CapitaLand Commercial Trust - DBS Research 2018-06-29: Confounding The Critics Again

CapitaLand Commercial Trust - DBS Vickers 2018-06-29: Confounding The Critics Again CAPITALAND COMMERCIAL TRUST SGX: C61U

CapitaLand Commercial Trust - Confounding The Critics Again

  • Sells Twenty Anson for S$516m, 19% above book value and at 2.7% exit yield.
  • Demonstrates the conservative nature of CapitaLand Commercial Trust (CCT)’s valuation and deserves to trade at a premium to book.
  • Maintain BUY, Target Price of S$2.12.

What’s New

Disposes Twenty Anson at 2.7% exit yield

  • CapitaLand Commercial Trust (CCT) announced that it has entered into an agreement to sell Twenty Anson, a 20-storey office building in Tanjong Pagar for S$516m or S$2,503 psf which is 19.2% higher than the latest valuation as at 31 December 2017 of S$433m, and 20% higher than the original purchase price of S$430m in 2012.
  • The selling price translates into an NPI yield of 2.7% based on the trailing 12-month income for the property.
  • The sale is expected to be completed in 3Q18.
  • Assuming the net proceeds from the sale are used to repay existing debt, CCT’s pro-forma aggregate leverage would drop from 37.9% as at 31 March 2018 to 34.5% with NAV per unit also increasing to S$1.76 from S$1.74.
  • CCT did not disclose the identify of the buyer of Twenty Anson. However, we understand it was an institutional fund.

Our thoughts

  • While the sale of Twenty Anson came as a surprise, there had been market speculation that CapitaLand Commercial Trust (CCT) might dispose this property as it had been actively unlocking value and reconstituting its portfolio, focusing more on properties situated in prime locations and reducing its exposure to properties in fringe CBD locations.
  • Over the last 12 months, CCT sold a 50% interest in One George Street and Wilkie Edge on exit NPI yields of 3.2% and 3.4%, which were 17% and 39% higher than their respective book values. Using these proceeds, CCT reinvested in Asia Square Tower 2 and Gallileo in Frankfurt at NPI yields of 3.6% and 4.1% respectively, as well as commenced the redevelopment of Golden Shoe Car Park into a 51-storey integrated development comprising Grade A offices, serviced residences and retail space. 
  • Going forward, we expect CCT to eventually use the proceeds from the disposal of Twenty Anson to continue to reposition its portfolio and deepen its presence in Europe following its maiden acquisition there via its recent Gallileo acquisition. 
  • We also believe this transaction supports our argument that CCT’s book value is conservative and why CCT deserves to trade at a premium, rather than 0.93x P/BV currently. In addition, in our view, this deal shows that investor concerns over the potential expansion in office cap rates in Singapore due to rising interest rates are misplaced. 
  • With the Singapore office market expected to be on a multi-year upturn, office rents rising faster than expected and placing upside risk to our DPU estimates, and a management team that has consistently shown the ability to buy low and sell high, we reiterate our BUY call and Target Price of S$2.12. 

Mervin SONG CFA DBS Vickers | Derek TAN DBS Vickers | https://www.dbsvickers.com/ 2018-06-29
SGX Stock Analyst Report BUY Maintain BUY 2.120 Same 2.120