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

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).

Acquisition done at attractive valuations. 

  • 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%.

DPU-dilutive transaction. 

  • 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. 

Upside from office sector recovery. 

  • 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.

To be partly funded by 166:1000 rights issue. 

  • 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. 

TAKE PROFIT with a revised Target Price of SGD1.60. 

  • 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 | 2017-09-22
RHB Invest SGX Stock Analyst Report TAKE PROFIT Maintain TAKE PROFIT 1.60 Down 1.68