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What Investors Should Know About CapitaLand Mall Trust’s Latest Acquisition Proposal

CapitaLand Mall Trust  (SGX: C38U) owns 30% of the Westgate shopping mall in Jurong East. Recently, the real estate investment trust proposed to acquire the remaining 70% stake. Here are some of the key details to know about the acquisition proposal.

Property details

Westgate sits on approximately 195,000 square feet of land, with a net lettable area of 410,825 square feet. The property performed well in the first half of 2018, with higher tenant sales compared to a year ago. The property is valued at S$1.127.5 million, which translates to about S$2,744 per square foot.

CapitaLand Mall Trust agreed to purchase Westage based on a value of S$1,128 million. Based on this price, the property has an annualised net property yield of 4.4%.

Source: Author’s compilation of data from CapitaLand Mall Trust Presentation on Acquisition of 70% Stake in Westgate

Method of financing

The total cash outlay for the acquisition is S$405.6 million, with S$7.9 million paid in units to the REIT manager. CapitaLand Mall Trust said that the cash outlay will be financed through a mix of debt and equity. Depending on the debt-to-equity ratio of the cash outlay, the gearing and impact on distributable income will change.

The graph below illustrates the impact on the trust’s gearing depending on the loan-to-value ratio.

Source: Capitaland Mall Trust Presentation on Proposed Acquisition of the Balance 70.0% of the Units in Infinity Mall Trust Which Holds Westgate

As you can see, if the acquisition is fully funded by debt, the gearing of the trust will rise to 36.0%. The trust will need to balance the use of debt versus the impact on its gearing ratio.

Management reasons for proposed acquisition

The management has cited a few reasons why they want to purchase the remaining stake in Westgate.

1. Westgate is strategically located in the Jurong Lake District which is Singapore’s planned second central business district (CDB).

2. CapitaLand Mall Trust sold Sembawang Shopping Centre in April 2018. As it stands, Westgate’s property yield is also higher than Sembawang Shopping Centre’s exit yield. The shift of capital will enable CapitaLand Mall Trust to realise higher yield on its capital.

3. Westgate is reasonably priced. The agreed value is in the mid-point of two independent valuations and within valuations of comparable malls and recent transactions. The chart below shows Westgate valuation in comparison with other malls in Singapore.

Source: Capitaland Mall Trust Presentation on Proposed Acquisition of the Balance 70.0% of the Units in Infinity Mall Trust Which Holds Westgate

4. Westgate will enhance its portfolio resilience and diversification. The acquisition will increase portfolio to necessity shopping segment from 79.1% to 80.3% and reduce the reliance on any single shopping mall in its portfolio

DPU and how it will affect unitholders

The final distribution per unit impact will depend on the interest rate secured on the loans and the final decisions on the financing method.

Source: Capitaland Mall Trust Presentation on Proposed Acquisition of the Balance 70.0% of the Units in Infinity Mall Trust Which Holds Westgate

The illustration above shows the possible outcomes that the Westgate acquisition will have on the REIT’s DPU. We can see that depending on the loan-to-value ratios, the impact on DPU could either remain unchanged (LTV 70% with loan interest at 3.5%) or increase by 1.5% (Loan-to-value 100% at interest rate of 3.25%).

The Foolish bottom line

The acquisition looks reasonable, in my view.

While Westgate may not be the most high-yielding asset in Singapore, the property’s location at the growing Jurong district could be an important factor to its long-term growth. If CapitaLand Mall Trust decides to fully-fund the acquisition using only debt, the REIT’s gearing ratio will be 36%, which is well below the 45% regulatory limit. Investors should look out for more updates on details of the financing method to get a clearer picture of how it will affect DPU going forward.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended units in CapitaLand Mall Trust. Motley Fool Singapore contributor Jeremy Chia does not own shares in any company mentioned.