1.73 per unit on Monday.

CCT will also be doing a private placement of between 374.1 million and 395 million new units and an ATM offering of 15 million new units through the ATMs of DBS Bank, including POSB. The units under the private placement and ATM offering will be sold at between $1.61 and $1.68 per unit.

The preferential offering opens on Aug 17 and closes on Aug 25, while the ATM offering, which is on a first-come first-served basis, opens at noon on Aug 17.

The preferential offering, ATM offering and placement issue price will be set after an accelerated book-building process and will be announced prior to the commencement of the preferential and ATM offering. HSBC and UBS are the joint lead managers for this equity raising by CCT.

CapitaLand's wholly owned subsidiary, CapitaLand Commercial and Integrated Development (CCID), has undertaken to accept in full its provisional allocation of new units under the preferential offering. CCID has an indirect interest in 37.4 per cent of CCT. CCID will subscribe for between 74.5 million and 82.3 million new units under the private placement. It will also take up new units under the preferential offering which have been allocated but are not taken up and new units under the ATM offering which are not taken up.

The indicative time and date of the listing of the new CCT units on the Singapore Exchange are 2 pm, Sept 1.

CapitaMall Trust, which is partnering CCT in purchasing Raffles City, is expected to launch its equity offering to help finance its share of the acquisition costs shortly.

With more difficult market conditions for fund raisings by Reits and equities in general, market players are keenly looking out for the reception that CCT gets for its equity raising.

CCT's unit price is up by 16.9 per cent in the year-to-date. Its last traded price on Monday was down 8.9 per cent from a week ago.

Over this year, Reits have had to contend with investor fears of rising interest rates, which could make Reits relatively less attractive as yield plays. Still, analysts like CCT for providing exposure to improving prime office rents in Singapore and for its acquisition track record.

Extracts fm UOB Kay Hian Report dated 26-Jul-06,

Unitholders to receive 12% more distributable income for 1H06 backed by strong demand for quality office space CCT announced its first half FY06 results this morning.

• Distribution per unit (DPU) of 3.49 cents was declared, which is an 8% increase from the first half 2005 DPU of 3.24 cents. This represents an annualised yield of 3.8% based on the closing price of S$1.83 on 25 July 2006.
  
• Distributable income was S$31.2m, a 12% increase over the S$27.8m reported for the corresponding period in 2005. Part of the increase is the change in CCT’s distribution policy from 95% to 100% of taxable income. 
  
• Gross revenue for 1H06 was S$59.8m, an increase of S$3.6m or 6% over 1H05.
  
• Rental rates committed for renewals and new leases for CCT’s properties in Singapore’s CBD are above the respective micro-market average rents for the quarter ended 30 June 06. Tenant retention continues to be strong at 87% as at 30 June 06 and the committed occupancy for the portfolio stands close to 100%.
  
• In addition, Moody’s has for the first time accorded a family corporate rating of “A3” to CCT with a stable rating outlook.
  
• Going forward, CCT will continue to actively pursue opportunities in Singapore and abroad, and aims to achieve an asset growth target of between S$5b to S$6b by 2009.

Some uncertainty with respect to stake in Raffles City

All eyes on Raffles City funding. CapitaComnmercial Trust (CCT) recently announced details of its proposed equity fund raising (EFR) exercise to finance its 60% stake in the S$2.19b Raffles City acquisition. The proposed value of EFR is S$803m. However, in the event that CapitaMall Trust (CMT) unitholders vote against the acquisition, CCT could end up buying a 100% stake in Raffles City. CCT's EFR would require up to S$1,074.7m under this scenario, making it one of the largest cash call in 2006. Depending on CCT's eventual stake in Raffles City, the EFR may increase the number of outstanding CCT units by 53% to 71%.

CapitaLand to underwrite up to 60% of new units. CapitaLand (CapL) presently has about 37% stake in CCT. To ensure the success of Raffles City acquisition, it has undertaken to subscribe a further S$200m worth of new CCT units, if there are no takers. This represents over 60% of new units that may be issued, which may raise Capl’s stake to over 46%. The remaining new units to be subscribed by investors will then have a more palatable size at about S$320m to S$430m.

