If it can buy a new asset at a higher property yield than the exit yield for One George St, that would benefit unitholders

 

IN A message to unitholders in its annual report, the manager of CapitaLand Integrated Commercial Trust (CICT) had indicated in February that the newly merged trust will be looking to optimise its portfolio.

 

Tony Tan Tee Hieong, chief executive of CICT' s manager, had said: " We have started our portfolio reconstitution strategy, to review and evaluate our existing properties for other enhancement opportunities or potential divestments to recycle capital."

 

A likely candidate for divestment is the trust' s half-stake in One George Street, about 400 metres from Raffles Place MRT station, analysts say.

 

Talk on the grapevine is that a process engaging potential buyers for this asset is underway. Following the initial round, three parties are expected to submit their bids soon: entities linked to Gaw Capital Partners, JP Morgan Asset Management and Morgan Stanley.

 

A sale, if it materialises this year, would come four years after CapitaLand Commercial Trust (CCT) divested the other 50 per cent in the office building to insurer FWD Group for S$592 million. CICT was formed from the merger of CCT and CapitaLand Mall Trust.

 

The sale to FWD valued the entire property at S$1.18 billion or S$2,650 per square foot (psf) based on the 23-storey building' s net lettable area.

 

The current pricing being negotiated for CICT' s remaining stake in the building is expected to be higher, with some observers suggesting a range of S$2,800 to S$3,000 psf. The property is on a site with nearly 81 years' balance lease.

 

In all likelihood, FWD Group has the right of first refusal (ROFR) to buy CICT' s remaining 50 per cent in One George Street. Its acquisition of the earlier stake in 2017 came with signage rights on the building. The market had expected FWD, which is backed by Richard Li Tzar Kai, to move into the building, along with Mr Li' s Singapore-listed Pacific Century Regional Developments. That has not happened.

 

It remains to be seen if FWD will exercise its ROFR.

 

Logical move

 

From CICT' s perspective, it makes sense to divest One George Street.

 

It is a mature asset that has been built to its full development potential under the current Master Plan.

 

Completed in 2004, the property was a redevelopment of the former Pidemco Centre on South Bridge Road. CCT bought One George Street from sponsor CapitaLand in 2008.

 

The building' s existing net lettable area of 445,735 sq ft has an occupancy rate in the high-90-per-cent range. Talk in the market is that the passing rent could be in the high-single-digit range per month on a psf basis.

 

A back-of-the-envelope calculation suggests this reflects a net yield of about 3 to 3.2 per cent, assuming a price of S$2,900 psf. This would work out to S$646.3 million for a 50 per cent stake - about 15 per cent above the S$561 million valuation (or S$2,517 psf) of the asset as at the end of last year.

 

By selling One George Street, CICT stands to book a divestment gain. That would be positive for the counter.

 

The trust could use the sales proceeds to trim aggregate leverage, which stood at 40.8 per cent as at March 31. It could also direct the funds from the sale towards a higher-yielding investment.This could be a completed property or a redevelopment project, whether at home or abroad.

 

Acquisition options

 

Within Singapore, a couple of potential acquisition candidates come to mind. One would be 79 Robinson Road, a 29-storey development with 518,000 sq ft of offices completed last year. CapitaLand developed this project jointly with Mitsui & Co and Tokyo Tatemono Co.

 

Tenants secured for the building include Allianz, Boston Consulting Group, EFG Bank and Equinix.

 

Another potential acquisition candidate in due course would be CapitaSpring - a new project on the former Golden Shoe Car Park site that is expected to receive its Temporary Occupation Permit (TOP) in the second half of this year.

 

CapitaSpring is being developed by a 45:45:10 partnership between CICT, Capitaland and Mitsubishi Estate Co.

 

The project has a commercial component (made up of 635,000 sq ft of offices and 12,000 sq ft of retail space) as well as a serviced residence component. CICT has a five-year call option from occupation to acquire its partners' stakes in the commercial component of the development at market valuation. This will be subject to a minimum price based on the total development cost less net property income, compounded at 6.3 per cent per annum.

 

The longer CICT waits, therefore, the higher the acquisition price and the harder it may be for a deal to be yield accretive to CICT unitholders.

 

Based on the trust' s Q1 2021 business update, CapitaSpring' s commercial component has achieved a committed occupancy of 50 per cent as at April 15, 2021. Another 15 per cent is under advanced negotiation.

 

Tenants announced so far include JP Morgan, Saxo Markets and The Work Project. JLL is also understood to be a tenant.

 

New tenant

 

The Business Times understands that one of the more recent signings at CapitaSpring is by Sumitomo Mitsui Banking Corporation (SMBC), which is taking three floors adding up to nearly 70,000 sq ft. Several other potential tenants, including tech groups, are in advanced negotiations to lease space at CapitaSpring.

 

Gross effective monthly rents in the building are expected to cross S$12 psf a month soon.

 

If CICT manages to make a new acquisition or acquisitions at higher property yields than the exit yield on One George Street, that would be a good proposition for unit holders.

 

The counter' s S$2.17 closing price on Thursday reflects a 5 per cent distribution yield, going by some analysts' forecast of close to 11 Singapore cents in distribution per unit for FY2021.