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Does CapitaLand Mall Trust’s Westgate Acquisition Make Sense For Its Investors?

What Happened:

On 27 August 2018, CapitaLand Mall Trust (SGX:C38U) announced that it was looking to take full ownership of the Westgate shopping mall. Prior to the announcement, CapitaLand Mall Trust already had a 30% stake in Westgate. The rest of the mall is owned by the REIT’s parent, CapitaLand Limited  (SGX:C31).

Then, on 26 September 2018, CapitaLand Mall Trust released more details about the announcement and also set a date for an extraordinary general meeting (EGM) for unitholders to vote on the acquisition. The EGM is scheduled to take place at 10am on 25 October 2018. If unitholders give the thumbs up, the deal is expected to be completed on 1 November 2018.

So What:

There are a few important things to know about the acquisition. Let’s start with CapitaLand Mall Trust’s reasons for wanting to fully own Westgate:

1. CapitaLand Mall Trust will take a full stake in a mall positioned to benefit from the development of the Jurong Lake District (JLD), as opposed to a partial exposure previously. The JLD is expected to be Singapore’s “second CDB”, with a potential of 20,000 extra homes and 10,000 new jobs. At the same time, the nearby Tengah New Town is poised to accommodate 42,000 new homes when fully developed.  

2. The acquisition allows the REIT to redeploy the proceeds from its sale of Sembawang Shopping Centre (see here for details) to a mall which has greater growth potential.

3. The valuation of Westgate on a per NLA basis (there will be more details on the valuation later) is at the lower end of the range when compared to other malls that are located at transport hubs with an MRT station and bus interchange.

4. Jurong East MRT, which is connected to Westgate, will also be one of the few transport hubs in Singapore to have three MRT lines running through it in the future, including the future Jurong Region line. The mall is also connected to Ng Teng Fong Hospital and a bus interchange, and attracts four million shoppers per month.

5. Full control of Westgate enhances the REIT’s portfolio by increasing the percentage of necessity shopping to 80.3% (up from 79.1% previously).

Here are the financial details of the acquisition:

1. Westgate is valued at S$1.13 billion which works out to S$2,746 per square foot (psf) of net lettable area and a property yield of 4.3%. For context, Jurong Point was acquired in April 2017 at around S$3,343 per square foot, and a net yield of 4.2%.

2. CapitaLand Mall Trust is looking at a total outlay of S$805.5 million, with a breakdown shown below:

Source: CapitaLand Mall Trust presentation

Let’s now move on to how the acquisition may affect CapitaLand Mall Trust’s financials. There are two aspects here: First, there’s the deal’s effect on the REIT’s aggregate leverage, and second, there are the potential effects on the REIT’s distribution per unit (DPU).

On the former, the REIT’s aggregate leverage is expected to increase, although the magnitude will depend on how the cash outlay portion of the deal – S$405.6 million – is financed. The table immediately below runs through a few scenarios. As you can see, depending on how much debt is used, CapitaLand Mall Trust’s aggregate leverage is expected to end up between 34.0% and 36.0%, up from 31.5% as of 30 June 2018.

Source: CapitaLand Mall Trust presentation

As for the REIT’s DPU, there are a range of potential outcomes depending on how the cash portion of the acquisition is financed and the interest rate on the debt that is being used. The outcomes are illustrated in the chart just below:

Source: CapitaLand Mall Trust presentation

There are a few points to note about the Westgate deal’s effects on CapitaLand Mall Trust’s financials:

  1. The method of financing is still not finalised. The final decision regarding the funding mix for the cash outlay of S$405.6 million will be made by CapitaLand Mall Trust’s Manager at an “appropriate time taking into account the then prevailing market conditions, interest rate environment, and availability of alternative funding options.” So, things could change.
  2. I think that CapitaLand Mall Trust’s financial health will not be stressed if I assume that the LTV (loan-to-value) of the Westgate deal does not fall below 70% and that the REIT can borrow for the acquisition at an interest rate of less than 3.5%. This is because the assumptions lead to (a) the REIT having an aggregate leverage of 36% at the maximum, which is still a reasonable distance from the regulatory leverage ceiling of 45%, and (b) the REIT’s DPU could either remain unchanged or be increased by up to 1.5%.

What Next:

Given what I know at the moment, I think the Westgate acquisition is acceptable. My assessment could change if the LTV for the deal falls drastically below 70%, and/or if the interest rate on the REIT’s debt for the purchase is significantly higher than 3.5%.

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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 Chong Ser Jing owns shares in CapitaLand. The Motley Fool Singapore does not own shares in any companies mentioned.