Maintain earnings for now. The above huge cash call notwithstanding, we anticipate distribution per unit (DPU) accretion, as CCT's DPU yield for FY07 is about 100bp lower than Raffles City's 5.1% rental yield. This implies that CCT's cost of capital is lower then the return it is getting from Raffles City acquisition. This is confirmed by CCT's EFR prospectus, which expects an annualized DPU accretion of 8.5% and 10.5% in FY06 and FY07, respectively. However, we will keep our forecast until there is greater certainty with respect to the pricing of the new units, and the eventual stake that CCT will hold in Raffles City.

Maintain BUY and fair value. We continue to like CCT for its acquisition growth potential, and the DPU accretion from Raffles City acquisition. We maintain our fair value of S$2.11, based on CCT achieving an asset size of S$4.0b, as compared to its current size of S$2.1b, or the size of S$3.4b if we include Raffles City. With over 20% upside to its share price, we reiterate BUY on CCT.

Extracts fm CitiGrp Report dated 24-Apr-06,

• Mantain HOLD — Although we like CCT’s exposure to the recovering office sector, we are concerned about the impact of the pending cash call (to finance the acquisition of Raffles City), hence, we maintain our Hold rating and S$1.98 target price.
  
• 1Q06 in line — 1Q DPU 1.72 cents, up 8% yoy due to acquisition of HSBC Building as well as higher rental income from Robinson Point (up 19% yoy) and Starhub Centre (up 16%). Rental income from Market Street and Golden Shoe Car Parks were lower (down 51% and 8%, respectively) due to enhancement works. Income from 6 Battery Rd was down 5% due to impact of negative rental reversion.
  
• Beneficiary of recovering office sector —Average committed occupancy was 99.6% at Mar 06, up from 99.1% 3 months ago. Other than Capital Tower (accounts for 25% of income), its other buildings are seeing positive rental reversions as well.
  
• Outlook remains positive — With its almost pure exposure to the office sector, CCT is well positioned to benefit from the limited supply and strong demand for office space in Singapore.
  
• Investors beware —CCT will need to raise some S$800m (equivalent to almost 50% of its current market cap) to finance the acquisition of a 60% stake in Raffles City (S$2.2bn) sometime in July 06. We foresee downside risk to the share price if demand for the new units is poor.
  
• Lack of catalyst – Although Capitaland has another S$3.7bn worth of noncore investment properties, they are unlikely to be injected into CCT soon, given the need to digest the acquisition of the massive Raffles City over the next 3-6 months.

1Q06 up mainly due to portfolio expansion. Growth in qross revenue and net property income was attributed mainly to the HSBC building acquisition, but was partially offset by a 51% drop in net property income from Market Street Carpark from S$0.7m to S$0.3m due to asset enhancement works. After stripping out contribution from HSBC Building, 1Q06 was relatively flat compared to 1Q05.

Recent acquisitions. CCT recently completed the acquisition of 100% junior bonds in Wisma Technip on 12 April 2006. The joint acquisition of Raffles City with CMT, where CCT will hold 60% interest (acquisition value at S$1.3bn), should be completed by August 2006. Revenue and net property income of these acquisitions is expected to be the main growth driver for CCT in FY06 with organic growth limited.

Office market update. Prime office rentals in Singapore has been recovering since 4Q04, growing 18.2% YoY in 2005 vs 10% in 2004. The URA Office Index also saw an increase of 12.7% in 2005 compared to 3.5% in 2004. According to CBRE, prime office rents reached S$5.60 psf per month, up 8% QoQ and 20% YoY. They are projecting a further increase for average prime and Grade A office rents to S$6.50 and S$7.20 psf per month by end 2006. This is on the back of strong leasing momentum expected for 2006 with limited supply for the next three years. However, with only 18.4% of leases (as percentage of gross rent) due for renewal in FY06 and its existing portfolio is near 100% occupancy (excluding Golden Shoe Carpark and Market Street Carpark, all buildings are at 100% occupancy except Bugis Village at 93% occupancy), organic growth for CCT appears limited for FY06.

Adjusting acquisition assumptions. As of 1Q06, CCT’s gearing stood at 30%, with interest coverage at 4.4x and effective interest rate of 3.5% after interest rate swap contracts for S$250m fixed interest costs raised the weighted term expiry from 1.6 to 4.1 years. Following management guidance of a portfolio target of S$4.0bn by FY07 and gearing of 40%, we have raised our acquisition assumptions to S$600m. After adjusting our WACC assumptions, we upgraded our DCF based valuation to S$1.80.

