The mall will be bought from an incubator fund owned by CapitaLand, which is also the main sponsor of CapitaRetail, and will be the trustÆs first acquisition since its IPO in November 2006.
The timing of the fixed-price deal û the S$185 million institutional portion was done on Friday, followed by a S$3 million retail offering on Saturday û raised a few eyebrows among market watchers. Not only are the equity markets extremely volatile and jittery at the moment, but CapitaRetail is also trading at its lowest levels since its IPO and has lost 93% of its market capitalisation since early October.
According to sources, however, the China-focused real estate investment trust (Reit) was in a bit of a conundrum since the shareholder approval for the fund raising was about to expire at the end of this month. The placement has also been acting as an overhang on the unit price since the acquisition was first announced back in September, which has resulted in CapitaRetail becoming an underperformer among the Singapore-listed Reits.
ôThe issue was very well flagged and, to a large extent, people have just been waiting for it to happen,ö one source notes. ôIn many ways, doing a deal in this kind of market, even though it is challenging, allows the Reit to get on with business and gives the management one less thing to worry about.ö
CapitaRetail did also have a couple of good sessions on Wednesday and Thursday last week after the surprise 75bp rate cut by the US Federal Reserve sparked a turnaround in Asian equity markets in general. The recovery pushed CapitaRetailÆs unit price 7.1% above last TuesdayÆs low of S$1.41. However, the Thursday close of S$1.51 was still below the closing level from last Monday.
The Reit was suspended from trading on Friday to carry out the placement.
In a direct response to the choppy markets, however, the company decided to buy only the completed first phase of the Xizhimen shopping mall, while initially it was planning to also buy the second phase (an extension of the basement) which is still under development. This meant that its equity financing needs shrunk from about S$280 million ($197 million) to S$188 million, making it a slightly easier sell. The total cost of the phase one acquisition is S$341 million, including a S$3.3 million acquisition fee to CapitaRetailÆs management company that will be paid in units. The balance with be covered by a S$100 million bank loan and S$49.7 million of internal resources.
Because it is now buying only the portion of the mall that is already providing a steady cash flow, the acquisition will be more dividend accretive than if it had also bought the assets that are currently generating no income. According to the same source, this ought to be viewed as positive among investors since ôbeing able to demonstrate that you can do accretive transactions is the bread and butter of a Reit.ö
CapitaRetailÆs two sponsors, CapitaLand and CapitaMall Trust, also helped to carry the deal by buying S$74 million worth of units, or 39.4% of the total offering, to avoid any dilution of their existing investments, CapitaRetail said in a statement. And according to sources, several of its other unitholders chose to follow the sponsorsÆ example which resulted in about three-quarters of the institutional placement being bought by existing unitholders.
Even so, to get a deal done in the current market environment at all is no small feat, as clearly shown by the fact that at least five of the six initial public offerings scheduled to price in Asia last week were withdrawn. As of last night there was still no word on the sixth deal, but given that that particular one had been due to price on Thursday it is highly likely that it too will be pulled.
CapitaRetailÆs placement also marks the first time this year that a company have raised new capital from follow-on equity offering, since the deals that took place before the markets started tumbling were all sell-downs by existing shareholders. The fact that no other company has approached the equity capital markets is not exactly strange, however, given the sell-off in share prices. Despite the three-day rally at the end of last week all 17 stock markets (of size) in Asia Pacific were trading below their 2007 close as of last Friday. The Ho Chi Minh Stock Index is the worst performer with a 16.3% drop, but Tokyo, Hong Kong, Shanghai, Taiwan, Korea, India, Thailand and the Philippines have all lost more that 9% this year. Singapore is off 8.8%.
CapitaRetail sold a total of 138.2 million units, of which 136 million went to institutional investors. The price was set at S$1.36 per unit, which represents a 9.9% discount to ThursdayÆs close and a 9.5% discount to the volume-weighted average price on that same day. It is also 3.5% below the lowest close since the IPO.
However, the units sold in the placement do not give the investors any right to the dividend that the company plans to pay for the period from July 1, 2007 to February 4, 2008, which is estimated to be between 4 and 4.06 Singapore cents per unit. When you take that into account, the discount falls to about 7.5%.
In the statement, the company said unitholders can expect a dividend of 6.67 Singapore cents per unit for the fiscal year 2008, which is 4.1% more than the dividend per unit (of 6.41 cents) that was forecast based on the size of CapitaRetailÆs portfolio before the latest acquisition. CapitaRetailÆs management team also envisages lifting the current occupancy rate to 100% by 2009 from 88.7% at present, which would boost the net property income yield to 6.4% in 2009 from 5.7% in 2008.
The institutional offering was over-subscribed within 30 minutes of its official launch at 2.30pm Singapore time and closed before 3pm, according to the company statement. Citi, DBS Bank and JPMorgan were the joint bookrunners for the institutional placement, and DBS also arranged the retail offering which was done on a ôfirst-come, first-servedö basis. Citi is a newcomer to the group, being the only one of the three bank that didnÆt also act as a bookrunner on the IPO. China International Capital Corporation and UBS that were both on the IPO did not play a role in the follow-on.
Not surprisingly, most of the non-existing unitholders who bought into the deal were long-only type funds, although a few momentum players such as hedge funds were said to have participated. Including existing unitholders, the deal attracted more than 50 investors.
The latest acquisition will leave CapitaRetail with a portfolio of eight Chinese retail malls, valued at approximately S$1.1 billion. Lim Beng Chee, who is CEO of the management company that runs CapitaRetail, said in a written statement that the company is positive that it will achieve its target asset size of S$3 billion by the end of 2009. However, this acquisition will increase the ReitÆs gearing ratio to 31.6% from 29.7%, which will leave an additional debt capacity of only S$36.9 million before it hits the allowed 35% limit. This suggests that a large portion of any future acquisitions will have to be funded by equity.
The Xizhimen mall is part of the BeijingÆs Xihuan Plaza complex, which also includes three office towers. It has seven stories of retail space and attracts about 300,000 shoppers on an average weekday and twice that on the weekend. As of September last year, it was valued at about Rmb1.7 billion (S$340 million) by two separate independent valuers.
CapitaRetail has an option to buy phase two of the mall, which will connect it with two adjacent underground and railway stations, when it has been completed, subject to certain conditions.
Despite the sharp decline over the past four months, CapitaRetail is still trading 34% above its IPO price of S$1.13.