What happened?
We have not seen Singapore REITs making large acquisitions for some time.
After all, the elevated levels of interest rates have made it harder for REITs to purchase assets that would be beneficial to unitholders.
This week, CapitaLand Integrated Commercial Trust, or CICT, announced that it had entered into an agreement with its sponsor, CapitaLand Investment Limited (CLI), to acquire a 50% interest in ION Orchard mall at an agreed property value of S$1.85 billion.
The share price of CICT fell by 3.3% to S$2.06 after the REIT resumed trading on 4 September.
Let’s dig deeper into this transaction to find out more about why CICT undertook this purchase.
What you need to know about CICT’s purchase of ION Orchard Mall
#1 – An iconic mall with superb location
ION Orchard is an eight-storey mall with a net lettable area of around 623,600 square feet.
The asset has a leasehold tenure of 99 years with effect from 13 March 2006 (i.e. 81 years left on the lease).
The property gross yield (on a 100% basis) is 7.1%.
ION Orchard also boasts excellent connectivity, being located at Orchard MRT station which serves both the North-South and Thomson East-Coast MRT lines.
In addition, the property has a prominent facade and comes with top-tier specifications to maximise shopper flow and shopfront visibility, making it a valuable asset for the REIT to acquire.
The mall is also integrated with a 56-storey condominium, The Orchard Residences, and has sheltered access to ION Orchard Link, an underground pedestrian link with retail offerings.
#2 – A beneficiary of the tourism and retail recovery
ION Orchard has more than 300 tenants that span a diverse range of sectors.
Some of these include watches and jewellery (Cartier), fashion (Dior and Louis Vuitton), beauty and wellness (Aesop and Sephora), lifestyle (Leica and Lululemon), and food and beverage (Bacha Coffee and Taste Paradise).
This downtown mall will be a key beneficiary of the tourism recovery that has seen pent-up demand push up visitor numbers to Singapore.
The Orchard Road belt saw roughly 4.5 million tourists in 2023 out of the 13.6 million that visited last year.
Last year also saw tourism receipts hit S$27.2 billion, just shy of the S$27.7 billion in 2019 before the pandemic hit.
Singapore is expecting around 15 million to 16.5 million visitors in 2024 with 9.8 million already logged year-to-date till 31 July.
#3 – Enhances portfolio diversity
This acquisition also helps CICT to improve its operating metrics by increasing its property diversification.
Its existing portfolio, with assets under management (AUM) of S$24.5 billion, comprises 30% retail, 39% office, and 30% integrated developments.
Post-acquisition, its enlarged portfolio will be worth S$26.5 billion with office taking up 37%, retail 35%, and integrated developments 28%.
CICT’s Orchard Road retail component will increase from the current 14% to 25% of its total retail net lettable area (NLA) of 5 million square feet.
Its downtown mall component will increase to 57%, up from the current 52%, with suburban malls seeing their contribution to NLA shrink from 48% to 43%.
Importantly, the purchase of 50% of ION Orchard also re-emphasizes CICT’s Singapore core, increasing the proportion of Singapore’s contribution to its AUM to 94.2%, up from 93.7% pre-acquisition.
#4 – New retail concepts with potential growth through active asset management
With the acquisition of ION Orchard, CICT will introduce new retail concepts and tenant offerings.
Several new-to-portfolio tenants include Loewe, Fendi, Gentle Monster, Singapore Airlines, and Zara.
New retail concepts and launches include Tag Heuer pop-up and Fendi newsstand pop-up.
There is also potential organic growth for ION Orchard through active asset management, as evidenced by CICT’s track record in achieving very high occupancy rates.
ION Orchard’s current occupancy is around 96% but other CICT properties such as Plaza Singapura and Raffles City Singapore have occupancies of 99.9% and 99.6%, respectively.
CICT’s manager has an active toolkit for enhancing the REIT’s assets.
These include the reconfiguration of space for best use, rejuvenation of the mall to refresh its look, and the introduction of innovations to keep pace with evolving retail concepts.
A great example is the recent rejuvenation of Raffles City Singapore which saw the reconfiguration of around 110,000 square feet of retail space to accommodate specialty retail.
The asset enhancement initiative helped to improve the asset’s occupancy from just 91% back in December 2022 to 97.4% in the space of a year.
#5 – Transaction expected to be DPU-accretive
Most importantly, this acquisition is expected to help CICT to increase its DPU.
The proforma DPU accretion is estimated at 0.9%, which will bring the first half of 2024’s DPU of S$0.0543 to S$0.0548.
There is also a chance to convert ION Orchard’s holding structure to achieve tax transparency.
If this move is successful, it will result in tax savings and enhanced earnings that will benefit distributable income and provide a further DPU boost.
Equity fundraising announced
CICT has launched an equity fundraising exercise to partially fund this transaction.
This exercise includes a private placement of shares at an offer price between S$2.04 per unit, and a preferential offer of 56 units for every 1,000 units held at an issue price of S$2.007 per unit.
The preferential offer price is at a 6.1% discount to CICT’s last closing price of S$2.13 before the trading halt.
Post-acquisition and the equity fund raising, CICT’s leverage ratio is expected to remain stable at 39.9% (current: 39.8%).
CICT currently offers a dividend yield of 5.2%, inline with its historical average dividend yield. However, this is below the sector average dividend yield of 5.7%.
CICT is currently trading at a price-to-book ratio of 1x, above its historical average of 0.85x.
As this transaction involves CLI, it is considered an interested-party transaction (IPT) and with the purchase exceeding 5% of CICT’s net tangible assets, it requires unitholder approval at an extraordinary general meeting (EGM) to be convened in due course.
We will await further details about the preferential offering and EGM, and share more details about what unitholders need to do next.
In the meantime, dive deeper into the CapitaLand Integrated Commercial Trust with our checklist and find out if it may be worthwhile adding the REIT to your watchlist.
To learn more about our outlook on Singapore REITs, read our detailed report on “Singapore REITs – Distributions may remain under pressure”
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