Rights issues to pad up CapitaLand, CMT war chests

Both issues offered at steep discounts; CapitaLand looking at acquisitions, CMT to pay off debt

Singapore’s biggest property developer CapitaLand and its listed retail trust CapitaMall Trust (CMT) yesterday announced two rights issues totalling some $3.07 billion.

CapitaLand said that it will raise $1.84 billion in a 1-for-2 rights issue to build up its war chest to $6 billion, from $4.2 billion now, as it remains on the lookout for acquisition opportunities in markets such as Singapore and China. The developer’s fourth-quarter net profit slumped 88 per cent.

And CMT, Singapore’s largest real estate investment trust which is 29.7 per cent owned by CapitaLand, will raise $1.23 billion in a 9-for-10 rights offer. It will use most of the proceeds to pay off $956.2 million of debt due this year.

Market rumour that CapitaLand was planning a rights issue first surfaced early last month, depressing the company’s shares.

CapitaLand is the second major Singapore company to raise money through a rights issue in recent months. In late December, DBS Group said that it planned to raise about $4 billion to bulk up its capital base. Both CapitaLand and DBS count Singapore investment company Temasek Holdings as their largest shareholder.

‘This year is turning out to be a race in raising funds through rights issues and has depressed CapitaLand’s shares for a while,’ Nicole Sze, a Singapore-based investment analyst at Bank Julius Baer & Co, told Bloomberg.

But while CapitaLand’s rights issue was expected, CMT’s announcement took some by surprise. Analysts were expecting it to just look for debt refinancing. Another one of CapitaLand’s Reits, CapitaCommercial Trust, recently said that it had refinanced at attractive rates.

Another element that caught most analysts by surprise was the steep discounts at which the rights issues are being done.

CapitaLand’s rights offer is priced at $1.30 a share, which represents a 45 per cent discount to its closing price of $2.36 a share last Friday, the last day that the stock was traded. The offer price is also at a 54 per cent discount to CapitaLand’s post-rights issue net tangible asset (NTA) of $2.80 per share.

Likewise, CMT is making its rights offer at 82 cents a unit – 43.4 per cent lower than last Friday’s closing price of $1.45 and also 50.3 per cent lower that CMT’s expected net asset value per unit once the rights issue is completed.

‘CapitaLand and CMT could be pricing the rights issues lower to entice their shareholders to take up their allotments in the current weak market,’ said one analyst.

Both the developer and its trust are expected to be in a better position to grow once the rights issues are completed.

CapitaLand said that the ‘pre-emptive’ rights issue will provide it with ‘greater financial capacity to pursue acquisitions and investment opportunities that may arise’.

‘We will also be well-positioned for any mergers and acquisitions opportunities that might arise,’ said CapitaLand chief executive Liew Mun Leong. ‘We have a number of proposals on the table that we are studying but we are not ready to make any announcements yet.’

He identified Singapore, China and Japan as attractive markets for acquisitions, and also said that CapitaLand is on the lookout for distressed assets.

CMT, on the other hand, will use the bulk of the proceeds to repay borrowings due this year, which total $956.2 million. The balance will be used to pay for asset enhancement initiatives as well as for general corporate and working capital purposes.

DMG & Partners Securities analyst Brandon Lee said that the rights issue puts CMT ‘in the clear when it comes to its debt’ – which means that CMT will not have to compete with other property trusts for financing in the tight credit environment.

Lim Beng Chee, chief executive of CMT’s manager, said that the trust chose to go with a rights issue rather than look for refinancing for its loans as it was looking at the ‘longer-term’. The rights issue is expected to provide the trust with greater financial flexibility for future opportunities, such as asset enhancement works at Jurong Entertainment Centre and the newly-acquired The Atrium@Orchard, he said.

Analysts also said that the trust will be better positioned to make acquisitions after the rights issue as its gearing is expected to fall from 43.2 per cent to 29.1 per cent. This will make it easier for CMT to raise money in future. CapitaLand similarly said that its net gearing will be reduced from 0.47 times now to 0.28 times after the rights issue. But the developer’s NTA per share will fall from $3.57 to $2.80.

CapitaLand has agreed to subscribe for up to 60 per cent of the total size of CMT’s rights issue, including its rights entitlement based on its current 29.7 per cent stake. If CapitaLand takes up 60 per cent of the rights issue, its stake in CMT will climb to 44.1 per cent. The developer said that it will not use any proceeds from its own rights issue to buy any units in CMT’s rights issue, and will instead use existing cash reserves.

