CCT gets option to buy 1 George Street for $1.17b

Published March 28, 2008

CCT gets option to buy 1 George Street for $1.17b

Deal comes with income support from seller CapitaLand till 2013

By KALPANA RASHIWALA


(SINGAPORE) Big office investment sales deals have not ground to a complete halt. CapitaCommercial Trust announced yesterday that it has an option from sponsor CapitaLand to buy 1 George Street for $1.165 billion or $2,600 psf of net lettable area, showing that income support may be the way to make acquisitions palatable to Reits.

This is especially so when it comes to office blocks with a substantial portion of leases signed a few years ago when rentals were weak. Never mind that income support for such deals may once have been frowned upon.

The deal for 1 George Street involves a five-year rental guarantee, with seller CapitaLand ensuring a minimum net property income of $49.5 million per annum, translating to a net property yield of 4.25 per cent per annum on the purchase price till 2013.

This means that CapitaLand will top up any shortfall in net property income to ensure that the $49.5 million floor is achieved every year for the period. The acquisition will be funded entirely through debt; there will be no equity raising.

1 George Street is a 23-storey Grade A commercial building that was completed three years ago. It is fully leased and its tenants include The Royal Bank of Scotland, WongPartnership and Lloyd's of London (Asia).)

Most of the leases were signed around 2004/2005, when office rents were weak, which is why CapitaLand is providing yield protection for the asset's acquisition by CCT. The $49.5 million annual minimum net property income implies gross monthly rentals of $10.50 psf. Given that the current average market rental in the Raffles Place area is about $16.30 psf, this spells upside for 1 George St as leases are renewed, CapitaCommercial Trust Management CEO Lynette Leong said.

Leases for about 50 per cent of the net lettable area in the property will come up for renewal in 2008 and 2009. Recently, a new lease for a small space in the building was signed for $19 psf, Ms Leong revealed.

'With the yield-protection given by CapitaLand, CCT will be able to attain minimum returns from this asset. The five-year yield protection eliminates all the downside risk and whatever upside there is from the asset, it will all flow through to CCT. That's a pretty compelling offer,' Ms Leong said.

The deal drew an inevitable comparison with K-Reit Asia's acquisition of a one-third stake in One Raffles Quay from its parent, Keppel Land. The two deals have similarities - they involve income support and are at prices seen as lower than market.

However, Ms Leong, at a media and analyst briefing yesterday, argued that there were important differences between the two deals.

For one, CCT will get 100 per cent direct ownership of 1 George Street, and the asset will enjoy full tax transparency as a result of being owned by a Reit. This means that CCT would not have to pay tax on income from this asset, unlike K-Reit Asia's acquisition of a one-third stake in ORQ which is being effected through the purchase of shares in the company that owns ORQ. Hence, the income that K-Reit will receive from the asset would be net of 18 per cent corporate tax.

Another difference is that KepLand will provide income support only till 2011 whereas CapitaLand is doing so till 2013, beyond the 2011/2012 timeframe when a spike in Grade A office space is expected.

CapitaLand Commercial CEO Wen Khai Meng explained that the reason for 'providing the floor for five years is to address the view that there will be a huge supply in 2011/2012'.

Another difference: CCT has secured 100 per cent committed debt funding for its proposed acquisition of 1 George Street and will not have any equity raising exercise. K-Reit, on the other hand, is seeking unitholders' approval for a rights issue to help partly refinance a bridging loan taken from Keppel Corp to complete the acquisition of the one-third stake in ORQ.

The $2,600 psf of net lettable area at which CapitaLand is proposing to sell 1 George St to CCT is lower than the $2,700 psf at which the asset was valued at in a deal last August when CapitaLand bought the remaining half share in the asset to gain full ownership of the award-winning property.

CapitaLand expects to book a gain of about $47.1 million after taking into account the yield protection and the company's 30.5 per cent interest in CCT.

