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CapitaLand Retail China Trust’s Latest Acquisition In China: Set For Growth

Earlier today, CapitaLand Retail China Trust (SGX: AU8U) announced a new acquisition that could see the REIT increase the value of its portfolio by 14%.

The acquisition target in question is Galleria, a retail mall in Chengdu, China. The total cost of the acquisition is expected to be around RMB1.57 billion, which works out to around S$314 million.

Galleria is a six-storey shopping mall located in the Gaoxin District of Chengdu city. The mall has a gross floor area of 91,816 square metres and is valued at RMB1.52 billion. The mall also has an occupancy rate of 100% at the moment. For perspective, CapitaLand Retail China Trust reported a total portfolio value of RMB11.05 billion as of 30 June 2016, along with a portfolio occupancy rate of 94.9%.

Chengdu is one of the largest cities in Western China, with a population of more than 15 million. Galleria will be CapitaLand Retail China Trust’s first mall in Chengdu.

The REIT believes that the acquisition would help improve its performance. It is planning to fund 90% of the acquisition through bank loans and the remaining 10% through its internal cash holdings.

By the REIT’s calculations, this funding structure would increase its aggregate leverage ratio from 29% to 37%. As a reminder, Singapore has a 45% regulatory gearing limit for REITs. CapitaLand Retail China Trust has S$114 million in cash, as of 30 June 2016.

As mentioned, the REIT expects the purchase to boost its overall portfolio size by 14% to RMB12.55 billion. It is also expected to be accretive to the REIT’s distribution per unit (DPU). Based on CapitaLand Retail China Trust’s proforma calculations (assuming the acquisition was completed at the start of 2015), the REIT’s DPU for 2015 would improve by 3.2% from S$0.106 to S$0.1094.

Moreover, CapitaLand Retail China Trust believes that it can improve Galleria’s margins with better management efficiency and an increase in rent. 67% of the mall’s leases are expiring within the next three years, which opens up the opportunity for rental growth.

All told, Galleria seems to be a great addition to CapitaLand Retail China Trust’s portfolio, despite the increase in leverage. CapitaLand Retail China Trust is currently trading at 1.0 times its book value and offers a trailing 6.6% dividend yield. Unitholders’ approval is not required for the Galleria acquisition, according to the REIT’s documents on the deal.

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Editor's note: This article had previously incorrectly stated that CapitaLand Retail China Trust owns five malls in Chengdu excluding Galleria; it is actually CapitaLand Retail China Trust's sponsor, CapitaLand, that owns five malls in Chengdu. The error has been corrected. The Motley Fool deeply regrets the error. 

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 shares in any companies mentioned.