CapitaLand to sell its holdings in three China shopping malls

Singapore

CAPITALAND will sell all its holdings in three shopping malls in China for 2.96 billion yuan (S$589.2 million) to CapitaLand Retail China Trust (CRCT), the two mainboard-listed companies announced in bourse filings on Tuesday morning.

A CapitaLand subsidiary and three associated companies entered into a conditional agreement with CRCT to divest their interests in the three companies that hold the three malls - CapitaMall Xuefu and CapitaMall Aidemengdun in Harbin in the country's north-east, and CapitaMall Yuhuating in Changsha in Hunan province.

The sale will generate proceeds of S$239.9 million and a net gain of S$37.6 million for CapitaLand, which is CRCT's sponsor.

Meanwhile, to acquire the three companies, CRCT will spend around S$505.4 million, subject to post-completion adjustments.

The China-focused real estate investment trust (Reit) will finance the proposed transactions with a combination of debt and equity, with an objective to achieve accretion.

It will decide the financing details later, but is likely to maintain its gearing ratio at around 35 per cent or to raise it to at most 38 per cent, said Tan Tze Wooi, chief executive officer of the Reit's manager, at a media and analyst briefing on Tuesday.

If CRCT taps debt financing, which may include a small portion of onshore yuan-denominated borrowings, it intends to keep its overall cost of borrowing at between 2.9 and 3 per cent, Mr Tan said.

In support of CRCT, CapitaLand will take up its pro-rata entitlement if equity fundraising is included in the funding of the acquisition.

CapitaLand owns 38.04 per cent of CRCT's units. This includes its indirect interests in CapitaLand Mall Trust, which owns 12.29 per cent of CRCT.

The transactions, conditional upon CRCT unitholders' approval, are expected to be completed in the third quarter of 2019.

The properties' total agreed value of 2.96 billion yuan represents a discount of 1.3 per cent to Cushman & Wakefield's independent valuation of three billion yuan, and a 0.2 per cent discount to JLL's independent valuation of 2.967 billion yuan.

If acquired, the malls will give an implied net property income (NPI) yield of 6 per cent, higher than CRCT's existing portfolio NPI yield of 5.7 per cent.

The acquisition is also expected to increase the Reit's distribution per unit, Mr Tan said.

CapitaLand will continue to manage the three malls after the sale.

Lucas Loh, president and chief executive of China in the CapitaLand Group, said: "Asset recycling is a key part of CapitaLand's strategy to enhance returns and rejuvenate our portfolio."

The three multi-tenanted malls will boost the number of leases in CRCT's portfolio by 52 per cent.

At Tuesday's briefing, Mr Tan gave a rental reversion outlook of 5 to 6 per cent for the malls.

The acquisition will increase the contribution of multi-tenanted malls to CRCT's portfolio gross revenue by 1.8 per cent to 93.5 per cent, while the maximum gross revenue contribution by the top two properties in CRCT's portfolio will decrease from 44.9 per cent to 36.0 per cent on a pro forma basis.

With a total gross floor area (GFA) of 248,282 sq m, the malls will expand CRCT's portfolio GFA by almost a third (30.7 per cent). Their average occupancy is 99 per cent.

Between 2016 and 2018, CapitaMall Xuefu, CapitaMall Aidemengdun and CapitaMall Yuhuating registered a compound annual growth rate (CAGR) of 6.5 per cent, 8.7 per cent and 6.3 per cent in tenants' sales respectively.

The acquisition will enlarge CRCT's footprint in China from eight cities to 10, and give it exposure to two rising provincial capital cities, Harbin and Changsha.

Post-acquisition, its enlarged portfolio will comprise 14 shopping malls. Its portfolio size will grow by 18.6 per cent to S$3.8 billion; its NPI will gain 22.8 per cent to 959.3 million yuan on a pro forma basis.

There will also be significant scope for repositioning and asset enhancement in the next few years as anchor leases reach expiry at the three malls, said Mr Tan.

Shares of CapitaLand closed up 10 Singapore cents at S$3.41 on Tuesday; units of CRCT were down three cents at S$1.53.