Flashnote: Capitaland Mall Trust Westgate Acquisition Update & 3Q Results

It was a busy news day for Capitaland Mall Trust, with the REIT reporting their latest quarter of results and launching a private placement to raise funds for the Westgate Acquisition. So I thought I’ll give a quick review of each piece of news.

Check the 3Q results and Private placement announcements for more information.

Third Quarter Results

Capitaland Mall Trust posted a pretty decent set of results for the third quarter of 2018. Here are the highlights per the announcement:

Revenue and DPU

3Q DPU

3Q NPI

Source: Capitaland Mall Trust 3Q 2018 Results Announcement

DPU reached 2.92 cents in the quarter, up from 2.81 cents in 2Q 2018, partly due to $4 million released to unitholders which was retained from 1H 2018 performance.

Financial Indicators

Financial Indicators

Financial indicators remain healthy with relatively low leverage and good interest coverage. Leverage is likely to rise to 34% as explained later.

Rental Reversions

3Q Rental Reversions

Rental Reversions refers to the increase / decrease in rental rates once new leases are signed for the respective properties. Overall a slight positive of 0.6% positive rental reversion across the portfolio. Interesting to see the negative rental reversion and low retention rate at Westgate, a property they will be acquiring the remaining interest of really soon.

Overall an acceptable set of results and looking forward to the distribution receipt in November.

Westgate Acquisition Update and Private Placement

As predicted in my previous post on the acquisition, the acquisition will be funded by a mix of debt and equity – through a private placement. Based on the private placement details, it seems like they have gone for highest amount of equity modeled for in the EGM circular (70% LTV).

Funding details

Funding raised: At least $250 million with $25 million upsize option
New units: 122,011,000 units
Issue price: Between $2.049 and $2.097

Update @ 26 Oct: 134,089,000 units was ultimately issued at $2.07

Gearing Comparison

DPU Comparison

Source: Capitaland Mall Trust EGM Circular

Based on the above illustrations in the acquisition circular, the acquisition is yield accretive / neutral. However, do note that the illustrations were determined based on the unit price of $2, which is lower than the unit price range. This means that the acquisition is definitely yield accretive now as the REIT is issuing about 500k less units than illustrated. So that is definitely good news.

Update @ 26 Oct: The $25 million upsize option was exercised resulting in 11 million extra units being issued. This means that this private placement was ultimately slightly yield destructive, but it results in a slightly stronger balance sheet.

Advanced Distribution

As part of this private placement, an advanced distribution has be declared as well. It is currently guided to be 1.38 to 1.48 cents, so when added to the 2.92 cents declared for 3Q 2018, a Cumulative dividend of 4.30 to 4.40 cents is expected to be paid out.

Final Thoughts

I’ve been rather satisfied with my purchase in Capitaland Mall Trust since April and its good to see management making shareholder friendly acquisitions and funding decisions. Will look forward to seeing the rest of the reporting season play out for my other investments.

Happy Hunting,
KK

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Flash Note: Capitaland Mall Trust acquisition of remaining interest in Westgate

Today, Capitaland Mall Trust finally released more information on its proposed acquisition of Westgate as part of its EGM circular to unitholders. As a unitholder myself, I thought I’ll dive in, give my quick thoughts and speculate a bit.

The circular and presentation can be found here.

Overview

Capitaland Mall Trust is proposing to acquire the remaining 70% interest in Westgate that it doesn’t own from its sponsor, Capitaland. It will be holding an EGM on 10 am, 25th October 2018 to obtain unitholders’ approval to proceed with the acquisition.

Westgate.jpg

As most Singaporeans know, Westgate is a mall located next to Jurong East MRT and is part of a mixed use development of retail and office space. It is also located within the Jurong Lake District, the planned 2nd CBD in Singapore. As such, it is a fantastic property location wise with some growth potential as the Lake District develops and matures.

Financing Details

The main details that were revealed as part of this circular relates to potential funding structures and their potential impact on the key valuation metrics of the REIT. 3 potential models of funding was illustrated: 70% debt funded, 85% debt funded and 100% debt funded, with the balance funded by equity where necessary.

Gearing

Gearing Comparison

Source: Capitaland Mall Trust EGM Circular

As you can see here, the REIT has ability to fully fund the acquisition with debt without busting MAS gearing caps. Whether they choose to do so really depends on economic conditions at the time of fund raising.

Distribution per Unit

DPU Comparison

Source: Capitaland Mall Trust EGM Circular

A key assumption for this illustration is that equity is raised at $2 per unit, which is a 8.3% discount to today’s closing price of $2.18. Under the above conditions (No more than 30% of funding raised by equity and at $2 per unit), the acquisition is yield accretive. This is only true if management keeps the financing structure within these parameters.

Net asset value

NAV Comparison

Source: Capitaland Mall Trust EGM Circular

NAV post acquisition doesn’t change much. This means that the REIT is highly likely to be able to issue equity at a premium to book (based on illustrative price of $2 versus NAV of $1.93), which explains why the acquisition is able to be yield accretive at up to 70% LTV.

My Guess

Here we enter the realm of speculation, let’s assume the acquisition is approved at the EGM, which is highly likely given the merits of the deal.

First question: What would the final financing structure be?

Whether they ultimately choose to fund it entirely through debt or partially fund it with equity really depends on economic factors like interest rate and cost of equity. As the REIT is currently trading at a premium to NAV, cost of equity is low as it is able to issue equity at a premium to valuation. Coupled with the fact that the REIT potentially might need the debt headroom for other acquisitions or to complete the construction of Funan, it definitely makes sense for the REIT to issue equity.

Second question: Since equity is likely to be issued, will there be a rights issue? In order to answer that, let’s take a look at a hypothetical scenario – if it was a rights issue for 70% LTV scenario, what would be the likely structure of the deal?

Rights issue ratio.JPG

For convenience, I ignored the effects of the acquisition fee. I also included a “worst case” scenario where the Managers fund the acquisition at NAV.

A whopping 3.5 units per 100 shares! Given a rights issue / preferential offering is much more expensive to conduct as compared to a private placement, my money is on the REIT managers doing a private placement instead, should they choose to partially fund it through equity.

So my best guess is that the acquisition will be funded by a mix of debt and equity, while equity will most likely be raised via private placement. So don’t feel too compelled to raise cash to participate in a potential rights issue. Let’s see if I’m ultimately right 😛

Do you agree with my guess? Let me know your thoughts!

Happy Hunting,
KK

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