Is CCT Getting 1 George Street Too Easily?

Source : The Business Times, April 24, 2008

CAPITACOMMERCIAL Trust's (CCT) $1.165 billion proposed acquisition of 1 George Street from CapitaLand announced last month will be put to a vote of unitholders before June 30 - with CapitaLand abstaining.

By all accounts, CCT unitholders will approve the acquisition. After all, it's not easy for Singapore real estate investment trusts (Reits) to grow through acquisitions these days. On the one hand, tight credit market conditions make it difficult to get debt funding while on the other, Reits are trading at relatively high distribution yields - because of the general stock market slide - making it difficult to make yield-accretive acquisitions if they need to raise equity to foot the bill.

CCT, however, is more fortunate. It won't be issuing any equity and has secured full debt funding for its proposed purchase of 1 George Street; and even then, its gearing will rise to only about 40 per cent from 27 per cent now.

However, CapitaLand shareholders will not get to vote on the sale of 1 George Street to CCT because the size of the transaction does not cross any of the thresholds that would trigger a mandatory shareholder vote. Put simply, although the transaction is big, it's small relative to CapitaLand's size.

Some parties are complaining that CapitaLand should have conducted an open competition to ensure that it obtained the highest price for the award-winning property.

CapitaLand may have gotten more than the $1.165 billion or $2,600 per square foot (psf) of net lettable area that it will get from CCT. A competition would have been more transparent, especially since the deal with CCT involves an income-support element. CapitaLand will top up any shortfall to ensure a minimum annual net property income of $49.5 million till 2013.

Bidding competition

Another reason CapitaLand should have had a bidding competition is because the headline price of $2,600 psf is lower than the $2,700 psf at which the asset was valued in a deal last August when CapitaLand bought the remaining half-share in the property - notwithstanding that confidence in the office market is weaker today and that the higher price earlier reflected control premium.

From the viewpoint of CapitaLand shareholders, the group could make a bigger profit from selling 1 George Street to external parties than the $47.1 million it expects to book from the proposed deal with CCT. (This amount is after accounting for the five-year income guarantee and CapitaLand's 30.5 per cent stake in CCT.)

Last month, when the deal was announced, CapitaLand Commercial CEO Wen Khai Meng said that the group has a 'certain responsibility to help our sponsored-Reit to grow'. CapitaLand is aiming for a balanced strategy on its office portfolio by allocating part of it for outright divestment to reap capital gains - as it has done for Temasek Tower, Hitachi Tower and Chevron House - and keeping a core portfolio of office properties for recurring income by divesting them to its sponsored Reits, which provide a tax-efficient structure for holding income-producing assets. Not only does CapitaLand retain a sponsor's stake in such Reits, it earns fees from managing the Reit - forming an integral part of its successful property fund management model. This strategy is a key attraction to CapitaLand as a stock.

Move is a departure

However, critics also note that CapitaLand's decision to offer 1 George Street directly to CCT marks a departure of what it has done for its divestments of other Singapore office assets in the past year or so. Temasek Tower, Hitachi Tower and Chevron House were sold through a competitive bidding process to external parties.

In the case of Temasek Tower which was sold in March 2007, CapitaLand Group president and CEO Liew Mun Leong subsequently revealed that CCT had made an offer for Temasek Tower, but its price was below the $1.04 billion offered by the eventual buyer, Macquarie Global Property Advisors Group. 'Its (CCT's offer) was below Macquarie's. We have no reason to give them. That shows we are very transparent. We are not inbreeding. Fair game,' Mr Liew had said.

Why was 1 George Street different? One point to note is that CapitaLand owned Temasek Tower, Hitachi Tower and Chevron House jointly with other parties, so it could not simply offer these office buildings to CCT on a platter; CCT would have had to compete with other bidders if it had wanted to buy these assets. 1 George Street is also a newer, higher-grade office block compared with the three sold earlier and hence a more desirable asset to CCT.

Perhaps CapitaLand may wish to make clear the criteria it uses in deciding when to offer assets directly to one of its sponsored Reits and when to have an open competition. Otherwise, some big-name overseas property investors may feel that there's a lack of transparency and a level playing field.

Of course, one could also argue that such investors may have to accept that Reits will always get the first bite when it comes to its sponsor's assets. After all, that's what it means to have a long-term sponsor committed to ensuring the Reit's growth.