CapitaLand Ascott Trust - Acquisition of lyf Funan reflects active capital recycling

What happened? 

Singapore REITs have been on a buying spree recently.

Earlier, we saw CapitaLand Integrated Commercial Trust (CICT) acquiring a stake in ION Orchard. 

More recently, CapitaLand Ascott Trust (CLAS) has announced the acquisition of lyf Funan.

An Extraordinary General Meeting (EGM) relating to the transaction will be held on 18 November (Monday).

If you are a CapitaLand Ascott Trust holder, read on to find out more about the transaction.

CapitaLand Ascott Trust to acquire lyf Funan

CapitaLand Ascott Trust (CLAS) has entered into an agreement with Ascott Serviced Residence Global Fund (ASRGF) to acquire lyf Funan Singapore at an agreed property value of S$263 mn. 

CLAS’ sponsor, The Ascott Limited (Ascott), holds a 50% stake in ASRGF. 

Upon completion of the proposed acquisition, which is expected in 4Q 2204, CLAS will enter into a master lease with Ascott for lyf Funan Singapore. 

The master lease will be for an initial term of 20 years, and such term is renewable for a further five-year period upon mutual agreement by the parties. 

The acquisition is line with CLAS’ portfolio reconstitution strategy, and this comes on the back of the proceeds from the divestment of Citadines Mount Sophia Singapore which was completed in March 2024. 

The purchase consideration of S$146.4 mn will thus be largely funded by the proceeds from the recent divestment. 

The REIT Manager has commissioned an independent valuer, HVS, to value the Property as at 30 June 2024 and HVS has valued the property at S$265 mn. 

The REIT Trustee has commissioned another independent valuer, Colliers, and Colliers has valued the Property at S$271.0 mn. The agreed property value of S$263 mn is thus below both the valuations conducted by both independent valuers. 

After completion, CLAS will have five properties in Singapore, increasing the proportion of CLAS’ total assets in the country from 16% to 19%. 

CLAS remains geographically diversified, with each of its key markets currently comprising no more than 20% of its total assets.

What you need to know about lyf Funan

lyf Funan Singapore is the flagship property of The Ascott Limited’s lyf (or ‘live your freedom’) brand. 

lyf Funan Singapore is located in the heart of Singapore’s Civic District. It is in proximity to an array of business and entertainment attractions, and surrounded by various iconic landmarks, including heritage sites and art galleries.

lyf Funan Singapore sits within Funan, an integrated development which reopened in 2019 after a redevelopment. 

Apart from lyf Funan Singapore, the complex also comprises an experiential retail hub and two office blocks. 

The retail component offers lyf Funan Singapore’s guests a plethora of shopping, dining and entertainment options while the office component drives corporate bookings to the property.

As lyf Funan has a hotel license, it is able to welcome both long-stay and short-stay guests, and management expects the growth in demand in the Singapore hospitality market to outpace supply as global flight connectivity and capacity increase.

lyf Funan Singapore has achieved a strong average occupancy rate of more than 80%. Its performance in the first half of 2024 has also surpassed that of comparable properties in its sub-market.

Acquisition rationale of lyf Funan

The rationale for the acquisition is detailed by management as follows: 

1. Enhancing DPS through portfolio reconstitution, as CLAS will be reinvesting the proceeds from the Citadines Mount Sophia Divestment at higher yields
2. Increasing exposure to a key gateway city with favourable demand-supply dynamics, as new room supply in Singapore is expected to be muted beyond 2024, at a compound annual growth rate (“CAGR”) of 1.8%, lower than the CAGR of 3.3% from 2015 to 2019
3. Prime asset in an attractive location, given lyf Funan’s location in the heart of Singapore’s Civic District
4. Flagship lyf property with the ability to capture a wide range of demand, operating on a flex-hybrid hotel-in-residence model

How will the acquisition of lyf Funan impact distributions? 

The total acquisition outlay is approximately S$265.1 mn, comprising:

1. the estimated Purchase Consideration of S$146.4 million
2. the Loan Repayment Amount of S$113.0 mn
3. an acquisition fee payable in Stapled Securities to the REIT Manager of approximately S$2.6 mn
4. the estimated professional and other fees and expenses incurred or to be incurred by CLAS of approximately S$3.1 mn

The purchase consideration for lyf Funan of S$146.4 mn will be largely funded by the proceeds from the divestment of Citadines Mount Sophia Singapore, which was completed in March 2024. 

Based on CLAS' aggregate leverage as at 30 June 2024 and taking into account the proposed acquisition, CLAS’ aggregate leverage is expected to be about 39.1%.

For acquisitions conducted by REITs, being DPU/DPS accretive is one of the key factors we look out for to assess whether the proposed acquisition is beneficial to unitholders/securityholders.

In this case, CLAS’ total distribution is expected to increase by S$3.5 mn, which translates to a DPS accretion of 1.5% on a FY 2023 pro forma basis.

What should CapitaLand Ascott Trust investors do?

As the acquisition is to be financed by proceeds from past divestments and not via an equity fundraising exercise, securityholders are not required to subscribe for additional units of CLAS.

However, given that lyf Funan is being acquired from Ascott Serviced Residence Global Fund, which is indirectly 50.0% owned by The Ascott Limited, a wholly owned subsidiary of CLI, and that CLAS will subsequently enter into a master lease with Ascott for lyf Funan, these will constitute an interested person and interested party transaction. 

Securityholders’ approval at an Extraordinary General Meeting scheduled on 18 November 2024 are thus required for: 

• The proposed acquisition of lyf Funan
• Entry into the master lease with Ascott

What would Beansprout do?

There are several reasons to be positive on CLAS' acquisition of lyf Funan. 

CLAS has been proactively engaged in capital recycling and reconstituting its portfolio, so as to enhance the quality and performance of its properties and ultimately, of the REIT. 

In our view, the divestment of Citadines Mount Sophia Singapore at a yield of 3.2%, booking a healthy divestment gain of ~S$14.6 mn and subsequently investment of the proceeds to a newer and arguably higher quality asset, lyf Funan Singapore at a higher yield of 4.7% is a prime example of portfolio reconstitution done right. 

Over the long term, portfolio reconstitution is expected to create greater value for securityholders. 

The transactions are also 1.5% DPS-accretive, providing CLAS securityholders with growth in distributions. 

CLAS is expected to offer a dividend yield of 6.8%, above its historical average. 

CLAS is currently trading at a price-to-book valuation of 0.77x, close to its historical average. 

If you are interested to learn more about the outlook of Singapore REITs, join us for our upcoming free webinar on 26 November, where we will discuss what will drive the share prices of Singapore REITs in 2025. Register for free here. 

Join us at "SGX Discovery Series with Beansprout: Navigating the landscape of European S-REITs" on 19 November, where we’ll dive into opportunities in the sector. This event features exclusive insights from senior executives of leading European REITs, including Cromwell European REIT, Elite UK REIT, and IREIT Global. Register for free here. 

Related Links:

• CapitaLand Ascott Trust share price history and share price target
• CapitaLand Ascott Trust dividend history and dividend forecast

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