CapitaLand asset swaps not a game-changer, says analyst

Ascott Reit could have secured better accretion had it divested just the residential portion of Somerset Grand Cairnhill to third-parties, says CIMB.

CIMB noted:

What Happened
ART has announced the proposed divestment of Somerset Grand Cairnhill for S$359m (3.8% yield, S$87m gross divestment gain) and the proposed acquisitions of Ascott Raffles Place Singapore and Guangzhou for S$220m (4.1% yield) and S$63m (5% yield), respectively.

ART previously secured an OPP to redevelop Somerset Grand Cairnhill: Capland will redevelop the asset as a 40:60 hotel-residential development with higher GFA and divest the hotel portion back to ART on completion (expected in 2017) for S$405m (4.5% yield). The deal is subject to EGM approval on 27 Jul.

What We Think
The asset swaps and perpetuities were not unexpected – we previously highlighted these possibilities. We are net-neutral. We believe ART could have secured better divestment and acquisition pricing and accretion had it divested just the residential portion of the project to third-parties and kept the hotel portion for its own development.

This would also allow it to retain a foothold within the Orchard area and to deploy excess divestment proceeds for acquisitions. That said, positives from the current structure come from Capland’s assumption of development risk while the asset is not generating income, and limited time-lag in capital deployment.

4.5% EBITDA yield on redeveloped Somerset Grand Cairnhill looks achievable though accretion will be dependent on future REVPAU and interest-rate trends. Asset leverage should drop to 39.2% (from 41.6% as at end-1Q12) while rising to 43% come 2017 when New Cairnhill SR is acquired through a mix of debt and perpetuities.