CRCT's Rock Square deal to drive more acquisitions soon

It can also afford another acquisition worth $250m in 2018 after selling CapitaMall Anzhen.

CapitaLand Retail China Trust's (CRCT) acquisition of Rock Square in Guangzhou for $688.9m may have a lower initial yield, but it is an indicator of the company's growth, DBS Equity Research said.

According to an analysis, the initial yield is believed to be about 4%, lower than CapitaMall Anzhen's exit yield of around 6%.

DBS analyst Derek Tan said, "However, we believe Rock Square has much greater growth potential because 1) it is a newer property that started operations only in 2013, versus 2005 for Anzhen; and 2) it is a multi-tenanted property with around 60% of leases due in the next three years; this gives rental upside potential as well as flexibility to alter tenant mix optimise efficiency."

CRCT’s gearing is around 38% after the Rock Square acquisition and could be further reduced to 34% if proceeds from the divestment of CapitaMall Anzhen is used to repay debt.

This could mean a debt headroom of $550m, which allows CRCT to acquire more properties.

"We believe the divestment of Anzhen signals a shift in the Manager’s focus from stability to growth generated from more actively managed assets; the acquisition of Rock Square is a confirmation of such a move, and more acquisitions could be on the radar," Tan added.

Here's more from DBS Equity Research:

The most noteworthy point we believe was that CRCT received c.$180m in cash proceeds from the divestment of Anzhen.

While this sum was not used to pare down debt, only $100m will be utilised from its cash balance to fund the acquisition of Rock Square.

This leaves a total debt headroom of over $550m post the acquisition, which provides ample financial flexibility for further acquisitions in the near term.

This reiterates CRCT’s repositioning from stability to growth. As such, we have priced in another acquisition of $250m from the start of FY18.