CapitaLand also said that Temasek Holdings, which has a direct stake of 39.7 per cent in the company, will subscribe to all rights shares that it is entitled to.

Shares of both CapitaLand and CMT resume trading today.

CapitaLand to raise $1.84b, Q4 net falls 88%

CapitaLand, Southeast Asia’s biggest developer, posted an 88 per cent plunge in quarterly net profit and said it will raise S$1.84 billion (US$1.23 billion) via a 1-for-2 rights issue.

Separately, CapitaMall Trust , a shopping mall real estate investment trust (REIT) managed by CapitaLand, said it would raise S$1.23 billion via a 9-for-10 rights issue at S$0.82 a unit.

CapitaLand, 40 per cent-owned by Temasek Holdings, attributed its sharp fall in quarterly net profit, which was above analysts’ expectations, in part to weaker sales in China and Australia.

Looking ahead, CapitaLand said it was difficult to predict the length and severity of the global economic downturn.

But it added it was in a strong financial position ‘to take advantage of the many financial opportunities that are likely to present themselves in future.’

CapitaLand, which owns about 30 per cent of CapitaMall, said it would subscribe for up to 60 per cent of the REIT’s rights shares to support the issue.

‘The rights issue is pre-emptive to strategically enhance the group’s financial flexibility,’ CapitaLand CEO Liew Mun Leong said in a statement. ‘We will also be well-positioned for any mergers and acquisitions opportunities that might arise.’ The property giant did not say if Temasek had committed to support its rights issue.

CapitaLand, which has its main operations in Singapore, China and Australia, posted October-December net profit of S$78 million, down from S$675 million a year ago. The figure was above the S$18 million forecast by 16 analysts polled by Reuters.

Full-year net profit dropped 54 percent to S$1.26 billion, compared with a consensus forecast for S$1.36 billion. The reported earnings did not include unrealised fair value changes, CapitaLand said.

CapitaLand said it will offer shareholders the right to buy one rights share for every two existing shares held at S$1.30 a share, a 45 per cent discount to the firm’s last traded price.

CapitaMall’s rights units are priced at a 43 per cent discount to their last traded price.

CapitaLand brought forward its earnings announcement by one day and suspended trading in its shares on Monday. — REUTERS

CapitaMall Trust will pass tax rebates on to tenants

It will help tenants downsize their units, improve sales through marketing

CAPITAMALL Trust (CMT), which has pumped around $55 million into revamping Lot One Shoppers’ Mall at Choa Chu Kang, said yesterday that it will help its tenants cope with the economic slowdown through various ways.

‘We want the tenants to survive so that we can survive,’ president and CEO of CapitaLand Liew Mun Leong told the press. CapitaLand manages CMT through an indirect wholly owned subsidiary, CapitaMall Trust Management Limited (CMTML).

With the government giving out a 40 per cent property tax rebate for industrial and commercial properties this year in the Budget, CapitaLand has said that it will pass on rebates totalling $41.5 million to tenants in retail, commercial and industrial properties. This could translate to an estimated 4 per cent drop in rents, said Mr Liew.

Besides CapitaLand, other landlords such as Frasers Centrepoint Trust (FCT) have also said that they will pass on the benefits of the property tax rebate to their tenants.

But there is a fine balancing act between cutting costs for tenants and maintaining earnings. In the retail aspect, ‘the malls are invested by shareholders, the malls are also expected to have a return’, said Mr Liew.

So beyond dishing out rental rebates, CMT is monitoring retail sales and will help tenants in other ways, said the CEO of CMTML. Lim Beng Chee. Within the trust’s portfolio, discretionary spending on items such as telecommunication products and jewellery have fallen in 4Q 2008 compared with a year ago.

Tenants can consider downsizing or shifting to cheaper spots in malls, said Mr Lim. CMT will also help tenants improve sales through better marketing, said CapitaLand Retail’s deputy CEO, Simon Ho.

In Lot One for instance, comic book retailer Comics Connection has been saving $4,500 or more in rental every month since it moved into a smaller shop space located on a higher floor after the revamp.

The mall rejuvenation, which is almost complete, increased net lettable area by 6.6 per cent and also reconfigured several shop units to raise gross rent per month by 28.4 per cent. Monthly rents in the mall range from $5-$20 psf.

‘There is still a lot of scope for asset enhancement’ within the CMT portfolio and that will be the key strategy for growth in the next few years, said Mr Lim.

