CCT - Raising new equity to address FY10F debt maturities

On 22 May, CapitaCommercial Trust (CCT) announced a 1-for-1 rights issue to raise S$828.3mn in gross proceeds, pricing 1.4bn rights units at S$0.59 a piece. Excluding 3% issue expenses, the net proceeds of around S$803.5mn will be used to reduce S$885mn worth of borrowings maturing next year. In our 15 April update (Lower property taxes, interest rates, mitigate sharper office rental fall), we had highlighted that CCT may need to raise additional equity of around S$867.1mn to ensure that its gearing remains below 0.4x, based on our projected asset values. As such, the move was not entirely surprising, although the discount at which the rights units were priced was steeper than our expectation (we note that CCT’s share price shot up 28% between April 30 and the day before the rights issue was announced on 22 May [compared to a 17% gain in the FSSTI index over the same period], suggesting that the discount originally intended may not be as steep as it subsequently turned out to be).

Assuming that the S$370mn convertible bonds are put back to CCT in FY11F, CCT has S$1.012bn worth of borrowings due for refinancing in FY11F. CCT has demonstrated the ability to execute the refinancing of S$736mn worth of borrowings due this year, despite challenging credit market conditions, and with the financial flexibility of around S$3.05bn worth of unencumbered assets [at end-May valuation, includes One George Street (OGS), which will be unencumbered once part of the new equity raised is used to pay down the S$650mn two-year secured term loan due next year, but excludes the Raffles City asset, in which CCT owns 60%], we believe CCT will be able to address FY11F debt maturities as well.

CCT reported 1Q09 DPU of 3.2Scts (+25% y-y ; +20% q-q), which met 30% of our previous FY09F DPU forecast of 11Scts and 29% of consensus FY09F DPU forecast of 11.1Scts. Its core operating performance was slightly ahead of our expectation – gross rental revenue of S$97.5mn (+37% y-y; flat q-q) and NPI of S$69.9mn (+41% yy; +6% q-q) met 26% of our respective full-year forecasts – but the variance from our projection largely came from net finance expenses.

1Q09 net finance expenses of S$18.9mn comprise S$21.2mn of interest on borrowings, which met 21% of our full-year forecast, amortisation of transaction cost of S$2.9mn, which met 28% of our full-year forecast, and a S$5.1mn gain in remeasurement of financial derivatives, which is not reflected in our forecast.

Despite a challenging operating environment in 1Q09, CCT managed to roll over with positive reversion around 38% of leases due for renewal this year at Six Battery Road (6BR), around 52% of leases due for renewal this year at Raffles City Tower (RCT) and even 10% of the leases due for renewal next year as well as in FY11F at Capital Tower (CT). The fact that portfolio vacancy was maintained at a low of 3.3% at the end of 1Q09 (2.3% by end-April) despite CCT’s proactive lease management was also commendable, in our view.
We have rolled over our intrinsic NAV estimate to reflect FY10F valuation — gross asset value estimate raised to S$4.73bn (from S$4.36bn previously). To arrive at our price target, we had previously adjusted our core NAV estimate to reflect potential dilution from any equity-raising to pre-empt a non-cash revaluation deficit of S$1.3bn (our gross asset value estimate of S$4.73bn vs. the latest portfolio valuation of S$6.03bn) to potentially be booked over the cycle.

Now that the equity-raising has materialised and the gross proceeds of S$828.3mn to be raised is close to our initial estimate of S$867.1mn, we believe the potential overhang is now removed. As such, we raise our price target to S$1.07 (+12.6%) from S$0.95 (FY09F core NAV estimate, adjusted for rights – in our 22 May update [Preempting revaluation deficit], we stated that “Adjusting for the rights, our core intrinsic NAV estimate is diluted from S$1.33/unit previously to S$0.95/unit (-28.6%), which is lower than the S$1.16/unit estimate (our price target) that we had supposed to reflect potential dilution from equity-raising…. On the math, this would imply an adjusted price target of S$0.95…”). Our price target implies a potential total return of 24.1%, including our projected FY10F DPU yield of 6.5%, at the current share price.

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