CapitaLand Commercial Trust (SGX:C61U), or CCT for short, is the first and largest commercial real estate investment trust in Singapore’s stock market. Its portfolio consists of prominent commercial buildings located in the heart of Singapore, including Asia Square Tower 2 and Twenty Anson among others.
Two weeks ago on 17 May 2018, CCT announced its decision to acquire its first property outside of Singapore. Here is a quick summary of the details of the proposed transaction, and how it will affect the REIT’s unitholders.
An attractive price
The property in question, which is located in Frankfurt, Germany, is a 38-storey Grade A commercial building with ancillary retail space, and a four-storey heritage building for office use. It has a total net lettable area of 437,157 square feet, which is approximately 40,522 square meters.
Notably, the building sits on freehold land and currently has a 100% occupancy rate with a long average lease expiry of 10.6 years.
CCT has agreed to purchase a 94.9% interest in the property at a total property value of €356.0 million, which is a slight discount to the building’s independently appraised valuation of €360.9 million. Together with the acquisition fees, CCT will have to pay S$548.3 million in total.
Sources of funding and gearing ratio
CCT will use a mix of debt and proceeds from a private placement to fund the new acquisition. It is estimated that the trust will borrow an additional S$339.5 million. The REIT has raised gross proceeds of S$217.9 million from a private placement that was closed on 18 May 2018. The private placement units were offered at a price of S$1.676 apiece.
As of 31 March 2018, CCT had a gross debt level of S$4.0 billion. The increase in its debt load – all other things being equal – will push the REIT’s leverage up to 39% from 37.9%. This, despite the leverage ratio being under the 45% regulatory cap, is still relatively high compared to other REITs in Singapore. As a point of comparison, at a gearing ratio of 39%, CCT will have the fifth highest gearing level amongst all REITs/stapled trusts in Singapore and will be well above the 34.8% average leverage ratio.
Will it be yield-accretive
According to CCT’s management, the acquisition of the Frankfurt property would have added 0.03 cents – or 1.4% – to the REIT’s distribution per unit for the first quarter of 2018 even after taking into account an enlarged unit base from the private placement. This is because the new acquisition has a higher net property yield (4%) than its current portfolio (3.9%). Furthermore, part of the acquisition will be funded by debt, as mentioned earlier.
However, retail investors should be disappointed that they were not able to participate in CCT’s latest round of equity fund-raising, as the REIT had opted for a private placement instead.
Other benefits of the acquisition
In my view, there are a few benefits that come with the trust’s first foray into Europe. First, the expansion will widen its geographical footprint and reduce its reliance on the Singapore office market.
Secondly, the acquisition property’s anchor tenant is Commerzbank AG, which is, crucially, a very stable bank with a high credit rating score. It is the second largest listed lender by total assets in Germany, and the country has a 15.5% stake in the bank. There is, therefore, very little risk that the bank will default on its leases on the property.
Thirdly, the addition of the Frankfurt property will improve CCT’s overall portfolio occupancy by 30 basis points to 97.6%, and increase its weighted average lease expiry by 0.4 years to 6.1 years.
The Foolish conclusion
CapitaLand Commercial Trust has been very aggressive in trying to maximise its debt headroom to grow its portfolio. This has had the effect of growing the REIT’s distribution per unit to unitholders. However, there are some negatives to this acquisition that may irk investors.
Firstly, CCT had decided to source for additional equity through a private placement. This had diluted the stakes of the REIT’s existing unitholders. More importantly, existing retail unitholders did not have the opportunity to participate in CCT’s latest round of fundraising.
Secondly, 62% of the acquisition fee is funded by debt. The increased debt load will put CCT near the regulatory limits of its debt capacity. Investors will have to note that after this acquisition, CCT is unlikely to be able increase its debt load much further and, hence, might not make another debt-driven acquisition for some time.
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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 does not own shares in any companies mentioned.