CapitaLand Commercial Trust (CCT SP) - UOB Kay Hian 2017-07-14: Redevelopment Of Golden Shoe Car Park

CapitaLand Commercial Trust (CCT SP) - UOB Kay Hian 2017-07-14: Redevelopment Of Golden Shoe Car Park CAPITALAND COMMERCIAL TRUST C61U.SI

CapitaLand Commercial Trust (CCT SP) - Redevelopment Of Golden Shoe Car Park

  • The proposed redevelopment of Golden Shoe Car Park (GSCP) has a 42% higher net lettable area than CapitaGreen (which contributed 18.1% of net property income in 1Q17), suggesting a similar proportionate increase upon full acquisition and stabilisation. 
  • Management is considering DPU stabilisation upon the sale of Wilkie Edge. 
  • Maintain BUY and target price of S$1.90. We will factor in income contribution from GSCP once there is more visibility in its earnings.



WHAT’S NEW

  • CapitaLand Commercial Trust (CCT) will be undertaking a S$1.82b redevelopment of Golden Shoe Car Park (GSCP) through a joint venture with Capitaland and Mitsubishi Estate Company (MEC). 
  • CCT and Capitaland will each hold a 45% interest and MEC will hold a 10% interest in the redeveloped property. The cost of redevelopment will be split in proportion of each party’s stake.


STOCK IMPACT

  • GSCP will be sold to the JV for S$161m, which is 10% above the average valuation of the property with redevelopment potential. The sale price is 14.3% above GSCP’s valuation of S$141m as a car park facility as at 31 Dec 16. 
  • The average valuation of S$146.5m was primarily based on the residual land value approach and taking into account the differential premium (DP) payable and the land’s remaining leasehold period of 64 years. 
  • About 52.6% of the development cost (S$957.8m) is for the DP and land related costs. The property was purchased for S$72.1m in 2004.

Divestment proceeds from GSCP and One George Street to fund development.

  • About 60% of the funding for the redevelopment of GSCP, or $491.4m, will come from debt. The remaining 40%, or 327.6m, will come from divestments. The divestment gains from One George Street and GSCP are S$79.7m and S$73.9m respectively.
  • Gearing to drop to about 35% if CCT uses all proceeds from asset divestments, including that from the 50% stake in One George Street and GSCP, and from all the S$175m convertible bonds due 2017 when converted into CCT units.

Highly divisible JV structure and flexible call options. 

  • The redeveloped property will be held by Glory Office Trust. The serviced apartment component of the property, however, will be leased to Glory SR Trust for the entirety of the land lease. Management has indicated that this structure is conducive to the separability of the property components.

Redeveloped property in the future acquisition pipeline. 

  • As a part of the JV, CCT has a 5-year call option over the entire office component of the property, including the units held in a trust by Capitaland and MEC. 
  • Following the expiry of the option, CCT and Capitaland have the right to drag-along MEC’s office units for any sale, transfer or disposal with the units held by CCT or Capitaland. CCT and Capitaland hold similar drag-along rights for MEC’s serviced residence units. These above options and rights would allow CCT to acquire and dispose of properties as needed.

Management considering DPU stabilisation. 

  • Management indicated it is aware of concerns regarding lower DPU following the recent divestments. When the divestment of Wilkie Edge is completed, management will decide whether to supplement DPU with a discretionary distribution.

Rental and RevPAU assumptions. 

  • Management and the independent valuators adopted estimate rental rates of S$12-14 psf per month for the office space, and revenue per available room of S$255-270 for the serviced apartments. Based on this, they projected a target annual yield-on-cost of 5%.

Increased valuations for existing properties. 

  • Management noted that the independent valuations for the properties held by CCT have risen following changes in commercial demand. 
  • From the previous asset valuation announced in January, all properties have appreciated in value with the exception of the Bugis Village property, which depreciated by 3.2%, and GSCP, which maintained the same value. On average, the portfolio appreciated by 1.8%, or S$266.7m.

Comparison to CapitaGreen. 

  • There are many parallels to be drawn between the redevelopment of GSCP and CapitaGreen in terms of location, construction and trust structure. As that the latter contributed 18.1% of net property income in 1Q17, this bodes well for the addition of the new property. 
  • GSCP has a 42% higher NLA than CapitaGreen and could result in a similar proportionate increase in the NPI.


VALUATION/RECOMMENDATION

  • Maintain BUY and target price of S$1.90, based on DDM (required rate of return: 6.7%, terminal growth: 2%). 
  • We will factor in income contribution from GSCP once there is more visibility in its earnings.


SHARE PRICE CATALYST

  • Higher-than-expected contribution from redeveloped GSCP.
  • Higher office rentals, positive newsflow on leasing activity as well as employment growth.




Vikrant Pandey UOB Kay Hian | http://research.uobkayhian.com/ 2017-07-14
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.900 Same 1.900



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