On March 25. the manager of CapitaLand Integrated Commercial Trust (CICT) announced it was jointly acquiring buying 79 Robinson Road with CapitaLand Open End Real Estate Fund (COREF), a newly established discretionary fund managed by CapitaLand Investment (CLI), for $1.26 billion or $2,423 psf. The consideration is in line with independent valuations, says CICT’s manager. CICT will hold 70% and COREF 30%.
The property has a net property income (NPI) yield of 4.0%, based on pro forma annualised NPI for January. The transaction is expected to be completed in 2Q2022. CICT’s total outlay will be $869.2 million including fees and expenses of $14.1 million.
Although the acquisition of CLI's 35% stake in 79 Robinson Road is an interested party transaction (IPT), the value of its IPT as a percentage of CICT's net tangible asset is below 5%, the threshold at which it would require unitholders’ approval.
At present, 79 Robinson Road is held in Southernwood Property (SWP), a special purpose vehicle in which CLI has a 65% stake and a joint venture between wholly-owned subsidiaries of Mitsui & Co and Tokyo Tatemono Co holds the remaining 35%. SWP will be converted to a limited liability partnership (LLP) following completion of the acquisition. An LLP provides CICT with tax transparency. Under the LLP agreement, each partner has a right of first refusal (ROFR) respectively in the event of any proposed sale, transfer or disposal by the other partner of its interest in the LLP.
The occupancy rate of 79 Robinson Road is 92.9%. The pro forma 4% NPI yield includes tenant incentives. Hence, if occupancy rises, NPI yield could be higher. “This precinct is getting a fair bit of traction. We are looking at 4% entry yield so we should be able to track 4.5% as the existing tenancies could have some step-up,” notes Tony Tan, CEO of CICT’s manager.
Lower land lease
See also: CICT's manager proposes to acquire ION Orchard at $1.85 billion, subject to EGM
he problem with 79 Robinson Road, which is a Grade A building following a redevelopment of the site, is that it has just 45 years of land lease left. Hence its capitalisation rate at 3.6% to 3.65% is higher than Capital Tower’s which has more than 70 years of land lease remaining. “79 Robinson Road was completed in 2020. It’s not any worse off than CapitaSpring and is a high quality Grade A asset built to green mark platinum,” Tan says. “We have a relatively long WALE of 5.8 years and 4% entry yield.”
Tan also points out that the acquisition is accretive to DPU by 2.9% as the building will be debt-funded, driving up CICT’s aggregate leverage to 41%. The accretion takes FY2021’s DPU of 10.51 cents to 10.56 cents. Tan says CICT is unlikely to raise equity for this acquisition as the amount of $100 million would be too small. Instead, proceeds from the divestment of JCube at around $330 million and debt are likely to be used for the acquisition.
Market watchers reckon that the equity fundraising could materialise when CICT exercises its call option to acquire the 55% of CapitaSpring it does not own. Although 79 Robinson Road is acquired at an LTV (loan-to-value) of 60%, CICT’s fixed rate debt remains above 80%, Tan indicated. From an accounting perspective, while CICT has to consolidate the debt for 79 Robinson Road, regulations enable the REIT to take in just 70% of the debt, based on CICT’s proportionate ownership.
See also: CICT's manager proposes to acquire ION Orchard at $1.85 billion, subject to EGM
In 4Q2021, CICT’s manager announced the acquisition of A$1.1 billion ($1.12 billion) of properties in Australia, comprising two office buildings and an integrated development, at NPI yield of 5.1% and DPU accretion of 2.8%. The acquisition of the two office buildings was completed on March 24.
While a large diversified portfolio lowers concentration risk, CICT’s series of acquisitions could weigh on its cost of capital should investors get a bout of indigestion. As it is, RHB Research has downgraded CICT to neutral.
More accretive
OUE Downtown, whose land lease runs from 1967, also has 44–45 years left. It is a very different offering from 79 Robinson Road. For one, it is not Grade A and the old building was refurbished rather than redeveloped. As a result, its cap rate is 3.9% and its valuation of $902 million as at Dec 31, 2021, translates into a psf value of $1,704.
OUE Downtown was sold into OUE Commercial REIT for $908 million or $955.9 million including expenses and income support of $16.5 million in 2018. Of note is that it was financed by debt and a dilutive rights issue, which diluted pro forma DPU by 24%, taking DPU from 4.67 cents to a pro forma 3.54 cents. The acquisition was completed in 2018. Since then, OUE Commercial REIT has merged with OUE Hospitality Trust, diluting DPU further. DPU in FY2021 stood at 2.6 cents.
On the other hand, although 79 Robinson Road has a land lease of 45 years, it is Grade A and will be connected to Tanjong Pagar MRT via an underpass. Capital Tower, which has 74 years of lease left is valued at $1,972 psf, which makes it a lot cheaper than OUE Downtown ($1,704 psf) if they were both recalibrated to 99 years. Capital Tower is directly connected to Tanjong Pagar MRT and is of a much better quality than OUE Downtown.
Of course, office property is making a comeback, as evidenced by the resilience of REITs with office assets. Research by JLL shows that the average gross effective rent for Grade A CBD office space rose 2.3% q-o-q from $10.23 psf/month in 4Q2021 to $10.46 psf/month in 1Q2022. This is the fastest pace of growth since rents turned around in 2Q2021. Altogether, rents have recovered by 6.9% from the recent bottom of $9.79 psf per month in 1Q2021.
Interestingly, the expiring rents of 4.2% of leases at Capital Tower was $5.94 psf per month. With higher rents, perhaps Capital Tower can be revalued upwards. CLI for its part is likely to gain AUM from its stake in CICT and managing COREF, and book a $72 million gain on the divestment of 79 Robinson Road. Sounds like a win for CLI.
