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Breaking Down CapitaLand Commercial Trust’s Acquisition of Asia Square Tower 2

CapitaLand Commercial Trust (SGX: C61U) completed its much-anticipated acquisition of Asia Square Tower 2 towards the end of last year. The building was purchased for S$2.09 billion, a slight discount to its independent valuation of S$2.11 billion.

Despite it being a few months since the acquisition took place, I thought it would still be useful to give a quick analysis on how this acquisition will affect unitholders in the future.

Details of the acquisition

The acquisition was funded through a mix of debt, divestment proceeds and funds raised through a rights issue.

The rights issue contributed S$690.4 million or 32.1% of the acquisition cost. Bank borrowings of S$1.12 billion contributed 52.1% and the remaining 15.8% was funded through divestment proceeds.

At the point of acquisition, Asia Square Tower 2 had a committed occupancy of 88.7% and spotted a 3.6% net property yield.

Details of the rights issue

As mentioned earlier, CapitaLand Commercial Trust had to raise funds for the acquisition through a rights issue. The rights ratio was 166 rights units for every 1,000 existing units. The new units were priced at S$1.363, a discount to the adjusted net asset value per unit of S$1.75 (after taking into account the enlarged unit base).

The rights issue expanded the unit base of the trust by 513 million units or 16.6%. This enlarged unit base will inevitably have a dilutive impact on earnings and distributions per unit in the future.

Effect of the acquisition on net property income per unit

To find out if the acquisition of Asia Square Tower 2 will have a positive return for unitholders, we will need to calculate the likely growth in net property income (NPI). To do this, we will have to take into account the income lost through the divestments of One George Street and Wilkie Edge. From there, we can then determine the NPI per unit, after taking into account the dilution caused by the rights issue.

First, the 50% stake of One George Street had a 3.2% exit yield and contributed S$19 million to NPI for the preceding 12 months. Wilkie Edge had a 3.4% exit yield and contributed S$9.5 million to NPI. Combined, the loss of income from the two divestments totals S$28.5 million per year.

Based on the agreed property value of S$2.09 billion, the new property, Asia Square Tower 2 has a NPI yield of 3.6%, on a 88.7% occupancy rate. Since then, the trust has managed to increase its occupancy rate to slightly over 90%. This would have had the impact of increasing NPI earned on the property. However, for simplicity sake, I will use the initial estimate of a 3.6% yield. This translates to a NPI earned from Asia Square Tower 2 of S$75.38 million per year. Taking into account the $28.5 million loss of income through the divestments, there is an overall net gain of $46.89 million.

But wait, there’s more. To get the net effect of the higher NPI on a per unit basis, we will need to take into account the enlarged unit base. NPI for the financial year 2016, before these transactions were made, was S$231.3 million. The net gain of S$46.89 million from the acquisition would increase the trust’s NPI by 20.2%.

Since the net gain of 20.2% in NPI is larger than the unit dilution of 16.6%, the acquisition will likely have a positive impact on distributions per unit in the future.

The Foolish bottom line

I have done a very simple exercise to calculate the net effect of the CapitaLand Commercial Trust’s latest acquisition. By my calculations, despite the enlarged unit base, the acquisition will still have a positive impact on distributions per unit for existing unitholders.

However, there are also other aspects of the acquisition that investors need to be aware of. First, the trust will have to pay a larger tax on rental income from Asia Square Tower 2 due to its ownership through a special purpose vehicle. Unitholders will also need to monitor the trust’s debt profile as their gearing ratio increased substantially because of the acquisition. Only by putting all the pieces together can we get a holistic view on the long-term effects of the acquisition.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended units of CapitaLand Commercial Trust. Motley Fool Singapore contributor Jeremy Chia doesn’t own shares in any companies mentioned.