Singapore-listed CapitaMall Trust yesterday braved a worsening market to raise S$250 million ($200 million) from a share placement that it will use to fund asset enhancement initiatives at its existing shopping malls.
The follow-on sale came just one trading day after CapitaMalls Malaysia Trust issued about $106 million worth of new shares in a transaction that saw very good response and was able to price at the top of the offering range. As indicated by their names, the two trusts are both part of the same group. CapitaMalls Malaysia owns and operates shopping malls in Malaysia and is listed in Kuala Lumpur, while CapitaMall Trust focuses on shopping malls in Singapore.
However, while CapitaMalls Malaysia came to market at the end of a week with strong stock market gains, CapitaMall Trust completed its trade as renewed scepticism about the European rescue package and financial troubles at US brokerage firm MF Global (a holder of large quantities of European government debt) prompted another selloff. Some of the selling could have been triggered by the fact that yesterday was the last day of October, but bankers said it looks like the primary market window that had opened up over the past couple of weeks, may now be shut again.
Yesterday was a clear reminder that sentiment is still shaky and headline-driven, and even though most markets have posted a steady recovery since hitting a low on October 3-4 — the Hang Seng Index has added 22% and Singapore’s FTSE Straits Times Index is up 13% — benchmark indices are still only back to where they were after the big drop in early August.
Still, as the biggest real estate investment trust (Reit) in Singapore and a key member of the Temasek-backed CapitaLand group, CapitaMall Trust is viewed as a quality issuer. This, together with its defensive qualities as a yield play with exposure to the consumer sector through its portfolio of Singapore shopping malls, enabled it to pull off the deal. It also helped that the transaction was quite small.
“CapitaMall is less volatile than most and has been trading reasonably well [in the past three months]. It’s the kind of stock that people typically hide in,” said one banker. The unit price is down 3.8% year-to-date and as of yesterday’s close was only 1.3% below where it was before markets took a dive in early August.
This didn’t mean that the placement was a blow-out. According to a source, the base deal was covered to the extent that it allowed some discretion in the allocation, but the demand was not strong enough to exercise the S$50 million upsize option, even though the order book was open for more than seven hours. (CapitaMall Trust was suspended from afternoon trading yesterday, which allowed the deal to be launched just after 2.30pm.) Investors did participate, but in smaller sizes than would normally be expected for a name like this.
A decent number of global real estate funds provided anchor support for the transaction, while some insurance companies and other long-only asset managers helped fill the order books. In all, about 40-45 investors were said to have participated.
CapitaMall Trust offered up to 139.665 million shares at a price between S$1.79 and S$1.85, which translated into a discount of 1.3% to 4.5% versus the latest market price of S$1.875. However, Like CapitaMalls Malaysia, the issuer will pay an advanced dividend to its existing unitholders in early November to mitigate the effects of the dilution caused by the placement and to make sure that the distributable income accrued until now will benefit only the existing unitholders. It didn’t specify the size of the dividend, but said it will be in the range of 0.97 to 1.07 Singapore cents per unit. Using the mid-point of that range to adjust the closing price, the discount on offer narrowed to 0.8% to 4.0%.
The price was fixed at the bottom of the range at S$1.79 for an adjusted discount of 4%. This means that CapitaMall Trust will issue the maximum number of shares and that the placement will account for 4.4% of the existing share capital and about 20 days’ worth of trading volume, based on the daily activity in the past three months.
At 4%, the discount was significantly wider than the 1.7% discount to the adjusted close offered by CapitaMalls Malaysia on Friday, but it is worth noting that CapitaMall Trust is one of the few Singapore Reits that trade at a premium to its net asset value. At 1.2 times NAV it is definitely not cheap relative to its peers. That said, 16 of the 22 analysts who cover the stock, according to Bloomberg have a “buy” rating on it.
In a statement issued to the Singapore Exchange, CapitaMall Trust said it will use about 90% to 95% of the money raised to finance capital expenditures and asset enhancement initiatives, including continuing projects at its JCube, The Atrium@Orchard and Iluma malls. This isn’t as immediately accretive as an acquisition would be, but is still expected to result in higher dividends over the longer term. The key thing is that the company has a defined use of proceeds and isn’t just opportunistically seeking to raise more cash. The management said it had chosen to do a placement because it will give the trust greater financial flexibility than a debt issue would. CapitaMall Trust’s gearing level will fall to 39% from 40.1% following the deal.
CapitaMall Trust has earlier said that it plans to spend S$38 million to refurbish the Iluma mall that it bought in the first quarter this year. The work, which will include an improved layout and a new façade, is scheduled to be completed in the second quarter of next year and is estimated to boost the property income from this mall by 76.6%. The return on investment as a result of these improvements is estimated at 22.4%.
The trust posted a 2.8% year-on-year increase in distributable income for the third quarter, which translated into a third quarter dividend per unit of 2.42 Singapore cents, or an annualised dividend yield of 5.2%.
J.P. Morgan acted as the sole bookrunner for the transaction. The US bank also arranged the placement for CapitaMalls Malaysia on Friday together with CIMB.
