CapitaLand Commercial Trust (CCT SP) - DBS Research 2017-05-02: Sale of 50% Stake in One George Street

CapitaLand Commercial Trust (CCT SP) - DBS Vickers 2017-05-02: CAPITALAND COMMERCIAL TRUST C61U.SI

CapitaLand Commercial Trust (CCT SP) -

  • 50% stake in One George Street (OGS) to be sold to insurer FWD Group.
  • 3.2% exit yield or S$2,650 psf - a good price for CCT.
  • A potential “trade up” in asset from OGS to Asia Square Tower 2 will be a positive development in our view.

What’s New 

  • CapitaLand Commercial Trust (CCT) announced that it is divesting One George Street (OGS) to One George Street LLP (OGS LLP) a limited liability partnership but will own a 50% interest in this JV. The remaining 50% in the JV will be held by insurance company, FWD Group. 
  • The agreed valued of OGS is S$1,183.2m or S$2,650 psf which is 16.7% above OGS’s latest valuation of S$1,014m (S$2,271 psf) as at 31 December 2016. Based on the net income of S$38m for the 12 months preceding 31 March 2017, this translates to an exit NPI yield of 3.2%.
  • In addition, under the LLP Agreement, if the JV does not achieve an agreed after-tax return on equity, CCT will direct OGS LLP to pay FW Group a portion of income from OGS LLP to which CCT is entitled. This amount will be equivalent to the shortfall in the said agreed after-tax return on equity but not exceeding 50% of the asset management fees paid by OGS LLP (JV Partner Payments). 
  • CCT estimates that at the higher end of the spectrum, that the JV Partner Payments may in aggregate be worth S$2.3m over the initial two-year period. From the third year onwards, there would not be any JV Partner Payments. Due to confidentially reasons, CCT is unable to disclose the agreed after-tax return on equity.
  • Post the disposal to the OGS LLP, OGS will continue to be managed by CapitaLand Commercial Trust Management (CCTML) for an initial term of five years which may be renewed at the option of CCTML for successive periods of three years each.

Financial impact 

  • CCT expects to recognise an estimated net gain of S$79.7m from the sale of an effective 50% interest in OGS. 
  • CCT’s NAV per unit is expected to increase 2.3% y-o-y to S$1.77 from S$1.73, with proforma DPU falling 4.4% to 8.68 Scts from 9.08 Scts. 
  • We estimate CCT’s aggregate leverage will drop from 38.2% to around 33% (excluding impact of debt that OGS LLP may take on, details of which are not disclosed).

Our take 

  • We believe the sale of OGS is a positive step taken by CCT to reconstitute its portfolio while achieving a substantial premium to book value. Give the premium achieved for OGS, it also potentially bodes well for CCT to sell Wilkie Edge above its latest valuation. 
  • As highlighted in our past reports, these property disposals may be a catalyst to close CCT’s share price discount to its book value.
  • Post the sale of OGS and potentially Wilkie Edge, we believe the additional financial firepower may not only be used to partially fund the redevelopment of Golden Shoe (which we believe is likely to be in a form of JV with its Sponsor, CapitaLand, a similar structure to the redevelopment of CapitaGreen), but also the potential purchase of an interest in Asia Square Tower 2. 
  • In recent press reports, CapitaLand has been rumoured to be acquiring Asia Square Tower 2 for around S$2,800 psf. While some investors may be hesitant about CCT selling a building for S$2,650 psf and subsequently paying a higher price psf for another property, we believe this move will enhance the quality of its portfolio and benefit the REIT in the long term. 
  • We believe a premium may be justified by 
    1. swapping OGS with a remaining leasehold of 85 years, for Asia Tower 2 with remaining leasehold of c.89 years, and 
    2. partially future proofing its portfolio by gaining exposure to Marina Bay, Singapore’s new CBD, which CCT currently does not have any exposure in.
  • For now, we maintain our Maintain BUY call with a TP of S$1.69.

Melvin SONG CFA DBS Vickers | Derek TAN DBS Vickers | 2017-05-02
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.690 Same 1.690