• CCT to sell Twenty Anson for S$516mn, 19% above last valuation as at 31 Dec 2017.
• Favourable exit yield of 2.7%, vs 3.2%-3.4% for previous divestments in 2017.
• Decent IRR of c.7% achieved over 6-year ownership period of Twenty Anson.
• Expect loss of rental income to be topped up with divestment proceeds.
• Maintain Accumulate with unchanged TP of S$1.88.

What is the news?

CapitaLand Commercial Trust (CCT) has agreed to sell Twenty Anson, a twenty-storey prime office building in Tanjong Pagar to an unrelated third party for S$516mn. The sale consideration is 19% above the S$433mn valuation as at 31 December 2017. Twenty Anson accounted for about 5.5% of CCT’s FY17 net property income (NPI). Completion of sale is expected in 3Q18.

The Positives

+ Favourable exit yield of 2.7%. This exit yield based on Twenty Anson’s NPI of S$13.8mn for the 12 months preceding 31 March 2018, is even more attractive than the 3.4% and 3.2% exit yields for Wilkie Edge (WE) and One George Street (OGS) sold by CCT last year.

+ Further showcasing ability to rejuvenate portfolio and effectively recycle capital. Through the 3 local divestments (WE, OGS, TE) and 1 acquisition (Asia Square Tower 2, AST2) since 2017, Management has repeatedly demonstrated the ability to effectively recycle capital and rejuvenate the portfolio for enhanced returns. Using the latest local acquisition as example, AST2 had a yield on cost of 3.6%, based on committed occupancy of 88.7%. The 3 divestments were at lower exit yields, despite having shorter (or similar) land leases remaining. This effectively means capital has been effectively recycled into a higher yielding asset, with comparable or better potential for growth in the vibrant Marina Bay district.

+ Decent IRR achieved over 6-year ownership period of Twenty Anson. Recall CCT purchased Twenty Anson for S$430mn in 2012 with a yield on cost of c.4%. Throughout the 6-year holding period, CCT would have achieved unlevered IRR of c.7%, vs the average cost of capital of c.4.6%, by our estimates.

+ Reduced gearing provides ample firepower to fund future growth. Assuming divestment proceeds are used to pare down debt, aggregate leverage would drop from 37.9% in 1Q18 to 34.5%.

Outlook

Twenty Anson contributed only c.5.5% of CCT’s FY17 NPI. We expect any loss of rental income from 3Q18 to be topped up with divestment proceeds. With only 8% of debt next due for refinancing in FY19 and 90% of debt on fixed rates, interest rate risks are mitigated. CCT will benefit from expected rising office rents due to tapering supply. We expect office rents to grow 5-10% in 2018.

Maintain Accumulate with unchanged target price of S$1.88

We adjust our forecasts to factor in the divestment. Our forecasted CAGR growth for DPU from FY17-FY19 is at 3.4%. Our target price translates to an FY18e yield of 4.7% and P/NAV of 0.97x.

Source: Phillip Capital Research - 02 Jul 2018