Singapore, 19 March 2006 – CapitaCommercial Trust Management Limited (“CCTML”), as manager of CapitaCommercial Trust (“CCT”) is pleased to announce that CCT has signed a conditional put and call option agreement with Tincel Properties (Private) Limited (“TPPL”) on 18 March 2006 to acquire the 99-year leasehold Raffles City (“RC”), located in Singapore’s Central Business District, for S$2.085 billion. Concurrently, CCT and CapitaMall Trust (“CMT”) have signed a collaboration agreement where CCT is committed to acquire a 60% interest in RC, and CMT is committed to acquire the remaining 40%, subject to the approvals of the respective unitholders. In the event that the transaction is not approved by CMT’s unitholders, CCT will acquire 100% interest in RC. RC is a prime integrated development comprising an office tower, two hotels, a shopping centre, a convention centre and three basement car parks. CMT will be taking a 40% stake in RC as the shopping centre component contributed approximately 40% of the total net property income of RC in 2005. The entire transaction is expected to be completed by end-August 2006.

The property purchase price of RC is S$2.085 billion. In addition, the purchaser will be required under the sale and purchase agreement to (i) reimburse TPPL for amounts paid and assume the remaining costs for the building capital expenditure and asset enhancement works of up to S$41 million and (ii) pay TPPL for certain property related liabilities of S$40 million. Based on the total purchase consideration of approximately S$2.166 billion, the projected annualised property yield is 4.9% for 2006 and 5.1% for 2007. The acquisition is expected to be yield accretive for both CCT and CMT unitholders based on the respective closing unit prices of CCT and CMT of S$1.93 and S$2.38 as at 17 March 2006. The various options for financing the acquisition are currently being considered and will be announced at the appropriate time.

Mr Sum Soon Lim, Chairman of CCTML, said, “Raffles City is a strategically located premium property. This acquisition will reinforce CCT’s status as the leading commercial REIT anchored by a portfolio of well-located and quality commercial properties. In addition, the purchase will increase CCT’s asset size from S$2.1 billion to at least S$3.5 billion. This deal is also the first in Singapore where two REIT managers with proven track records in their respective areas – CCTML in the management of commercial properties and CapitaMall Trust Management Limited (“CMTML”) in the management of retail properties – have come together to own and manage this asset to generate long term returns to the respective unitholders.”

Mr Hsuan Owyang, Chairman of CMTML, said, “Raffles City is a strategically located asset which enjoys excellent connectivity with access to two MRT train lines as well as the upcoming Circle Line. Together with Plaza Singapura, we will be in a unique position to have two prime assets, with each situated above an interchange station where three main train lines will intersect, thus allowing us to capture the tremendous human traffic flow to our properties. The yield accretive acquisition of Raffles City will increase our asset size significantly from S$3.4 billion to S$4.3 billion, further strengthening our position as the largest REIT by asset size and market capitalisation in Singapore.”

Target price raised on expectation of acquisitions

Ambitious plans. CapitaCommercial Trust (CCT) had previously set itself an ambitious target of achieving a portfolio size of S$4.0b by 2007 (from current S$2.08bn). In fact, it had set itself a time table for achieving its target: S$2.5bn by 2005, S$3.3bn by 2006 and S$4.0bn by 2007. Presently, CCT appears to be behind its own schedule. More importantly, with half time fast approaching, CCT is fast running out of time. Hence we see a possible concerted effort on the part of CCT’s managers to buy something. The key impediments to acquisitions appear to be the rapidity in which market values have moved. Presently, the spread between CCT’s trading yield and net property yield of Grade A Singapore office buildings is less then 100bp. This makes any acquisitions unlikely to be accretive to unitholders. So Singapore acquisition is highly unlikely in the short term.

Lowered trading yield makes overseas acquisitions attractive. This leaves only overseas properties as acquisition targets. However, the issue with overseas assets is the need for much higher yield to justify the higher risks. We estimate that a premium of at least 200-300bp to Singapore property yield is necessary. However the recent re-rating of CCT (leading to DPU yield dropping to about 3.7%) and concurrent stable Grade A properties in Shanghai yields of about 7.0-8.0%, means that Shanghai properties has just pass our hurdle spread. Furthermore, with the revised gearing for SREITs of 60% (from 35%), this allows minimal equity input, thus lowering downside risk. Finally as cost of debt is cheaper than cost of equity, debt biased acquisition is also likely to enhance accretion.

