CAPITALAND COMMERCIAL TRUST (SGX:C61U)
CapitaLand Commercial Trust - One Step Closer To A Mega Merger
- CapitaLand Commercial Trust (SGX:C61U) unitholders will be voting on the proposed merger with CapitaLand Mall Trust (SGX:C38U) next week. We recommend unitholders to vote in favour of merger.
- The underlying benefits are better diversified portfolio with potential cheaper cost of capital, greater redevelopment and rejuvenation potential of combined entity outweighing negative retail sector outlook.
- Keep NEUTRAL on CapitaLand Commercial Trust and Target Price of SGD1.70, 1% upside.
A mega merger to keep pace with the rapidly changing commercial landscape.
- Earlier this month CapitaLand Commercial Trust and CapitaLand Mall Trust announced a revised timeline for the proposed merger with an expected completion by Nov 2020 (from end-Sep 2020). The scheme consideration remains unchanged with every CapitaLand Commercial Trust unitholder set to receive 0.72 units of CapitaLand Mall Trust and SGD0.259 in cash.
- However, the CapitaLand Mall Trust manager announced one-off waiver of acquisition fee (1% of CapitaLand Commercial Trust portfolio value) amounting to SGD111.2m in light of COVID-19. This should result in a higher pro-forma (FY19) DPU accretion of 7.6% compared to 6.5% but will be mildly dilutive (2.2%) to CapitaLand Commercial Trust’s NAV.
Merged entity set to become largest S-REIT
- and second largest REIT in Asia-Pacific in terms of market cap, which is likely to result in higher trading liquidity and lower cost of capital. We believe other key benefits are a better diversified portfolio, thereby reducing asset and tenant concentration risks especially in light of COVID-19 and greater growth potential in terms of acquisition target and rejuvenation/redevelopment of its existing assets into mixed-use space and integrated developments, which have been a key evolving trend in global real estate market. These benefits should outweigh the structural challenges faced by CapitaLand Mall Trust’s retail assets, with COVID-19 accelerating digital and e-commerce trends.
- The combined entity will be mainly Singapore focused (96% of total assets) with a balanced mix of retail (33%), office (38%) and integrated developments (29%).
CapitaLand Commercial Trust’s office assets showing resilience but leasing challenges remain.
- Overall portfolio occupancy remained stable at 95.2% as at end-2Q20 with CapitaLand Commercial Trust securing two-thirds of expiring leases in 2020 at positive rental reversion. Looking ahead with expiring rents for remaining leases in 2020- 2021 still 10-20% below market rent, we believe CapitaLand Commercial Trust will still be able to achieve slight positive rental reversion.
- Overall asset value declined 1.7% mainly due to lower market rent and rental growth assumption by valuers in light of COVID-19, while cap rates remain largely unchanged.
Slight construction delays expected.
- Asset enhancement works at Six Battery Road, 21 Collyer Quay (21CQ) and the redevelopment of CapitaSpring are expected to see slight construction delays (1-2 quarters) due to COVID-19. For 21CQ, management noted that WeWork is committed to occupy the entire asset on a 7-year lease despite market concerns on a potential pullback in demand from co-working operators.
- See CapitaLand Commercial Trust Share Price; CapitaLand Commercial Trust Target Price; CapitaLand Commercial Trust Analyst Reports; CapitaLand Commercial Trust Dividend History; CapitaLand Commercial Trust Announcements; CapitaLand Commercial Trust Latest News.
- See also CapitaLand Mall Trust Share Price; CapitaLand Mall Trust Target Price; CapitaLand Mall Trust Analyst Reports; CapitaLand Mall Trust Dividend History; CapitaLand Mall Trust Announcements; CapitaLand Mall Trust Latest News.
See also recent SGX Market Update: S-REIT M&As: CapitaLand Commercial Trust - CapitaLand Mall Trust & ESR-REIT - Sabana REIT Mergers
Vijay Natarajan
RHB Securities Research
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https://www.rhbinvest.com.sg/
2020-09-25
SGX Stock
Analyst Report
1.700
SAME
1.700
