Singapore Office - DBS Research 2017-07-14: Polishing Up The Golden Shoe

Singapore Office - DBS Vickers 2017-07-14: Polishing Up The Golden Shoe CAPITALAND COMMERCIAL TRUST C61U.SI CAPITALAND LIMITED C31.SI

Singapore Office - Polishing Up The Golden Shoe

  • Golden Shoe Car Park to be redeveloped by CapitaLand Commercial Trust (CCT), CapitaLand and Mitsubishi for S$1.82bn.
  • Positive signal for Singapore office market with CCT projecting rents to hit S$12-14 psf/mth.
  • Transaction supports CapitaLand’s aspirations of 8% ROE.
  • Maintain BUY on CapitaLand (S$4.33 TP) and CapitaLand Commercial Trust CCT (S$1.69 TP).

Finalises Golden Shoe redevelopment.

  • CapitaLand Commercial Trust (CCT) announced that it will jointly redevelop its Golden Shoe Car Park property into an integrated development with 650,000 sqft of Grade A office space and 299 serviced apartments with its Sponsor, CapitaLand Limited (CAPL) and Mitsubishi Estate Co., (MEC) Ltd for S$1.82bn. 
  • Under the agreement, CCT and CAPL will each hold a 45% interest, while MEC will hold a 10% interest in two unlisted special purpose sub-trusts, namely Glory Office Trust and Glory SR Trust, set up to own the office and serviced residence components of the development respectively.
  • As part of the transaction, CCT will sell Golden Shoe for S$161m, 14% above its latest valuation. 
  • The development is targeted to be completed in 1H2021 with CCT having a five-year option to buy the remaining 55% interest in the office component from CAPL and MEC at market value with a minimum price set at development costs compounded at 6.3% per annum.

Implied positive signal as a group on the multi-year recovery in the office cycle. 

  • With a targeted yield on costs of 5% for the development, implying office rents of S$12-14 psf/mth, we believe this is a strong signal by CCT/CapitaLand, an experienced office developer/owner, of their confidence in the medium-term outlook for the Singapore office market and office buildings being an attractive asset class, despite the current weak spot rents. 
  • The targeted completion of this redevelopment in 1H21, over a period (2018-2020) with annual completions of c.0.6m sqft a year, is also supportive of higher rents in the medium term. 
  • We believe this transaction also validates our overweight call on CCT/office sector in anticipation of a recovery in rents and resilient capital values, and should give confidence to investors to maintain this bullish stance.

Details of the redevelopment

  • Golden Shoe Car Park will be redeveloped into a 51- storey high integrated development that will rise to a height of 280 metres.
  • It will comprise 29 floors of premium Grade A office space on the top portion of the building (level 21 to level 49) with total net lettable area of 635,000 sqft.
  • In addition, eight storeys of serviced apartments will be built (level 9 to level 16) with 299 rooms to be managed by Ascott.
  • The building will also have 12,000 sqft of ancillary retail space, 350 car park lots, ten motor cycle lots and 165 bicycle lots.
  • At levels 2 and 3, a food centre will be built with ownership transferred to the Ministry of Environment and Water Resources at no cost when the development is completed. The new food court will be occupied by former stallholders of the Market Street Food Centre located at the Golden Shoe Car Park currently.
  • The building will have a 4-storey high Green Oasis on levels 17 to 20. This green space will include a café, sky garden, recreational area as well as meeting rooms and conference facilities.
  • The targeted temporary occupation permit (TOP) is 1H 2021.
  • Unfortunately, the government has not granted an extension of the land lease. The site has another 64 years left on its leasehold status.

Development costs 

  • The estimated development costs of the project is S$1.82bn comprising: 
    1. S$146.5m (based on average of Knight Frank and Jones Lang LaSalle valuation of S$148m and S$145.6m respectively based on the residual land value approach and taking into account differential premium payable and remaining leasehold period) for the purchase of Golden Shoe Car Park with a premium of S$14.6m to be paid to CCT. This is 14% above the S$141m valuation as at 31 December 2016. 
    2. Differential premium and other land-related costs of S$957.8m to be paid to the government authorities 
    3. Construction costs and professional fees of S$576.1m. 
    4. Other costs including marketing and financing costs of S$125m
  • The effective land costs (purchase price for Golden Shoe and differential premium) equates to S$1,119m or S$1,113 psf of GFA which is comparable to other market transactions of between S$821 psf of GFA (for CapitaGreen in 2011) and S$1,689 psf of GFA (Central Boulevard site in 2016).
  • The anticipated capital structure of the development is based on a 60% debt and 40% equity split. Thus, CCT’s 45% share of the development costs is S$819m with an equity contribution of S$327.6m.
  • CCT’s equity contribution will be staggered with an initial payment related to the differential premium and the remainder tied to the progressive completion of the building. Funding for this equity contribution will be sourced from CCT’s recent sale of Wilkie Edge and 50% stake in One George Street as well as sale of Golden Shoe to the JV.
  • Borrowing costs for the project we understand will be similar to the CapitaGreen development in the high 2% to 3% level.
  • The targeted yield on costs for the project is 5% which compares favourably to recent market office transactions on cap rates of between 3-4%, albeit with development risks.
  • Post CCT’s contribution to the JV and its recent asset disposals, CCT expects its gearing to stabilise around 35%. The proforma gearing is also after accounting for up to 3% increase in the valuation of CCT’s existing properties (excluding properties that have been disposed) given a 15-bp compression in cap rates to better reflect recent market transactions.

