SINGAPORE (Dec 4): Phillip Capital is maintaining its “neutral” call on CapitaLand Retail China Trust (CRCT) with a target price of $1.66 on news it is acquiring a property in Guangzhou for RMB3.36 billion ($689 million).

See: CapitaLand and CRCT to jointly acquire shopping mall in Guangzhou for $689 mil

CRCT and sponsor CapitaLand have entered into a 51:49 joint venture for the acquisition of Rock Square, which will be funded 50% by debt, 28% by cash and 22% by private placement proceeds.

On Nov 29, CRCT said that the private placement was oversubscribed and it exercised an upsized option to issue a total of 64.4 million new units at $1.612 each new unit to raise $103.8 million.

The trust manager says that 98% or $101.7 million of the gross proceeds will fund the Rock Square acquisition while 2% or $2.1 million of the proceeds will be used to pay the fees and expenses for the placement.

See: CRCT raises $103.8 mil in oversubscribed placement for joint acquisition of Guangzhou mall

In a Monday report, analyst Dehong Tan says, “We estimate NPI yield on cost to be in the high 3+/4% region.”

This is higher than recent market transactions and is also in line with HK-listed Link REIT’s recent purchase of the Metropolitan Plaza about 3km away from Rock Square in April at about 4% NPI yield.

More importantly, Tan views the acquisition as accretive due to its optimal financing structure.

The trust recently divested CapitalMall Anzhen for $230 million. The recycled capital into Rock Square means that the trust is swapping a stable higher yield for greater capital appreciation potential in another Tier-1 city.

“Acquisition will grow pro forma FY16 DPU by 1.1%. The funding structure utilising 50% debt and 28% internal cash was able to result in a low overall cost of capital for the acquisition, which we estimate could be 2.5-3%,” says Tan.

Hence, despite the lower NPI yield than the overall portfolio NPI yield of about 5.3%, the high usage of cheaper funding sources of debt and internal cash resulted in an accretive acquisition.

“While the accretive acquisition lifted our FY18 DPU by 0.94%, we prefer to see a more sustainable pickup in rental reversions or more accretive acquisitions before relooking at our recommendation,” says Tan.

As at 11.32am, units in CRCT are trading at $1.60 or 17.2 times FY17 earnings with an NPI yield of 6.5%.