SINGAPORE (May 2): DBS is maintaining its “buy” call on CapitaLand Commercial Trust with a target price of $1.69 after the latter announced this morning that it was divesting One George Street (OGS) to One George Street LLP (OGS LLP) a limited liability partnership but will own a 50% interest in the JV.
(See also: CapitaLand Commercial Trust to divest One George Street into 50%-held JV partnership for $84.6 mil)
The agreed valued of OGS is $1.18 billion or $2,650 psf which is 16.7% above OGS’s latest valuation of $1 billion ($2,271 psf) as at Dec 31 2016. Based on the net income of $38 million for the 12 months preceding March 31, 2017, this translates to an exit NPI yield of 3.2%.
CCT expects to recognise an estimated net gain of $79.7 million from the sale of an effective 50% interest in OGS. CCT’s NAV per unit is expected to increase 2.3% y-o-y to $1.77 from $1.73, with proforma DPU falling 4.4% to 8.68 cents from 9.08 cents. We estimate CCT’s aggregate leverage will drop from 38.2% to around 33%.
In a report out today, analyst Mervin Song says, “We believe the sale of OGS is a positive step taken by CCT to reconstitute its portfolio while achieving a substantial premium to book value. Give the premium achieved for OGS, it also potentially bodes well for CCT to sell Wilkie Edge above its latest valuation. As highlighted in our past reports, these property disposals may be a catalyst to close CCT’s share price discount to its book value.”
Under the agreement, if the JV does not achieve an agreed after-tax return on equity, CCT will direct OGS LLP to pay FW Group a portion of income from OGS LLP to which CCT is entitled.
After the disposal, OGS will continue to be managed by CapitaLand Commercial Trust Management (CCTML) for an initial term of five years which may be renewed at the option of CCTML for successive periods of three years each.
With the sale of OGS and potentially that of Wilkie Edge, Song believes the additional financial firepower may not only be used to partially fund the redevelopment of Golden Shoe, but also the potential purchase of an interest in Asia Square Tower 2.
In recent press reports, CapitaLand has been rumoured to be acquiring Asia Square Tower 2 for around $2,800 psf. While some investors may be hesitant about CCT selling a building for $2,650 psf and subsequently paying a higher price psf for another property, Song believes this move will enhance the quality of its portfolio and benefit the REIT in the long term.
“We believe a premium may be justified by swapping OGS with a remaining leasehold of 85 years, for Asia Tower 2 with remaining leasehold of around 89 years, and partially future proofing its portfolio by gaining exposure to Marina Bay, Singapore’s new CBD, which CCT currently does not have any exposure in,” says Song.
Units of CapitaLand Commercial Trust are trading at $1.62.