Mr Wen said that the group had to pay $2,700 psf in last August's deal for control premium. 'We feel $2,600 psf, plus income support, is a good deal given that CapitaLand still has about 30 per cent stake in CCT and given that we are the manager of the Reit and have a certain responsibility to help our sponsored-Reit to grow.

'I personally dislike income support, because it conjures up all sorts of wrong impressions. But it would be challenging for a Reit to justify non-yield accretion for the first few years in an acquisition. Based on current rental rates at 1 George Street, the yield would be below 4.25 per cent, but we are seeing very strong rental reversion,' he said

'The yield-protection arrangement of 4.25 per cent pa for five years makes the acquisition compelling, given the current blended yield of CCT's Grade A office assets is 3.2 per cent,' Ms Leong said.

Even with 100 per cent debt funding for the acquisition, CCT's gearing will rise to only about 40 per cent from the current 27 per cent, the trust's manager highlighted.

The deal will be subject to CCT unitholders' approval at an extraordinary general meeting to be held by June 30, as it is deemed an interested party transaction. CapitaLand is not allowed to vote. The acquisition is slated for completion by end-July.

March 28, 2008

Property trust to acquire office building for $1.17b

Sale of 1 George Street to CCT comes with arrangement guaranteeing yields

By Joyce Teo, Property Correspondent


CAPITACOMMERCIAL Trust (CCT) plans to buy a three-year-old office block - the building was completed in 2004 - in the Central Business District (CBD) for $1.17 billion from its biggest shareholder, CapitaLand.

The purchase of the 1 George Street building will augment the property trust's other prime blocks at a time of tight office supply and rising rents.

CCT's portfolio includes Capital Tower in Robinson Road, 6 Battery Road, the HSBC Building in Raffles Place and a majority stake in Raffles City.

The 1 George Street transaction works out to $2,600 per sq ft (psf) of net lettable area.

The deal comes with a form of yield protection. CapitaLand will ensure a minimum net property income of $49.5 million a year for five years from the day the sale is completed.

This translates into a net yield of 4.25 per cent a year on the purchase price, CCT said in a statement, and implies a rental rate of about $10.50 psf.

The yield protection arrangement makes the acquisition compelling, as CCT's current Grade A office assets have an average yield of 3.2 per cent per annum, said CCT's chief executive, Ms Lynette Leong.

Ms Leong said buying 1 George Street would increase CCT's net property income contribution from such assets from 43 per cent to about 55 per cent.

'The 4.25 per cent yield is reflective of the current office market,' said Cushman & Wakefield managing director Donald Han.

'Prime office acquisitions last year were done at average yields of between 3 per cent and 3.5 per cent.'

The yield protection arrangement will also shield the trust from any potential oversupply situation in the office market from 2010 and beyond, he said.

CCT's Grade A office buildings have done well. Asking rents at 6 Battery Road in Raffles Place, for example, have risen to $22.50 psf, with rent deals done above $20 psf.

The 23-storey 1 George Street is well sited to benefit from high CBD rents, being near the Raffles Place and Clarke Quay MRT stations, said CCT.

There is good upside for rents, as it was completed in 2004, when the office leasing market was sluggish.

The building is fully occupied, but about half the rental leases will be up for revision over the next two years, said Ms Leong.

Tenants at 1 George Street include The Royal Bank of Scotland, WongPartnership and the Canadian High Commission.

CapitaLand said it expected a gain of about $47 million from the sale. This is after taking into account the yield protection and its 30.5 per cent interest in CCT.

It said the divestment was in line with its strategy of unlocking value from commercial properties at the appropriate time to recycle capital.

CapitaLand gained full ownership of 1 George Street last year, when it bought German insurer Ergo's 50 per cent stake in the building at $2,700 psf of net lettable area.

CCT will seek unitholder approval for the deal at an extraordinary general meeting before June 30, so the deal can be completed before July 31.

As CCT has secured committed funding for the entire purchase price, it does not need to do a placement of CCT units or a rights issue to raise cash.

Its gearing, however, will rise to 40 per cent from 27 per cent.

[email protected]