Office Deal DPU-accretive; Recovery Gaining Traction

• CapitaLand Integrated Commercial Trust (SGX:C38U) is recycling part of its divestment proceeds from One George Street in Singapore (at a 3.17% exit NPI yield) into two Australian Grade-A office properties for AUD330.7m, from its sponsor at a 5.2% NPI yield, to deliver 3.1% DPU accretion.
• We see favourable growth fundamentals, as CapitaLand Integrated Commercial Trust (SGX:C38U)'s AUM rises 3% to S$22.4b, with overseas assets growing to 7%, even as management maintains its Singapore core. Here, recovery is gaining traction from tenant expansion as office demand returns, as committed occupancy has improved at Asia Square Tower 2 and CapitaSpring to 94.3% and 88.3% respectively (from 82.8% and 83.1% as at end-Sep 2021).

Properties Cushioned by 5.2% Entry NPI Yield

• The properties are both NABERS-rated Grade A office buildings within easy access of transport and amenities. 66 Goulburn Street at ~246k sf NLA, in Sydney CBD’s Midtown precinct, is backed by 95.3% committed occupancy, a 2.7-year WALE, and offers a 5.4% NPI yield. Occupancy for 100 Arthur Street at ~292k sf NLA in North Sydney CBD, rose from ~30% in early 2020 (with the exit of two anchor tenants) to 62.3% as at end-Sep 2021, and management expects to push this closer to 100% in the next 12 months.
• Excluding AUD7m in rental guarantee, its implied NPI yield would be lower at 3.2%, versus the 5.1% headline yield.

Favourable Growth Fundamentals

• Management believes the deals are opportunistic, with Sydney well-placed towards a gradual post-pandemic reopening. Leasing activity has improved year-to-date, with healthy pre-commitment for new completions.
• CBRE expects vacancies to tighten in 2023 with rising net absorption, while large-scale government-backed development and rejuvenation initiatives will suggest longer-term rental upside.
• We expect an absence of new supply till 3Q22 in North Sydney, to cushion occupancies and rents in the near term.

Eyeing Further Acquisition, Redevelopment Upside

• CapitaLand Integrated Commercial Trust (SGX:C38U) expects its gearing to be stable at 41%, with the deal’s ~50% loan-to-value (LTV), partly funded by proceeds of S$2.55 (COE: 5.9%, LTG: 1.5%).

Source: Maybank Kim Eng Research - 6 Dec 2021