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Brokers' take: DBS, UOBKH deem CapitaLand Reits' merger attractive

CapLand Mall_Westgate.jpg
Pictured: Westgate, a mall in CMT's portfolio. UOBKH sees CMT as a recovery play as safe-distancing measures ease and consumer behaviour gradually returns to pre-Covid-19 levels.

THE proposed union of CapitaLand Mall Trust (CMT) and CapitaLand Commercial Trust (CCT) offers an opportunity for their unitholders to ride on the benefit of a bigger vehicle post-merger, said DBS Group Research.

Unitholders can also capitalise on mixed-use assets and the progressive recovery of both portfolios from the Covid-19 pandemic, said DBS analyst Rachel Tan in a note on Monday.

First announced before the coronavirus pandemic, the two real estate investment trusts' (Reits) merger will create CapitaLand Integrated Commercial Trust (CICT) via a trust scheme of arrangement if successful.

Both Reits' managers last week issued notices that their respective unitholder meetings will be held on Sept 29 for the proposed union. This fixed date for the extraordinary general meetings "finally" removed the uncertainty of the merger plans, which bodes well for both CMT and CCT, Ms Tan wrote.

Besides, given that the transaction will be made below one-time price to net asset value, DBS believes it will be attractive for the Reits' unitholders, she added.

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Last week, the two Reits also announced deal sweeteners for the merger, such as higher accretion to their respective distribution per unit and CMT's manager completely waiving its S$111.2 million acquisition fee.

Meanwhile, UOB Kay Hian (UOBKH) noted that benefits from the planned union include the enlarged scale, the attractiveness of integrated developments, reduced asset concentration risk, and the merged entity staying grounded in Singapore.

The combined portfolio will double in size to 24 properties, and CICT will be the largest Reit in Singapore and the second-largest in Asia-Pacific.

"CICT will become the best proxy for S-Reits (Singapore-listed Reits). In addition, the enlarged scale positions will allow CICT to take on large scale integrated developments," said the brokerage in a sector update on Monday. CICT will have a large development headroom of S$5.8 billion, assuming the unitholders approve the higher 15 per cent cap for redevelopment of existing buildings, wrote UOBKH analysts Jonathan Koh and Loke Peihao.

Moreover, there is now a shift towards integrated developments in Singapore due to the intensification of land use and the attractiveness of such projects given that they are captive eco-systems that support work, live and play culture, the analysts said, adding that this shift is expected to accelerate after the Covid-19 pandemic.

CICT will own five integrated developments including Funan and Raffles City Singapore, accounting for 29 per cent of the combined portfolio, UOBKH noted.

The combined Reit portfolio will also have eight office assets and 11 retail properties, making up 38 per cent and 33 per cent of CICT's portfolio valuation respectively. In addition, net property income contribution from the top five properties will be reduced to 43 per cent for CICT, from CMT's current 50 per cent and CCT's 82 per cent.

Another benefit is that the enlarged entity will remain grounded in Singapore, UOBKH said. About 96 per cent of the combined portfolio is in Singapore, while the rest is located in Frankfurt, Germany. Overseas exposure will be capped at 20 per cent of portfolio valuation, or S$4.5 billion.

The brokerage maintained its "buy" call on CMT with a S$2.55 target price and its "hold" call on CCT with a S$1.66 target.

As at 2.17pm on Tuesday, units of CMT were trading at S$1.99, up S$0.01 or 0.5 per cent. CCT units gained S$0.01 or 0.6 per cent to S$1.70.

UOBKH sees CMT as a recovery play as safe-distancing measures ease and consumer behaviour gradually returns to pre-Covid-19 levels.

Separately, UOBKH on Monday maintained its "overweight" rating for the S-Reit sector, with CMT, Far East Hospitality Trust and Frasers Centrepoint Trust among its top "buy" ideas.

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