CapitaLand Commercial Trust - RHB Invest 2017-09-22: Dilutive Acquisition Of Asia Square Tower 2

CAPITALAND COMMERCIAL TRUST C61U.SI

CapitaLand Commercial Trust - Dilutive Acquisition Of Asia Square Tower 2

CapitaLand Commercial Trust (CCT) announced its much-anticipated acquisition of a 100% stake in Asia Square Tower 2 (AST2) for SGD2.1bn or SGD2,689 psf.
The acquisition price on a psf basis is attractive, at a ~5-10% discount to comparable properties, and its NPI yield (pre-tax) of 3.6% is also higher than the exit NPI yield of its recent divestments. However, the transaction – funded partly by a rights issue – is DPU-dilutive (~6%).

Overall, we see the move as a short-term negative and a long-term positive if CCT manages to extract value from the asset by capitalising on the office uptrend.
TAKE PROFIT, with a revised ex- rights TP of SGD 1.60 (3% downside on TERP).

The acquisition of this premium Grade-A office asset is done at a slight 1% discount to independent valuation and is ~5-10% lower than comparable Grade-A properties in the vicinity.
The acquisition price is also slightly lower than the SGD2,704 psf paid by Qatar Investment Authority to acquire Asia Square Tower 1 in 2016.
The move comes at a time when office supply is tapering off and rentals bottoming out – which is positive. The initial pro-forma 1H17 NPI yield (pre-tax) of 3.6% is also attractive compared to its recent divestments’ exit yield of 3.2-3.4%.

CapitaLand Commercial Trust (CCT) will acquire the asset from Blackrock by purchasing the existing investment holding structure. A master lease structure would be put in place between CCT and the holding company post transaction, which will lead to some tax leakages. CCT expects the tax to be ~SGD3.2m pa (~4% of NPI).
Overall, the transaction is dilutive to our FY18F DPU (~6%) and yield, which we think is a key concern for investors.

Asia Square Tower 2 (AST 2) has a committed occupancy rate of 88.7%, including some recently-signed leases that commence in Mar 2018. This is well below CCT’s portfolio occupancy rate of 97.6% and Grade-A average occupancy rate (2Q17) of 95.5% (per CBRE data).
With office supply slowing down and rental rates showing signs of bottoming, we see room for upside potential from occupancy improvements and rental growth.
Management did not disclose the average passing rental rate, which we assume to be SGD10.50psf. About 10%/23%/20% of the leases in the property are expiring in 2018/2019/2020 respectively, for which we expect positive rental reversions (~5-10%), considering the favourable office sector outlook.

In tandem with the acquisition, CCT launched a fully underwritten rights issue to raise net proceeds of about SGD690.4m (~32% of total). The remainder will be funded via bank borrowings of SGD1.12bn and divestment proceeds of SGD340.1m.
The rights issue price of SGD1.363/unit represents a 19.6%/17.3% discount to its closing and theoretical ex-rights price respectively. Post rights issue, its gearing remains comfortable at 37% (maximum: 45%), offering headroom for future acquisitions.

We trim our FY17F-19F DPU by 2%/6%/5% respectively, factoring in the impact of dilution from the rights issue and acquisition contribution. We also factor in a capital distribution of SGD5m for FY17F and SGD10m for FY18/19F from the divestment gains.
Our DDM-derived Target Price is based on a CoE of 7.4% (Rf: 2.75%; TG: 1.5%).
The stock offers FY17F-18F yields of 5.2% and 5.1% respectively.

CCT's presentation slides available at CapitaLand Commercial Trust Announcements
(Announcement dated 2017-09-21 16:37:12)

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2017-09-22

RHB Invest SGX Stock Analyst Report TAKE PROFIT Maintain TAKE PROFIT 1.60 Down 1.68