CapitaRetail China Trust eyes tripling assets to $3b by end-2009

It plans to cap borrowing at 35% of assets, raise equity

Singapore-listed CapitaRetail China Trust (CRCT) said yesterday that it expects to triple assets to $3 billion by end-2009 as investors remain enthusiastic about China’s retail sector.

CRCT, which owns eight China malls worth $1.1 billion, is confident it will be able to raise new equity when required and cap borrowings at 35 per cent of assets, chief executive officerLim Beng Chee said in an interview.

‘I’m lucky that China is a huge market … I can see a lot of growth in the market that I have, whereas in Singapore it is not easy to see the growth unless you have the scale,’ he said, when asked about failed equity raising efforts by other real estate investment trusts (Reits) because of weak market conditions.

Mr Lim said that CRCT, which was listed slightly over a year ago, wanted to be more conservative with its borrowing until it was certain of getting an investment-grade rating.

‘We will gear up when we have a more solid track record,’ he said, adding that the rating agencies are not familiar with China’s property market and legal system and have to date only assigned an investment-grade rating to one developer there.

Under Singapore law, Reits must cap their debt-to-equity ratio at 35 per cent unless they get a rating from international agencies such as Moody’s and Standard & Poor’s.

Singapore’s once booming Reit sector is expected to consolidate in the coming months as weaker players sell assets or merge with their stronger counterparts.

Several high-profile listings by India-based developers such as Indiabulls and DLF have been postponed or abandoned, while existing trusts such as Allco Commercial and MacarthurCook Industrial have dropped plans to raise funds for new acquisitions via secondary offerings.

CRCT, which is managed and part owned by CapitaLand , South-east Asia’s biggest developer, has first rights of refusal to malls owned by CapitaLand and its various investment funds.

Its pipeline of new properties include 16 existing malls as well as another 49 that will open in the next few years. Its current strategy involves acquiring and managing malls that cater to China’s growing middle and upper-middle class consumers. — Reuters

CRCT placement snapped up

Institutional investors take up 136m new units in CapitaRetail China Trust in 30 mins

A PRIVATE placement by CapitaRetail China Trust (CRCT) was snapped up by institutional investors within half-an-hour after its launch yesterday.

Approximately 136 million new units in CRCT were fully subscribed by investors under the private placement at an issue price of $1.36 per unit, the trust’s manager, CapitaRetail China Trust Management Ltd (CRCTML) said.

The total gross proceeds from the private placement amount to $185 million. The issue price was set at a discount of approximately 10 per cent to CRCT’s volume-weighted average price of existing units on the Singapore Exchange on Thursday.

CapitaLand Retail Ltd, on behalf of CapitaLand Ltd and its subsidiaries, and CapitaMall Trust subscribed for approximately $74 million worth of new units so as to maintain their proportionate unit- holdings in CRCT at their pre-placement levels. The joint lead managers, bookrunners and underwriters for the private placement were Citigroup Global Markets Singapore, DBS Bank and JPMorgan.

Lim Beng Chee, CEO of CRCTML, said: ‘Despite the soft and volatile market conditions, CRCT was able to raise capital and garner strong participation from investors, who had quickly subscribed for the new units within 30 minutes after the launch of the private placement. This demonstrates the resilient qualities of CRCT and the highly accretive benefits of this quality acquisition.

‘We remain positive in achieving our target asset size of $3 billion by the end of 2009.’

Following the equity fund-raising for the acquisition of Xizhimen Mall and the issue price of $1.36 per new unit, unitholders can expect a distribution per unit (DPU) of 6.67 cents for FY2008, the trust manager said. This is an accretion of 4.1 per cent to the forecast DPU of 6.41 cents for CRCT’s existing portfolio.

CRCT is also making a public ATM offering, in which approximately 2.2 million new units will be made available through the ATMs of DBS (including POSB) on a first-come, first-served basis at the issue price of $1.36 per new unit. The maximum number of new units per application under the ATM offering is 250,000.

The ATM offering will open at 10.30am today and close two hours later, subject to early closure if all the units under the ATM offering are fully taken up before that.

