Stonebridge Research: Commonwealth Property Office Fund (CPA)

Stonebridge Research: Commonwealth Property Office Fund (CPA) $0.80 – Update

KEY POINTS 

CPA operates under a simple trust structure with exposure to an Australian based portfolio of 27 prime grade office properties valued at approx. $3.6bn at 31 December 08.

100% of the groups operating earnings are derived by rent from the investment property portfolio. 60% of portfolio is leased to Govt/Blue Chip tenants of whom 50% have A grade or higher credit ratings. The portfolio WALE is 4.7yrs and occupancy at 31 March 09 was reported at 98.9% which slightly improved from 98.7% at December 08.

In Q309 CPA raised $205M at $0.80/unit via an insto placement and unit purchase plan. In addition, 13 assets were revalued which saw another $170M in property value written off and the portfolio avg. cap rate expand 30pts from 7.0% to 7.3%. CPA’s peak portfolio cap rate was 6.3% in Dec 07. NTA reduced from $1.41/unit to $1.24/unit.

Post raising and writedowns CPA’s covenant gearing (Total Liabilities/Total Assets) was 33% v 40% covenant limit which provides a buffer for a further 20% fall in values to breach assuming no income growth. To arrive at breach levels asset values would have to have fallen 35% from their peak which is at the more dramatic end of value declines in historical context.

Despite office fundamentals likely to be tested in the near term we are comfortable with CPA’s earnings position with only 13% of portfolio income up for renewal out until June 2011.

Valuation metrics are attractive with CPA trading at a 35% discount to the post raising NTA of $1.24/unit and on an implied cap rate of ~ 9.4% v 7.3% book.  If equity is valued based on a portfolio implied cap of 8.3%, a value of $0.91/unit is derived.

Management has guided toward a 4.2c DPU for the H209 and we estimate FY10 DPU 7.7c/unit or forward yield of 9.6%.

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