Future acquisition by CCT

  • A call option has been granted to CCT to acquire CAPL and MEC’s interest in Glory Office Trust at market valuation, subject to a minimum price that is based on the total development cost (excluding financing costs) of the office and ancillary retail components less any net property income attributable to Glory Office Trust, compounded at 6.3% per annum. 
  • CCT has the right to exercise its call option for five years after TOP has been obtained. This structure is similar to the CapitaGreen development where CCT was able to purchase the remaining 60% interest for a period of three years after TOP with a minimum purchase price subject to development costs compounded at 6.3% per annum.
  • There is also drag-along right granted to CAPL and CCT over MEC’s units in Glory SR Trust over a similar period of five years at an agreed value, subject to a minimum price that is based on the total development cost (excluding financing costs) of the serviced residence component less any net property income attributable to Glory SR Trust, compounded at 5% per annum.

Our take on CCT

  • We are positive on CCT unlocking the value from its Golden Shoe Car Park property and its strategy of rebalancing its portfolio into newer buildings and/or properties in more prime locations (i.e. disposing non-prime Wilkie Edge and recycling proceeds into the Golden Shoe Redevelopment).
  • Some investors may be disappointed that CCT is only using 10% of its development limit rather than taking a large stake in the redevelopment and maximising the 25% development limit. However, in our view, this will entail more risks as gearing is likely to rise closer to 40% which the majority of investors may not be comfortable with. CCT has clarified that if it had redeveloped Golden Shoe by itself, its gearing would have hit the 43% level.
  • Given the loss of income from the disposal of Wilkie Edge, Golden Shoe Car Park and 50% of One George Street, CCT’s near-term DPU will be under pressure. However, CCT guided that it has yet to decide if it intends temper this shortfall and if so how it will achieve a stabilised DPU. We expect CCT to use some of the disposal proceeds from Wilkie Edge, One George Street and Golden Shoe Car Park to achieve its mandate as a REIT to achieve a “stable” DPU.
  • CCT has also guided that to achieve its 5% targeted yield on cost, it is assuming office rents of between S$12-14 psf/mth and revenue per available room (RevPAR) of S$255-270 for the serviced apartment component.
  • While office rents of S$12-14 psf/mth appears high given current Grade A spot rents of S$8.95, this may be achievable given modest new office supply over the 2021/2022 period, no new supply in the Raffles Place precinct except the Golden Shoe project and assuming Singapore's economy remains on an upward trajectory. More importantly, we believe these rental forecasts signal to the market, CCT/CAPL’s confidence in the recovery of office rents and the medium-term outlook for the Singapore office market. This implies that the office sector is currently an attractive asset currently despite depressed rents.
  • We believe CCT’s RevPAR projections are realistic as we understand average daily room rate (ADR) for the nearby Ascott Raffles Place is already tracking around S$300.
  • We maintain our BUY call with TP of S$1.69 for now, pending CCT’s 2Q17 results next week. We will revise our DPU estimates after the results.

Our take on CapitaLand

  • CapitaLand to benefit in the medium term (BUY, TP S$4.33). 
  • We remain positive on CAPL as the deployment of capital to this low-risk redevelopment of Golden Shoe will support the longer-term ROE target of close to 8.0%. This showcases the group’s ability to consistently refresh its portfolio and unlock hidden value.
  • Potential gains on sale (at least a CAGR of 6.3%) of its 45% stake in the medium term upon completion will also underpin upside in earnings.

Melvin SONG CFA DBS Vickers | Derek TAN DBS Vickers | Rachel TAN DBS Vickers | http://www.dbsvickers.com/ 2017-07-14
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.690 Same 1.690
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