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CapitaLand Limited’s Selling Bedok Mall to CapitaLand Mall Trust: What Does This Mean for Investors of Both?

CapitaLand Limited (SGX: C31) announced yesterday evening that it’s looking to sell one of its retail malls, the Bedok Mall, to CapitaLand Mall Trust (SGX: C38U) for a total sum of S$783.1 million.

With CapitaLand being the manager, part-owner, and sponsor of CapitaLand Mall Trust, what might this transaction mean for both entities?

Let’s start with CapitaLand first – there are obvious advantages for the company to sell Bedok Mall. The sale can help monetise Bedok Mall for CapitaLand and free up capital which can then be reinvested into other areas of the company’s business.

The only issue here is that the weak residential real estate market in both Singapore and China (the two countries are the main geographical markets for the company’s property development arm) might raise some concerns as to whether CapitaLand can generate a good return on those reinvested funds if they’re plonked into the development business.

Moving on to CapitaLand Mall Trust, there are benefits for it too. The real estate investment trust is already an owner of many heartland malls in Singapore such as Junction 8 in Bishan, Tampines Mall in Tampines, and JCube in Jurong; the addition of Bedok Mall seems like a good fit for the REIT’s existing portfolio.

Bedok Mall, which is valued at S$780 million, currently serves Singapore’s largest estate by population (there are 300,000 residents in Bedok), and there’s another added bonus in that the proportion of residents in Bedok that belong to a high income bracket is actually higher than the national average. These traits can be signs that there’s potential for growing consumer spending in the estate.

CapitaLand Mall Trust is looking at a total outlay of S$795 million for Bedok Mall after taking into consideration all relevant expenses. To pay for the mall, CapitaLand Mall Trust will be issuing new units of itself in addition to utilising bank borrowings. Here’s a breakdown of how the acquisition cost will look like for CapitaLand Mall Trust:

  • The REIT is looking to issue 72 million new units of itself to CapitaLand. The final price of the new units to be issued will be determined by taking the “10-day volume weighted average price (VWAP) immediately preceding the date of completion [of the deal.]”
  • Based on the illustrative example of a VWAP of S$2.15, S$154.8 million of the S$795 million will be paid for using new units of CapitaLand Mall Trust.
  • Acquisition fees of S$7.8 million will also be paid for using new units of the REIT.
  • Whatever’s remaining will be paid for using bank borrowings. In the case of having a VWAP of S$2.15 for the 72 million new units to be issued, CapitaLand Mall Trust will have to use S$632.4 million in bank borrowings for the acquisition.

Based on the numbers given above, the acquisition of Bedok Mall will cause the aggregate leverage of the REIT to increase from 33.8% to 37.2%.

Although no estimates are currently given on how the purchase will affect the distribution per unit (DPU) for CapitaLand Mall Trust’s unitholders, the current property yield of Bedok Mall is around 5.1%, which is in line with the current distribution yield of CapitaLand Mall Trust. It might thus be reasonable to assume that the acquisition will have limited impact on the distribution per units for existing unitholders.

Foolish Summary

The sale of Bedok Mall from CapitaLand to CapitaLand Mall Trust seems like a typical transaction between a sponsor and its REIT. Bedok Mall does fit nicely into the overall portfolio of CapitaLand Mall Trust and it allows CapitaLand to free up some funds for it to reinvest into its business.

But while the deal does appear to be a win-win, the reasonable assumption that the acquisition does not add much to the distribution yield for existing minority unitholders of CapitaLand Mall Trust might be a downer for them.

This transaction will be subject to the approval of CapitaLand Mall Trust’s unitholders; an extraordinary general meeting will be held in due course to obtain the votes on the matter.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim does not own any companies mentioned above.