CapitaLand Commercial Trust (CCT SP) - UOB Kay Hian 2017-06-23: Divestment Of One George Street

CAPITALAND COMMERCIAL TRUST C61U.SI

CapitaLand Commercial Trust (CCT SP) - Divestment Of One George Street

CapitaLand Commercial Trust (CCT) has completed the divestment of a 50% stake in One George Street for $591.6m ($2,650psf) to insurer FWD Group. The divestment will facilitate the redevelopment of Golden Shoe Carpark.
Management is still evaluating whether distribution from One George Street sales proceeds will be partly used to mitigate the income shortfall.

We reduce our 2017-19F DPU by 1-3.1% after factoring in the loss of income from One George Street.
Maintain BUY with a lower target price of S$1.90 (previously S$1.94).

CapitaLand Commercial Trust (CCT) has completed the divestment of a 50% stake in One George Street (OGS) for $591.6m ($2,650psf) to insurer FWD Group. The Manager will be receiving a divestment fee of approximately S$3.0m (being 0.5% of 50% of the agreed value of S$1,183.2m).

On a psf basis, the transacted price of S$2,650 psf comes 16.7% above its latest valuation, but is only 1.9% above 2008's acquisition price of S$2,600 psf. The implied NPI yield from this transaction stands at 3.2%, in line with market valuation.
Buyer FWD Group is the insurance arm of Pacific Century Group, owned by Li Ka Shing's son, Richard Li.

We reduce our 2017-19F DPU by 1-3.1% after factoring in the loss of income from OGS. The decline (4.4% on a pro-forma basis for 2016) is mitigated by contributions from CapitaGreen.
Gearing to drop to 33-34% if CCT uses all the proceeds to repay the debt from the current 38%. However, management mentioned that timing and certain covenants of outstanding debt may restrict an immediate repayment. Hence, gearing level will likely be somewhere in between 33-38%.

The sale does not come as a surprise, given that the REIT manager was rumoured to be looking to sell OGS since early-16.
We also note that OGS saw rent reversions ranging from -17% to +3% in 1Q17. The net gains from this transaction (S$79.7m) are slightly above four years’ worth of NPI contributions from the asset (S$38m in 2017, S$19m for their 50% stake). The asset reconstitution should take place within this time period to stem DPU declines

CCT plans to commence the redevelopment of Golden Shoe Carpark in 2H17 with target completion in 2021. The REIT manager has informed tenants they have until 31 Jul 17 to vacate the premises. Our estimated GDV is S$1.48b, which is about 14% higher than Capitagreen's S$1.3b (guesstimate is based on the higher GFA of 1m sf for Golden Shoe vs 880k for CapitaGreen). Assuming a similar 40:60 initial equity partnership as was done for CapitaGreen, CCT's initial equity share of the GDV will be about S$590m. Funding structure is likely to be 45:55 equity/debt, similar to CapitaGreen’s.

Management has received feedback from investors to manage the income shortfall from by paying some of the gains from the divestment of OGS. The net gain of S$79.7m is around four years’ worth of NPI contributions from the asset (S$19m for their 50% stake). Management is evaluating this but has not yet confirmed that they would do so.
We believe that there could be some distribution as there would be further dilution from the convertible debt that they own.

Reduce 2017-19F DPU by 1-3.1% after factoring in the loss of income from OGS.

Maintain BUY with reduced target price of S$1.90 (previously S$1.94) as we factor in the loss of income from OGS.
Our valuation is based on DDM (required rate of return: 6.7%, terminal growth: 2%).

Higher-than-expected contribution from Golden Shoe Carpark redevelopment.
Higher office rentals, positive newsflow on leasing activity as well as employment growth.

Vikrant Pandey UOB Kay Hian | http://research.uobkayhian.com/ 2017-06-23

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.90 Down 1.940