CapitaLand Commercial Trust - CIMB Research 2016-05-24: Boost from CapitaGreen acquisition

CapitaLand Commercial Trust - CIMB Research 2016-05-24: Boost from CapitaGreen acquisition CAPITALAND COMMERCIAL TRUST C61U.SI 

CapitaLand Commercial Trust - Boost from CapitaGreen acquisition

  • We are positive on the proposed acquisition of 60% interest in CapitaGreen for a total outlay of S$393m.
  • Timing of acquisition is earlier-than-anticipated, as we initially thought that CCT would wait for the asset to stabilise. 1Q16 revenue occupancy of 77.7%.
  • Debt funding enables acquisition to be DPU-accretive. Pro-forma gearing to rise to 37.7% (1Q16: 30.1%). We do not expect equity financing in the near term.
  • We turn positive on the step-up in DPU growth trajectory. Upgrade from Hold to Add with higher DDM-based target price of S$1.58.

Proposed acquisition of remaining 60% interest in CapitaGreen

  • CCT is exercising its call on its remaining 60% interest in CapitaGreen. 
  • CapitaGreen is held by MSO Trust, which in turn is jointly owned by CapitaLand (50% interest), CCT (40%) and Mitsubishi Estate Asia (10%). Upon completion of the acquisition (we assume Nov 16), CCT would hold 100% of CapitaGreen through the MSO Trust. 
  • CapitaGreen is a Grade A premium office with NLA of c.703,000 sqf. It is located on the site of former Market Street Car Park, in the heart of Singapore’s CBD.

Acquisition details – key conditions in call option agreement

  • Two key conditions have to be met in order for CCT to exercise the call: 
  1. the market valuation must be equal to or above the hurdle price of S$1,585.5m (based on actual costs incurred since development in 2011 less net income received and compounded at 6.3% p.a.); and 
  2. subject to Unitholders’ approval. Factoring in the remaining 57-year land tenure, the agreed market value of CapitaGreen is S$1,600.5m. This translates to S$2,276 psf and an implied cap rate of 4.15%, comparable to CCT’s Grade A buildings.

100% Debt funding enables acquisition to be DPU-accretive

  • The acquisition will be funded via debt; we assume a borrowing cost of 3% (current all-in cost of 2.5%). 
  • Pro-forma (assuming acquisition completed on 1 Jan 16), 1Q16 DPU would have risen by 1.4% to 2.22Scts, assuming an NPI yield of 3.2% for CapitaGreen, based on revenue occupancy of 77.7% (vs. current committed occupancy of 92.8%). 
  • We expect NPI yield to improve to 4.2% by end-16 when CapitaGreen’s revenue occupancy is expected to reach 92.8%. 
  • There is also potential upside if the remaining office space is leased up. Lastly, the property has no leases expiring prior to 2018.

CCT’s pro forma gearing to rise to 37.7%

  • CCT’s pro forma gearing is expected to rise to 37.7% as it assumes the S$534m debt from CapitaGreen (blended cost of 3.2%) and S$393m used to fund the acquisition. As a result, we project interest costs to jump up c.60% (to c.S$60m) over 1Q16 annualised interest costs.

Step-up in DPU growth trajectory

  • We reduce our FY16F DPU by 1% to factor in higher interest costs and asset management fees. Incorporating full-year contributions from CapitaGreen, we raise our FY17-18 DPU estimates by 16-17%.

Boost from CapitaGreen acquisition; Upgrade from Hold to Add

  • We believe there is no perfect time to acquire a stabilising property, as an inclination for higher yielding asset is counterbalanced by the higher acquiring price. 
  • In CCT’s case, there was also time pressure as the call option would have expired in Dec 17. 
  • With the boost from CapitaGreen and diversification effects, we turn positive on CCT. We upgrade the stock from Hold to Add with a higher DDM-based target price of S$1.58. 
  • Risks to our Add call include worsening office fundamentals and higher interests costs

LOCK Mun Yee CIMB Securities | YEO Zhi Bin CIMB Securities | http://research.itradecimb.com/ 2016-05-24
CIMB Securities SGX Stock Analyst Report ADD Upgrade HOLD 1.58 Up 1.48