CapitaLand Commercial Trust CCT - Phillip Securities 2016-05-26: Acquisition of remaining 60% of CapitaGreen

CapitaLand Commercial Trust CCT - Phillip Securities 2016-05-26: Acquisition of remaining 60% of CapitaGreen CAPITALAND COMMERCIAL TRUST C61U.SI 

CapitaLand Commercial Trust - Acquisition of remaining 60% of CapitaGreen

  • CapitaLand Commercial Trust (CCT) currently owns 40% of CapitaGreen and has announced the acquisition of the remaining 60% from CapitaLand (50%) and Mitsubishi Estate Asia (10%). 
  • Total acquisition outlay of S$393mn is expected to be funded by bank borrowings which would bring gearing up to 37.7% from 30.1%.

Acquisition details

Building Occupancy, DPU yield accretion details. 

  • CapitaGreen’s committed occupancy is 92.8% as at 31 March 2016, up from 91.3% as at 31 Dec 2015. As not all tenants have completely moved in, 1Q16 NPI was only able to factor in a 77.7% occupancy. Management expects to start collecting rents from the full 92.8% by the end of this year.
  • Based on this annualized 1Q16 NPI (77.7% occupancy), NPI yield is 3.2%. Assuming a 100% occupancy with the rest of the tenants (22.3%) paying roughly the same rents as the average passing rents for the current 77.7%, we expect NPI yield on cost to be c.4.1%, which is slightly lower than CCT’s overall portfolio NPI yield of c.4.3% as at FY15.
  • Assuming fully debt-funded, pro forma 1Q16 DPU would have increased 1.4% to 2.22c from 2.19c, based on the annualized 1Q16 NPI for CapitaGreen (based on 77.7% occupancy).

No lease expiries for next two years, but lease expiries in 2018 could face negative reversions. 

  • CapitaGreen received Temporary Occupancy Permit (TOP) in December 2014. 
  • Given that most leases were contracted in 2015 when office rentals peaked, and we expect rentals to fall 20% from peak to trough (expected in 2018), there is a high chance rental reversions in 2018 could take a hit and negatively impact DPU.

Hurdle price condition in call option agreement presents challenges to CCT with regard to timing of acquisition. 

  • CCT’s call option to acquire the balance 60% of CapitaGreen came with a condition that the purchase price at market valuation would be subject to a minimum of development cost (less net income) compounded at 6.3% per annum since the commencement of development in 2011.
  • Given that a 6.3% compounding of the full development costs (less net income) means an annual increment of c.S$80m to the hurdle price, and that the current average market valuation of S$1,600.5m represents a premium of only c.S$15m over the hurdle price, future falls in capital values of office buildings could render the call option invalid if market valuations drop below the hurdle price.

Investment Action

  • We adjust upwards our DPU forecasts for 2017 and beyond to factor in the CapitaGreen acquisition contributions, which will likely commence in 4Q16/1Q17 upon shareholders’ approval. 
  • Nonetheless we adjust our terminal growth rate downwards slightly on the back of the increased gearing to 37.7% which provides little room for further debt-driven acquisitions. 
  • We maintain our “REDUCE” call on CCT with an unchanged DDM-derived target price of S$1.29.

Dehong Tan Phillip Securities | 2016-05-26
Phillip Securities SGX Stock Analyst Report REDUCE Maintain REDUCE 1.29 Same 1.29