Capitaland

Kim Eng on 13 Jul 2012

Mutually beneficial deals. CapitaLand and Ascott Residence Trust (ART) are proposing an asset swap involving The Ascott Limited’s (TAL) Ascott Raffles Place (ARP) and Ascott Guangzhou (AGZ), and ART’s Somerset Grand Cairnhill (SGC). We see this as a prime example of the symbiotic relationships between Sponsor and REIT, with positive outcomes for both sides. Maintain BUY.

Details of the transactions. CapitaLand, via TAL, will acquire SGC from ART for SGD359m, while divesting ARP and AGZ to ART for a total of SGD283.3m. SGC will be redeveloped into a mixed project comprising high-end residential units and a new serviced residence with a hotel licence, which ART has a call option to repurchase in future at an agreed price of SGD405m. As a result of the transactions, CapitaLand could book in net gains of SGD98.9m in FY12.

Acquiring a piece of limited prime land. Located just off Orchard Road, CapitaLand will be acquiring a piece of prime property. Including differential premium and lease extension premium estimated at up to SGD180m, the acquisition works out to approx. SGD1,156 psf GFA. We estimate the net sellable area at ~222,600 sq ft, with a potential ASP of SGD2,800 psf on an estimated breakeven of ~SGD2,100 psf. This translates to a fairly attractive pre-tax margin of 25%.

ART benefits too. The deals are expected to be yield-accretive for ART, as it will be divesting SGC at an EBITDA yield of 3.8%, while acquiring ARP and AGZ at 4.1% and 5% respectively. Even the new Cairnhill serviced residence is projected to have an EBITDA yield of 4.5% at the agreed price. On a pro-forma basis, ART’s FY11 DPU would grow by 4.1% as a result of the enlarged portfolio.

Reiterate BUY. The transactions, subject to ART’s unitholders’ approval, highlight the point that the much maligned Sponsor-REIT model can lead to mutually beneficial outcomes and it remains an integral part of CapitaLand’s capital recycling model. Reiterate BUY, with a target price of SGD4.06 pegged to a 20% discount to RNAV.