Upgrade to BUY on revised assumptions. With the fall in trading yield of CCT and more debt financing available to S-REITs, the acquisition dynamics have changed in CCT’s favour. In view of this new development, CCT is more likely to achieve its asset targets. We have thus revised our assumption of CCT’s asset size in FY06 to S$3.0bn (from S$2.08bn). This in turn has positive implication to our valuation and we are revising up our target price to S$2.02 from S$1.49. Given the total return (capital gains and DPU yield) of over 13%, we are upgrading CCT from HOLD to BUY.

Extracts fm CIMB Report dated 26-Jan-06,

No Surprises

• In line with consensus and our forecast. CCT reported a fair set of results with 4Q05 gross revenue growing 9% yoy to S$30m and net income up by 12% yoy to S$17m. Total distributable profit rose by a higher 18% as CCT started distributing 100% of its income from Jul 05 (vs. 95% a year ago). Distribution per unit (DPU) was 1.85 cts, up 11% yoy. Assuming 95% distribution, the rise would have been only 5%. This DPU growth was led by improved occupancies, additional contribution from HSBC Building and higher car park revenue. Due to a shorter FY04 (starting from Mar 04), full year comparisons are not meaningful. FY05 distributable income came in at S$60m with DPU of 6.8 cts, in line with all expectations. Portfolio occupancy is now 99% (95% a quarter ago), underscoring the office sector’s recovery. 
  
  
• Growth via asset enhancement looks limited. High occupany rates of 99% limit CCT’s ability to grow DPU organically via higher rental reversions. Its announced asset enhancement programmes at Market Street Car Park and Golden Shoe Car Park are positive in the medium term but the accretion is not significant. 
  
  
• Evaluating S$5bn acquisition pipeline, investing in Malaysia via junior bonds. The recent relaxation of guidelines allowing Reits to own partial stakes in buildings has created opportunities for CCT to tap on parent CapitaLand’s portfolio for acquisitions. Separately, it is investing S$20m in junior bonds in a prime office building in Malaysia which will yield at least 6.5%. 
  
  
• Raised forecasts by 4% for possible acquisitions, maintain Neutral. Since CCT is confident of achieving some acquisitions this year, we are factoring in S$600m of acquisitions over FY06-08 on a net yield of 5% at its optimal gearing of 35-40%. Consequently, we have raised our FY06-07 DPU forecasts by 4%, and are introducing FY08 DPU at 7.6 cts. Growth is expected to be slow though steady at 4%. Based on our cost of equity of 5.75%, our target price is $1.66 (previously S$1.61). At projected yields of 4.5-4.7%, CCT is still one of the lowest-yielding Singapore Reits. Maintain Neutral.

Extracts fm CIMB Report dated 21-Oct-05,

• In line. CCT reported a fair set of results with 3Q05 gross revenue growing 7% yoy to S$29.1m and net income up by 15% yoy to S$16.3m. Total distributable profit was up by a higher 21% as CCT starts distributing 100% of its income from Jul 05 (vs. 95% a year ago). Distribution per unit (DPU) was 1.80cts, up 13% yoy. Assuming 95% distribution, the rise would have been 7%. This DPU growth was led by increased rental and non-rental revenues, improved contributions from car park operations and lower expenses. Portfolio occupancy is now 99%, up from 98.3% a quarter ago, underscoring the office sector’s recovery. 
  
• Industry outlook positive. Demand for space in CCT’s office properties has been rising. According to property consultants, prime office space rents have climbed to S$5.20psf per month in 3Q05, translating into an increase of over 11% YTD. 
  
• Limited organic growth. While we envisage a good recovery for office rentals, its high 99% committed portfolio occupancy may limit organic growth. We also understand that while renewed/new rentals were higher than the company’s forecasts, the rates were still lower than preceding rents. This means that it will take a while for rental income to rise in line with reversionary rates. 
  
• Maintain forecasts and Neutral rating. At projected yields of 4.5-4.8%, CCT is one of the lowest-yielding Singapore Reits. There is also no mention of any near-term acquisition strategy. With the fierce competition for commercial assets and perceived asset reflation, we believe it will be increasingly hard to match buyer and seller expectations. Hence, more aggressive growth via yield-accretive acquisitions may take a while to come through. With rising interest-rate risks, we have raised our cost of equity assumption to 5.75% from 5.55%, producing a DDM-based target price of S$1.61 (previously S$1.68).