The expected date of listing of the new units is Feb 5.

CapitaRetail China equity exercise completing soon

CAPITARETAIL China Trust (CRCT) is proceeding to complete a $280 million equity-raising exercise to fund the acquisition of Xizhimen Mall in Beijing by the end of this month.

CapitaRetail China Trust Management Ltd’s (CRCTML) CEO Lim Beng Chee, who said this at the trust’s fourth-quarter results briefing yesterday, also expressed confidence of getting legal title to Wangjing Mall – currently the trust’s main income generator – by May. CRCT currently does not have legal title to this property, also in Beijing. Instead, it has only contractual rights to the asset.

The trust posted distributable income of $8.6 million for the fourth quarter ended Dec 31, 2007, 9.1 per cent higher than the CRCTML’s forecast, despite net property income and gross revenue falling below forecast. CRCT’s Q4 distribution per unit of 1.80 cents reflects an annualised payout of 7.15 cents, translating to 3.78 per cent distribution yield based on CRCT’s closing price of $1.89 yesterday. The counter ended two cents lower yesterday. It reached an intra-day high of $3.34 in October last year.

Yields on real estate investment trusts like CRCT go up as their unit prices on the stock market fall, all other factors being equal.

Based on the trust’s current price, the upcoming $336 million acquisition of Xizhimen Mall will still provide yield accretion, going by the asset’s initial property yield of 5.7 per cent for the first year, Mr Lim added.

CRCTML obtained unitholders’ approval for the equity-raising exercise on Dec 4 but has yet to launch it because of weak equity market conditions. Assuming CapitaLand and CapitaMall Trust each subscribe for the new units to maintain their current 20 per cent stake each in CRCT, the amount to be raised from external parties would be $168 million, which Mr Lim described as a ‘very small equity raising’ for which he expects good response based on the keen interest among investors on the China growth story during CRCTML’s roadshow in November.

For Q4 ended Dec 31, CRCT posted net property income of $11.6 million, 13.6 per cent below the trust manager’s forecast in the trust’s listing prospectus dated Nov 29, 2006, on the back of gross revenue of $17.9 million, 11.2 per cent below forecast. This was due mainly to three of the trust’s seven established malls – Qibao Mall, Xinwu Mall and Jinyu Mall.

The shortfalls were temporary in nature – for instance, delays in the start of certain leases on the upper floors in the case of Qibao Mall. Management has taken a longer-than-expected time to sign new leases to achieve a more optimal tenancy mix and rental rate. Revenue is expected to improve within three to six months, CRCT said in its results statement.

Despite lower-than-expected revenue and net property income, CRCT’s Q4 distributable income still came in above forecast because of net interest saving, and over-provision of taxation in previous quarters.

For the year ended December 2007, CRCT posted distributable income of nearly $32 million, 9.5 per cent above forecast.

The trust’s asset size will increase to $1.2 billion after the Xizhimen acquisition and the trust manager is confident of achieving the $3 billion target size by end-2009, thanks to the strong acquisition pipeline put in place sponsor CapitaLand.

Source of opportunity

We initiate coverage of CRCT with a DCF-based 12-month target price of S$2.18 and a Sell rating. Listed on Dec 8, 2006, CRCT is the first pureplay China Retail REIT in Singapore, a spin-off from parent CapitaLand. We like acquisition growth prospects of CRCT, supplemented by a secured and proprietary acquisition pipeline from three CapitaLand private funds, with about US$ 1.6bn in equity; CapitaRetail China Development Fund I and II; and CapitaRetail China Incubator fund, but believe that much of the potential is already priced in the shares. We believe investors are already factoring in about $2.2 bn in acquisition prospects (or 2-3 years of acquisition growth), presenting potential downside risk if execution disappoints.

Organic growth has been weighed down by large mall anchors, and we find the relatively few asset enhancement initiatives disappointing, with the company’s growth profile further hampered by potential difficulty in funding its aggressive acquisition plans given the competitive equity market environment. We think the risk is to the downside, and find little support from low yields. We favor sector leader CapitaMall Trust, which we believe has better organic growth prospects and should see a rise in DPU via its 20% strategic stake in CRCT.

