Analysts question the timing, given falling office prices, but manager says it's constrained by terms of the call option
APITALAND Commercial Trust (CCT) has proposed to exercise its call option to buy over the remaining 60 per cent of the Grade-A office building CapitaGreen that it does not already own, for about S$393 million in total acquisition outlay.
This translates to a valuation for the entire building of about S$1.6 billion, or S$2,276 per square foot.
The proposed acquisition is to be done through a share sale in a special purpose sub-trust. CCT will also assume the remaining 60 per cent of the sub-trust's bank loan, which amounts to S$534 million.
At a briefing on Monday, analysts expressed concern over the timing of the acquisition, at a time when prices in the office market have just started to correct, with further declines expected in the second half of this year.
CCT's manager, however, maintained that it had constraints to work within and did not want to risk broader market uncertainties which are not within its control.
CEO of the Reit manager Lynette Leong, deliberately decked in a green skirt suit for the occasion, said: "Yes, the timing is definitely something that has been on our mind. The question is always: what is the right time?
"If we didn't have any constraints on the call option expiry date and the hurdle price, I think that would be much easier. But life is not always that easy."
The expiry date to the call option is in December 2017. The hurdle price, calculated at S$1.5858 billion at April 6, 2016, rises 6.3 per cent per annum.
"If the hurdle price keeps escalating, we'll lose the option altogether," she said.
The other gripe analysts had was: why not wait until CapitaGreen was higher yielding before buying it?
Its net property income (NPI) yield is only 3.2 per cent, based on CapitaGreen's annualised Q1 2016 NPI and a revenue occupancy of 77.7 per cent (versus committed occupancy of 92.8 per cent), as some newly committed tenants have not moved in yet.
To this, Ms Leong said that waiting until the building yields higher may further raise the valuation of the property, and thus the acquisition cost.
Pressed then on whether it was so important to acquire the remaining stake in the building, she replied that if CCT did not acquire it, it would remain as a minority shareholder, with limited power should the joint venture partners decide to sell it to a third party.
"And right now, we are actually working so hard to lease it out. From day one, our plan was to own it 100 per cent, which is why we did a structure like this that enabled us to acquire it at market valuation," she said.
Even after the briefing, some analysts remained unconvinced about the merits of the deal, believing that the timing was not optimal, with all the signs suggesting a deepening office market slowdown to come.
These analysts also see that the trust is genuinely hemmed in by the terms of the call option, which limit their ability to decide when to buy. Furthermore, they add that the deal is only yield-accretive because it is wholly funded by cheap debt; it wouldn't otherwise, if it was mixed in with equity financing, they said.
Currently, the sub-trust is jointly owned by CCT's parent CapitaLand (50 per cent interest), CCT (40 per cent) and Mitsubishi Estate Asia (10 per cent).
It had to be structured this way because CCT could not take on the whole redevelopment of the former Market Street car park back in 2011; it was constrained by the 10 per cent development limit that applied to Reits.
The agreed value of CapitaGreen based on market valuation as at April 6, 2016 is about S$1.6 billion.
After deducting the trust's liabilities and including a share of the trust's existing unitholders' loans and accrued interest of S$198.5 million, plus other acquisition-related expenses, the total acquisition outlay for the 60 per cent stake becomes S$393 million.
This is expected to be funded by borrowings from committed bank facilities, which will raise the gearing ratio from 30.1 per cent to 37.7 per cent.
The acquisition remains subject to unitholders' approval. On a pro forma basis, unitholders will see their distribution per unit (DPU) go up from Q1 2016's DPU of 2.19 cents, to 2.22 cents.
The acquisition will also increase CCT's portfolio net lettable area from 3.2 million sq ft to 3.6 million sq ft. Post-acquisition, CapitaGreen will also go from contributing just 6 per cent of the total NPI to 14 per cent.
The market was fairly nonchalant on the deal, however, with units of the trust down half a cent to S$1.375.
Source: Business Times, 24 May 2016