CMT – UOBKH
Putting on the acquisition hat
CapitaMall Trust (CMT) has entered into a sale and purchase agreement with the Singapore Government to acquire The Atrium@Orchard at S$839.8m or S$2,249psf. The Atrium comprises two Grade A office towers of seven and ten storeys with ground floor retail space. It is zoned as a commercial development. It is located above the Dhoby Ghaut MRT interchange station and adjacent to Plaza Singapura, which is part of CMT’s portfolio. Dhoby Ghaut MRT station is served by North South Line, North East Line and Circle Line (ready in 2010). The acquisition is expected to complete by end-Aug 08.
Value creation through asset enhancement initiative (AEI). The Atrium will be amalgamated with Plaza Singapura to create an integrated development with 170m of prime retail frontage along Orchard Road and NLA of over 900,000sf. About 100,000sf of prime retail NLA on Levels 1 and 2 of The Atrium will be created by decanting lower yielding spaces. Management plans to utilise some of the additional retail space for duplex flagship stores fronting Orchard Road. Renovation works will be carried out progressively from 2009 to 2010. State land between the two buildings will be covered by shelters to create an “open plaza” concept. The AEI will also benefit Plaza Singapura by improving traffic flows from the MRT station.
Upside from positive rental reversion. Average office rental for The Atrium is expected to double from existing S$5.87psf pm to S$10 to S$12psf pm by 2010 and 2011. This is not surprising given that an office lease at the premises was recently renewed at S$13psf pm. Management estimated that The Atrium will provide property yield of 4.5% assuming all leases are renewed at S$10psf pm.
Has secured financing for the acquisition. Total acquisition cost of S$850m will largely be funded by 5-year S$650m convertible bonds fully underwritten by Goldman Sachs. The convertible bonds carry coupon of 1% with yield-tomaturity at 2% to 3%. Conversion premium is 20% to 35%. The balance of S$395m will be funded by its Medium Notes programme, which was already issued over the past two months.
High gearing a concern. CMT has grown its asset size from S$6b to S$6.9b via this acquisition and has revised its local target asset size from S$8b to S$9b by 2010. Gearing has increased from 35.3% to 45%. Management appears eager to move on to acquire Clark Quay (NLA: 262,230sf) and Orchard Ion (NLA: 660,000sf). CapitaLand is likely to monetise its investment in Orchard Ion once it is able to demonstrate stability of rental income. The injection of the two abovementioned assets will likely put a strain on financial resources given aggregate price tag exceeding S$3b. There may be some concerns that CMT has sidetracked from its focus on retail malls but management plans to progressively convert more office space into retail space.
Impact on earnings. We have revised our FY09 DPU forecast by 5.1% to 16.5 cents. We have factored in contribution of The Atrium as an office building and the impact of positive rental reversion. We are not able to assess impact of AEI as management did not provide guidance on construction costs involved. There may be government approval required to convert office space into retail space. CMT provides FY09 distribution yield of 4.71%. We have fine-tuned our dividend discount model to reflect risk of more fund raising exercises for the pipeline of acquisitions when both the equity and debt markets are fairly weak. Our new target price for CMT is S$3.72. Downgrade to HOLD due to limited upside.