Catalyst

CRCT operates in arguably one of the fastest-growing retail markets worldwide, with nominal retail sales growth over the last decade of 11.7% p.a, driven by a strong economy, increasing income and consumer spending power. We note that that CapitaLand’s recent cooperative agreement with China Vanke to acquire malls developed in Vanke’s residential townships will expand its retail pipeline in China. CapitaLand has a sizable pipeline of 65 malls (excluding the tie-up with Vanke) through its private funds. While we think its pipeline is good, we believe investors need to allow time for malls to be ready for injection into CRCT and for CRCT’s malls to perform. Post IPO, CRCT has announced a pending acquisition, Xizhimen in Beijing, which would enlarge its portfolio to S$1,185 mn from S$806 mn.

Valuation

We derive our 12-month target price of S$2.18 using a base-case DCF per share value of S$1.46 and acquisition premium of S$0.72. With the completion of Xizhimen acquisition later this year, CRCT will have an enlarged portfolio of eight retail malls: GFA of 527,363 sq. m, with Beijing contributing 76% of 08E NPI, Shanghai 5%, and the rest from second-tier cities. Post S$280mn raised to finance Xizhimen, CRCT’s debt/asset ratio is 0.30x (FY08), implying debt capacity of only about S$80mn to fund new acquisitions (no credit rating). We estimate dividend yields of 3.3% in FY07E and 3.8% in FY08E.

Key risks

Positive news flow on CapitaLand’s China retail platform presents potential upside risk; we see aggressive market expectations and failure to execute on acquisition potential as downside risks.

CRCT seeks approval to retain Beijing mall, raise up to $280m

CAPITARETAIL China Trust (CRCT) wants approval from unitholders to keep its main income generator Wangjing Mall for another six months and to raise equity of up to $280 million to help acquire Xizhimen Mall. Both malls are in Beijing.

CRCT does not have legal title to Wangjing Mall – only contractual rights to the property. Legal title is still pending formal approval from the Chinese authorities. If this is not obtained within 12 months of CRCT’s Dec 8, 2006 listing date, the trust needs the nod from unitholders to retain the mall in its portfolio for another six months.

Wangjing Mall, which is almost fully let, is projected to contribute 33.2 per cent of the distribution per unit (DPU) from CRCT’s enlarged portfolio, including Xizhimen Mall, for the year ending Dec 31, 2008.

The forthcoming $336 million acquisition of Xizhimen Mall will boost CRCT’s portfolio to eight malls worth almost $1.2 billion and take the trust closer to its target asset size of $3 billion by 2009. The acquisition will boost projected FY2008 DPU 10.3 per cent to 7.2 cents, assuming the new issue is priced at $2.50 a unit.

The equity fund-raising exercise will involve the issue of 112 million new units for offer and placement to existing unitholders and new institutional and retail investors.

Assuming CapitaLand and CapitaMall Trust, which each own 20 per cent in CRCT, subscribe for the new units to maintain their existing stakes in CRCT, $168 million will need to be raised from other parties, making the equity fund-raising exercise ‘highly palatable’, Hsuan Owyang, chairman of CapitaRetail China Trust Management, said in a statement yesterday.

Besides the equity fund-raising exercise, CRCT will seek additional borrowings of about $88 million. The balance of the proceeds beyond the $344 million total acquisition cost of Xizhimen Mall, including related fees and expenses, will be used for working capital and capital expenditure. CRCT’s aggregate leverage will drop from 31 per cent to 28.7 per cent, giving it flexibility to undertake future acquisitions and asset enhancements.

An extraordinary general meeting to obtain untiholders’ approval will be held on Dec 4, 2007 and the proposed equity fund-raising exercise will be carried out no later than January 2008.

CRCT is buying the seven-storey Xizhimen Mall, which officially opened in September this year, from CapitaRetail China Incubator Fund.

The proposed acquisition includes an agreement to buy a planned extension to the mall’s basement 1 from Beijing Finance Street Construction Development Co, the original developer of the Xihuan Plaza complex where the mall is located.