Acquiring Clarke Quay for S$268m

Acquiring Clarke Quay for S$268m. Yesterday, CapitaMall Trust (CMT) announced that it has entered into a sale and purchase agreement with CapitaMalls Asia (CMA) to acquire Clarke Quay for S$268m. The 99-year leasehold property has a net lettable area (NLA) of 294,610 sq ft and committed occupancy of 94.9%. The purchase price of S$268m is based on the most recent valuation that was done on 3 Feb by Knight Frank, which works out to be S$910psf on NLA. We expect CMT to fund this acquisition using debt, which will increase its gearing from 30.5% to 33.1%. The acquisition is still subjected to the approval of CMT’s unitholders. 

Acquisition benefits CMT, strategically and financially. Strategically, Clarke Quay helps to diversify CMT’s portfolio of non-discretionary spending focused retail malls by increasing its exposure to discretionary spending segment (leisure and entertainment) of the consumer market. Leisure and entertainment spending had been resilient in 2009 and this was evident in the 3.5% YoY growth in gross turnover of CMT’s tenants in the leisure and entertainment business. Being one of the favourite nightspots in Singapore, Clarke Quay also offers the added potential to capture the expected increase in tourism in Singapore. Financially, the acquisition is yield accretive to CMT’s unitholders, given its relatively higher NPI yield of 5.9% compared to the existing NPI yield of 4.9% of its portfolio. 

Sufficient room to grow this mature asset. We see potential for CMT to grow the future rental income of Clarke Quay by securing new tenants to raise occupancy rate and also from positive rent reversions coming from expiring leases secured at below market rent after the repositioning of Clarke Quay in 2006. The increase in tourism and tourist spending could also drive rents higher going forward. The existing valuation of Clarke Quay is relatively undemanding in comparison to the average valuation of CMT’s existing asset portfolio (S$1,767psf on NLA). With its higher NPI yield and growth potential, we see potential for future growth in valuation, which would increase CMT’s NAV. 

Fair value raised to S$1.93; Upgrade to BUY. Factoring in the acquisition, we are now raising our FY10 and FY11 DPU yield to 5.5% (previously 5.2%) and 5.7% (previously 5.4%) respectively. Our fair value has also been raised to S$1.93 (previously S$1.83). Recent market correction has made valuation attractive again and with a projected total return of 14.6%, we are now upgrading CMT from HOLD to BUY.

Acquiring Clarke Quay

CMT buys Clarke Quay for S$268m 

Maintain Neutral. CMT has entered into a sale and purchase agreement to acquire Clarke Quay from its parent CapitaMalls Asia (CMA) for S$268m (or S$910psf of net lettable area). Based on the estimated property yield of 5.9%, and full debt funding, we expect DPU to increase by 2% on full-year contributions in FY11-12. While this would be an accretive acquisition, the impact on DPU would not be very material, in our estimation. Maintain Neutral, albeit with a higher DDM-based target price of S$1.91 (from S$1.88, discount rate 8.1%) after factoring in the acquisition. 

Accretive deal to be fully funded by debt 

Accretive deal. The net property yield of 5.9% based on FY09 net property income of S$15.8m and the purchase price of S$268m would be accretive vs. CMT’s portfolio NPI yield of 5.4%. Clarke Quay has been priced at book value with a cap rate of 6%. This is comparable to cap rates used for CMT’s suburban malls, at 5.5-6.6%; and similar to the 5.9% for the closest CMT mall in the vicinity, Funan DigitaLife Mall. CMT intends to fund the acquisition fully with debt, and expect cost of debt to be roughly the same as its blended interest cost of 3.5% as at Dec 09. We expect full-year revenue contribution to add 2% to DPU. Clarke Quay will increase CMT’s portfolio by 2.7% from S$7.4bn to S$7.6bn. 

Positive rental reversions likely. We estimate the net rent of Clarke Quay at S$4.70psf, which appears low considering its refurbished state compared with average suburban-mall rents which are in the teens. We believe this could be attributed to some long leases (such as to LifeBrandz which was reported to have taken a 6+6-year lease from 2006), and possibly discounted rent as traffic count in Clarke Quay before its refurbishment in 2006 had been poor. As such, we believe that rental reversions would be positive for Clarke Quay going forward. 

Sufficient funding sources. CMT has sufficient funding sources which include bank facilities and a S$2.5bn MTN programme in place. As recent as Jan 10, S$100m of 5-year notes were issued at 3.288%, below CMT’s average cost of debt of 3.5%. We believe that cost of debt for this acquisition should not vary very much from these levels. Asset leverage should rise to 33% after the acquisition, still unstretched. 

Unitholders’ approval required. As this is an interested-party transaction, an EGM would be held to seek unitholders’ approval. We expect this to be held some time in April, and estimate completion of the deal in July. 

More on Clarke Quay 

Clarke Quay is an integrated food & beverage, entertainment and lifestyle riverfront development. Located along the Singapore River, near Singapore’s CBD, Clarke Quay is within walking distance of the Clarkee Quay MRT station. Major tenants include Luminox Pte Ltd (wholly-owned subsidiary of LifeBrandz), Shanghai Dolly and The Pump Room. Clarke Quay underwent an extensive 2-year revamp costing S$85m which was completed in Dec 06. CapitaLand reported a 50% increase in visitor traffic after the revamp in its press release dated 26 Dec 06. 