In last week’s Budget, the government also encouraged landlords to consider further rental adjustments and more flexible leasing and payment terms.

‘We are keeping a close tab on the situation and where necessary, will introduce appropriate measures in a timely manner to help needy tenants tide over their difficulties,’ FCT told BT.

Could be cheaper

• In line. 4Q08 results were in line with Street and our expectations. 4Q08 and full year DPU were 3.65cts and 14.29cts respectively. Full year gross revenue of S$510.9m was up 18.3% yoy mainly on contributions from Atrium@Orchard and Raffles City. Portfolio occupancy improved marginally to 99.7%, up from 99.6% in the last quarter.

• Cap rates, asset values up. As at 1 Dec 08, CMT saw a marginal 1.9% increase in its asset values across its portfolio over their last valuation on 1 Jun 08 despite moderate cap rates expansion by 15 to 25 bps. With this valuation, asset leverage remained unchanged at 42% from the last quarter.

• AEI updates. Sembawang Shopping Centre which had been closed since early 2007 for asset enhancement works opened on 22 Dec 08. NLA had increased by 32% to 128,241 sf; whilst average monthly rents increased 48.8% to S$7.41psf. Todate, 98% of the NLA has been committed. Separately, asset enhancement works at Lot One Shoppers’ Mall were also largely completed. NLA had increased 6.6% to 216,982sf whilst average monthly rents had increased 20.5% to S$12.10psf.

• The billion dollar headache…CMT has S$986m of debt due for refinancing this year. This is some 31% of its total debt of S$3.2bn. Cash and committed credit facilities are sufficient to pay off only S$110m or 11% of the debt due in 2009. Due to the large quantum of the debt and relatively high leverage of 42%, management is likely to have to resort to both recapitalisation and debt to complete the refinancing. We are of the view that, with no changes in regulatory policies, the management is not likely to reduce payout of dividends to repay debt as the total distributable income of S$238m is only 24% of 2009 debt.

• Maintain Underperform, lower target price of S$1.66 (from S$1.90). We further cut our estimates assuming a 10% drop in rents from Atrium@Orchard and lower growth rate of 2% from CRS and the subsidiary portfolio. Our DPU falls 13-16% over 09-10 to 13.12cts and 12.01cts respectively. We also introduce our FY11 DPU estimates. Although CMT’s price has declined 31% from its last peak of S$2.18 in Nov 08, leading P/BV to fall from 0.9x to the current 0.68x, investors could look to a lower entry point in view of potential recapitalisation and dilution. Maintain Underperform.

Still going strong

CMT’s FY08 results were within expectations, lifted by organic improvement amid a fully occupied portfolio. Continued shopper traffic growth despite a weakening spending environment underlines the more resilient suburban retail sector. The stock offers FY09 yield of 9.7%. Near term catalysts from successful rollover of its debt and recapitalising newsflow within the Sreit sector could spur share price. Upgrade to Buy with DCF-backed TP of $1.92.

Continuous organic growth. CMT reported Q4 revenue of $134.5m, +16% yoy and +3.7% qoq while distribution income came in at $60.9m, -2.1% yoy and +0.3% qoq. Topline benefited from The Atrium income and organic improvement within its portfolio. Occupancy remained at c100% and new lease/renewals were transacted at an average 9.3% over preceeding levels. However, a hike in expense ratio to 36% (vs 33% previously) after charging a $4m capital allowance and greater interest cost eroded bottomline growth. Asset values rose by 9% yoy despite a 15- 25bps hike in cap rates, bringing book NAV to $2.41 and gearing 43%.

Locked in >87% of revenue. While retail sales outlook is dampened by the poorer economic outlook and discretionary spending had weakened towards end 08, shopper traffic at CMT malls continued to grow, showing the resilience of suburban malls. In addition, based on committed leases @ end 08, CMT had locked in >87% of its FY08 revenue for FY09. In terms of capital management, the group has $986m of debt due to be rolled over in 2009, of which $876m is maturing in 2H09. The group is exploring options for refinancing and intends to complete its refinancing ahead of the deadline.

Upgrade to Buy. CMT offers investor exposure to the more resilient suburban retail sector. Share price had fallen by 17% since early Jan 09 and is trading at 9.7% yield based on our stillbelow- consensus DPU forecast of 14.4cts. We expect newsflow on both its debt refinancing and removal of overhanging deleveraging concerns in S-reit sector via recapitalisation activities to be a driver to share price performance in the near term.