Liang Court redevelopment in spotlight as CapitaLand moves to recycle capital

Based on the redevelopment guide­ lines, 60% of gross floor area has to be allocated to residential, and 40% com­mercial. Thus, the CDL­-CapitaLand joint venture will be developing two residential towers comprising a total of 700 residential units, and an 11,530 sq m retail mall. Together, these two components should have a gross development value of more than $1 billion based on current residen­tial prices and retail mall valuations. The rest of the commercial GFA will be made up of a hotel and a serviced residence block held under CDLHT and Ascott REIT respectively.

Somerset Liang Court comprises 197 units in a 26-­storey tower adjoining the Liang Court Shopping Centre, represent­ing 24.06% of the total share value of the strata lots in the larger Liang Court Mixed Development Complex. Its property valu­ation as at June 30 was $211 million, and Ascott REIT acquired it for $127.5 million.

Ascott REIT will sell 15,170 sq m of GFA of its interest in Somerset Liang Court to CDL for $163.3 million and retain 13,034 sq m of GFA. The retained GFA will be developed into a 191­unit serviced residence block that will also have a ho­tel licence.

“This transaction of partial divest­ment and redevelopment enables Ascott REIT to realise a net divestment gain of $41.5 million and an expected $42.8 mil­lion fair value gain from its retained GFA in the land; refresh the lease of the prop­erty from 57 years to 99 years; and attain a new property with a hotel licence. By participating in the redevelopment, Ascott REIT could benefit from the development upside and optimise returns for the ben­efit of its unitholders,” explains Beh Siew Kim, CEO of Ascott REIT’s manager.

Novotel Singapore Clarke Quay is a 403­-room hotel that CDLHT will divest to CDL at $375.9 million. The trust’s manag­er says this is 87% above the original pur­chase price of $201 million. The exit net property income yield is 5.6% for an NPI of $21 million.

CDL will be redeveloping Novotel Singapore Clarke Quay into a 460­- to 475-­room hotel under Moxy, a young­ish lifestyle brand for millennials by Marriott. CDLHT will acquire the new ho­tel when it is completed in 2025 for no more than $475 million, at an NPI yield of 5.6%.

Based on pro forma figures, the transaction is 2%­ accretive to distribution per security (DPS) based on FY2018’s of 9.26 cents. This assumes no change in portfo­lio composition. In reality, there will be an impact on DPS. Any loss of NPI will be mitigated by the acquisition of W Singa­pore – Sentosa Cove for $324 million at an NPI yield of 3.1% (for an NPI of $10 mil­lion). The acquisition of the W hotel adds 0.9% to DPS on a pro forma basis. Alto­gether, the two hotels will accrete 2.7% to FY2018’s DPS of 9.26 cents, taking pro for­ma DPS to 9.51 cents.

Mandy Koo, head of investor relations at CDLHT’s manager, says since the NPI of W Singapore – Sentosa Cove is less than the exit NPI of Novotel Singapore Clarke Quay, the trust will use some of the divestment proceeds to top up DPS. CDLHT is expected to recognise a total divestment and fair­ val­ue gain of $36.3 million.

“There will be some DPS loss with the divestment of Novotel Singapore Clarke Quay, but we will be realising profit and in­ vestment gain. We bought this hotel at $201 million and are divesting it at $375.9 mil­lion, with a huge realisation of valuation gains. That will help mitigate the drop in DPS before the new [redeveloped] hotel is acquired,” Koo explains.

CDLHT will use internal resources, in­cluding proceeds from the divestment of Novotel Singapore Clarke Quay and/or debt financing, to fund the acquisition of W Singapore – Sentosa Cove. The pur­chase could cause aggregate leverage to rise from 36.3% as at Sept 30 to 42.3%. The new Moxy hotel is likely to be fund­ed with debt upon delivery in 2025. The actual method of funding will be determined closer to the completion when payment is due. Gearing, following the completion of the transactions (one divestment and two acquisitions), is likely to be 35.3%, leaving CDLHT with debt headroom of $512.7 mil­ lion, assuming a 45% gearing limit.

Ascott REIT will be redeveloping Somerset Liang Court into a new Somer­set themed serviced residence on its own, given its size. According to its announce­ment, however, on a pro forma basis, and based on the 2.16 billion units outstanding as at the beginning of FY2018, DPU could fall 4.6% to 6.83 cents compared with its FY2018 DPU of 7.16 cents.

The merger of Ascott REIT and Ascendas Hospitality Trust (A­HTrust) was approved by unitholders at their respective extraordinary general meetings and scheme meetings on Oct 21. The Ascott REIT ­Busi­ness Trust units (which will still be official­ly known as Ascott Residence Trust) under the combined entity are expected to be­gin trading on the Singapore Exchange on Jan 2, 2020. The number of ART’s securi­ties outstanding is likely to be 3,086.3 mil­lion. The A­HTrust acquisition is likely to be 2.6%­ accretive to FY2018 DPU of 7.16 cents. The merged ART will have levers to pull, though. It too can use its divestment gains to top up its distributions.

“The proceeds from the divestment will mainly be used to fund the redevel­opment of the property and distribution to unitholders from time to time. Ascott REIT believes in providing steady and sta­ble distributions to unitholders. With a strong financial position, Ascott REIT has the ability to top up any loss of income if necessary,” Beh says.

Correction
Our story "REITs have had a good run, yield compression may have come to an end" (Issue 908, Nov 18) should have said that Lippo Karawaci has about US$826 million of US dollar bonds due from 2022 onwards, and not as reported. The error is regretted.