Valuation and recommendation 

Positive deal for CMT. We believe this is an accretive deal at a reasonable price. An anticipated increase in visitor arrivals to Singapore this year as its two integrated resorts open should have positive spillover for centrally located tourist attractions and entertainment spots such as Clarke Quay. Hence, upward rental reversions are likely for this asset. 

However, impact on DPU is marginal. We include the purchase of this asset and have not changed our cost of debt assumption of 3.7%, further assuming 50% contribution from the asset in FY10. Our DPU estimate dips by 1% for FY10 as interest expense increases with debt, but rises by 2% for FY11-12 as full contribution kicks in. Our DDM-based target price rises accordingly to S$1.91 from S$1.88 (discount rate 8.1%). While this is an accretive acquisition, the impact on DPU should be immaterial, in our estimation. Maintain Neutral.

CMT buys Clarke Quay for $268m

Seller CapitaMalls Asia says right time to monetise property as it has stabilised

CAPITAMALL Trust (CMT) has agreed to buy Clarke Quay from parent company CapitaMalls Asia for $268 million in cash, the two companies said yesterday.

The purchase will increase CMT’s asset size to $7.6 billion, from $7.4 billion as at end-2009.

Both CMT and CapitaMalls Asia are units of CapitaLand, Singapore’s largest property group by market capitalisation.

CapitaMalls Asia was created after CapitaLand spun off and listed its retail arm late last year. CMT, Singapore’s largest real estate investment trust, was sponsored by CapitaLand and listed in 2002.

CapitaLand carried out several major asset enhancements of Clarke Quay between 2004 and 2006 to reposition it as a one-stop entertainment and lifestyle hub. It also refreshed Clarke Quay’s tenancy mix to ensure that it remains a vibrant lifestyle destination. Visitor traffic has doubled to nearly one million monthly today from about 500,000 visitors before the asset enhancement.

‘The acquisition of Clarke Quay complements CMT’s current portfolio of mainly suburban malls catering for necessity shopping,’ said Simon Ho, chief executive of the trust’s manager. ‘It increases the number of properties that we have catering for discretionary consumer spending and will enable us to ride on the long-term remaking of Singapore as Asia’s leading convention, exhibition, leisure destination and services centre.’

CMT’s portfolio now consists of 14 retail properties including Tampines Mall, Plaza Singapura and Raffles City Singapore.

Mr Ho added that when the repositioning of Clarke Quay was completed in December 2006, it did not yet have an established track record of operations and some leases were committed below market rent. There is therefore potential for rental upside when leases become due for renewal in the next few years, he said.

On its part, CapitaMalls Asia is monetising Clarke Quay to recycle capital for new investment opportunities.

‘This is the right time to monetise Clarke Quay as the property has stabilised,’ said Lim Beng Chee, chief executive of CapitaMalls Asia. ‘There is growth potential in Clarke Quay which is best realised through our stake in CMT going forward, after CMT has acquired the property from us.’

CapitaMalls Asia has an interest of about 29.9 per cent in CMT. It also fully owns CMT’s manager.

The price represents a 2.3 per cent premium over the valuation of $262 million as at end-2009, as well as a 5.9 per cent yield on Clarke Quay’s net property income of $15.8 million in 2009.

The transaction, which is conditional upon CMT unitholders’ approval, is expected to be completed by July 2010.

CMT said that based on its closing price of $1.73 on Feb 8, 2010, CMT’s distribution yield is 5.1 per cent and the implied property yield is 4.9 per cent. As such, the transaction is expected to be yield-accretive.

The trust added that it has sufficient financial flexibility and capacity to fund this transaction. Assuming the transaction is fully funded by debt, CMT’s gearing would be 33.1 per cent – still within its target range of 30-35 per cent.

CapitaMalls Asia lost 2 cents to close at $2.22 yesterday while CMT gained 4 cents to close at $1.77.

Refocusing on growth

• Results in line with estimates
• Pricing power returning, focus on delivering growth
• Maintain Buy, TP $2.03

Results meet market expectations. 4Q09 revenue of $140m was 4.2% higher yoy while NPI improved a higher 11.8% to $96m with cost savings from property and operating expenses. Distribution income rose a higher 25.5% to $76.5m with inclusion of $7m of profits and dividend from CRCT held back earlier. There was a small $26m of net revaluation deficit, largely coming from The Atrium, bringing full year writedown to $212.5m or book NAV of $1.54/unit.

Signs of stability emerging. The group renewed 971,191sf of NLA (c30% of total) in 2009 with rents at an average 2.3% higher than previous levels. However, more importantly, pricing power appears to be returning with lease reversion spreads in 2H09 higher than in 1H09. In addition, pedestrian footfalls have turned +ve in Dec 09 on a yoy basis while tenant gross turnover was 11.3% greater than in 3Q. We anticipate this uptrend to be sustained in 2010 on the back of economic recovery and greater tourist arrivals with the opening of the 2 IRs. Uplifting impact from completion of AEI in Raffles City and JEC should provide another earnings growth driver from 2011. CMT is well placed to tap accretive new acquisition/development opportunities as it remains one of the lowest geared retail Sreit with a leverage of 30.5%.

Maintain Buy, TP $2.03. The group is on track to deliver a 3-pronged growth strategy from both organic and inorganic means, particularly from FY11 onwards. Our estimates have not factored in any new acquisitions, which should provide further upside surprise when it materialises. The stock is trading at 5% FY10 and 5.1% FY11 yield. Maintain Buy with revised target price of $2.03.