Capitaland Commercial Trust is the biggest commercial office trust in Singapore. They already owned 40% of CapitaGreen, a building they sold to Capitaland to be redeveloped into an office building.
Last week, they proposed to purchase the other 60% of CapitaGreen they do not owned yet.
The first thing that hit me was that this purchase is not a tiny purchase. The 60% stake is valued at SG$960 mil. In contrast the valuation of Frasers Commercial REIT is SG$2 bil.
And this whole acquisition is funded by debt.
This will bring the gearing of CCT (Current Dividend Yield 5.9%) up from 30% to 37.7%.
The shareholders of CCT would have to thank the manager for their past conservative nature. Had they always been gearing up to purchase, this purchase would not have been possible.
Beating the Hurdle Valuation Price
CCT is in a position where perhaps they have no choice.
We know the office market is challenging now, with a lot of supply coming online this year and rents are likely to be under pressured. It might be wise in most circumstances to incubate CapitaGreen longer.
However, CT have a call option to buy back the stake and this has to be exercised by Dec 17, 2017, which is 1.5 years away.
To exercise this call option, they have to purchase above the hurdle price, which is the actual cost of development of SG$1.3 bil compounded at 6.3% a year.
This hurdle looks like it just keeps going up.
If they do not buy it now, once the call option expire, and the stake holders of CapitaGreen sells out, would that be a good situation for CCT to be in?
CapitaGreen looks a price acquisition
Analysts are throwing around a figure of 3.2-3.9% for the net property income yield.
However, 15% of the tenant base is rent free, which sort of means its under rented. Occupancy stands at 77% as a whole.
The net property income yield looks very low, certainly just above the normal bond borrowing rate (3-3.5%) or versus the office cap rate of 3.6% to 3.85%.
If you layer that the land lease for CapitaGreen is only 57 years, it does not look like a very appealing deal.
Typical low yield may eventually work out if the economy is growing and offices can be rented at a higher rate, and empty space can be leased out.
In Singapore’s case, the waiting period might be longer as this is the wrong part of the cycle.
The good thing is that this is entirely funded by debt, and thus would be accretive, if not by a small amount.
Analyst do see the DPU go up to $0.09. This would boost the current dividend yield to 6.5%. I am sure most will find it more attractive for the biggest office REIT in Singapore.