CapitaLand Integrated Commercial Trust (CICT) announced that they would be buying 50% of ION Orchard for $1.8 billion this week.
The acquisition would be funded entirely by equity fundraising – to the tune of $1.1 billion.
$1.1 billion, that’s A LOT of money to be raising in this climate.
Now CICT is my largest REIT position in my portfolio.
And I’ve been getting a lot of questions about this acquisition.
3 key questions I wanted to discuss:
- Is this a good acquisition for CICT?
- Will I subscribe for the preferential offering?
- Will I buy more CICT at 5.3% dividend yield?
CICT buys Ion Orchard for $1.8 billion
Full acquisition announcement here, but to sum up the key details:
- CICT is buying 50% of ION Orchard from its sponsor CapitaLand Investments (CLI).
- The other 50% will be held by Sun Hung Kai Properties – “a leading property developer and operator in Greater China renowned for premium large scale integrated developments”.
- Valuation is $3.7 billion (works out to a gross yield of 7.1%) – so the 50% stake that CICT is buying is worth about $1.7+ billion.
- Because CICT is acquiring from its sponsor (also known as an Interested Person Transaction), shareholder approval will be required for this transaction, and there will be an EGM in due course.
Why is the Sponsor, CapitaLand Investment, selling ION Orchard now?
I know the more paranoid investors will ask “Why Now”?
There’s always a suspicion among REIT investors that what is good for the Sponsor, may not necessarily be good for the REIT.
And if you look at the sponsor CLI’s share price – boy it is not pretty.
Even after the recent rebound, CLI’s share price sits close to all time lows, largely due to their China exposure (almost 40% of AUM).
So no doubt the sale of ION Orchard and freeing up almost a billion in cash will do wonders for the Sponsor, but the question is whether you can say the same for the REIT.
Case in point – here’s a question I got from a FH Premium subscriber:
“I just being a little bit worried about the acquisition price and cap rate etc. because these are kind of related entities
The main worry is good performance of trust is used to cover the bad performance of CLI.
Also, is the dividend addition enough to justify price?”
A bit of background – long time investors of CICT will know that this acquisition has been talked about for a while.
The Sponsor, CapitaLand Investment, holds ION Orchard in a 50-50 JV with Sun Hung Kai.
And ION Orchard has always been viewed as one of the crown jewels of CapitaLand’s portfolio, and it was always expected that this divestment into the REIT would happen eventually.
But of course, this doesn’t answer the question of why now.
I have no doubt ION Orchard is a good buy – at the right price
Now the presentation slides go into a fair bit of detail on why ION Orchard is a good buy for CICT.
But really, I think they’re preaching to the choir here.
I have no doubt in my mind that ION Orchard is a fantastic luxury mall and a great addition to CICT’s portfolio.
You can have a look at the slides below.
ION Orchard has a fantastic location right next to Orchard MRT, and solidifies CICT’s position as the premier downtown retail landlord.
It also gives CICT exposure to what is in my view, a best in class luxury mall in Orchard.
Icing on the cake – there isn’t any new retail supply in Orchard coming online any time soon.
Post acquisition, CICT will remain predominantly Singapore focussed at 94.2% of AUM.
I like this, this is part of why CICT is the largest REIT in my portfolio.
With a nice mix of exposure between retail, office and integrated developments.
Million dollar question – Did CICT buy ION Orchard at the right price?
But like I said, preaching to the choir here.
I think ION Orchard is a best in class mall, and a fantastic addition to CICT’s portfolio.
Only question in my mind is – Did CICT buy ION at the right price? And did they finance it the right way?
Let’s discuss each question.
Did CICT buy ION Orchard at the right price?
Gross yield is 7.1%.
But unfortunately we don’t know the net property income (this will only be provided at the circular stage in due course).
So we can’t really work out the true cap rate for ION Orchard at this price.
Gun to my head, I would be expecting a 4.5% cap rate or higher for a mall like that, in today’s climate.
But looking at DPU – the deal will be accretive for CICT.
Working backwards, this indicates that the cap rate should be somewhere in the 4s range, otherwise the acquisition would not have been DPU accretive.
4%+ cap rate for a best in class mall like ION Orchard – I think that’s a fair price.
We’ll see the full numbers in the circular for the EGM, but for now it doesn’t look like CICT is overpaying.
How will CICT fund the acquisition of Ion Orchard?
Per the Acquisition Slides:
Estimated total acquisition outlay (save for Acquisition Fee) to be funded by net proceeds from concurrent equity fund raising (“EFR”)
▪ The concurrent EFR comprises:
− No less than approximately S$350m private placement (“PP”) and
− Approximately S$757m nonrenounceable preferential offering (“PO”) (with pro-rata subscription by CICT’s Sponsor, CapitaLand Investment Limited)
$1.1 billion funded purely by Equity Fundraise – they’ve been waiting for this opportunity
Looking at this fundraising package.
Boy you just know that CICT must have been waiting for a jump in the share price to roll it out.
$1.1 billion is only about 8% of CICT’s market cap.
But quantum wise, $1.1 billion is quite a lot of money to be raising in this market.
Had they tried to raise $1.1 billion just 3 months ago when the share price was at 1.9ish, the DPU accretion numbers would have been a lot less sexy.
But because there was a nice rally in CICT’s share price from all the rate cut expectations.
This was a godsend for CICT, allowing them to raise a huge equity financing package at a higher unit price.
Is this a portend for other REITs – now that share price is rallying?
In some ways it makes you wonder if this will play out for other REITs going forward.
Most of these REITs have been delaying their acquisitions, and taking up debt instead of equity, to avoid going to market when their share price was depressed.
Now that rate cuts are coming, and REIT prices are picking up.
Will we see more REITs come to market with a large equity fundraise – to buy assets from their sponsors?
Let’s see.
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Private Placement of CICT
Coming back to CICT – here are the results of the private placement:
The Private Placement drew strong demand from new and existing institutional, accredited and other investors and was approximately 3.7 times covered.
The Private Placement Issue Price of S$2.040 represents a discount of:
(i) approximately 4.4% to the volume weighted average price (“VWAP”) of S$2.1338 per Unit for all trades in the Units on the Singapore Exchange Securities Trading Limited (the “SGX-ST”) for the preceding Market Day on 2 September 2024, up to the time the Underwriting Agreement was signed on 3 September 2024; and
(ii) approximately 3.4% to the adjusted VWAP2 (“Adjusted VWAP”) of S$2.1122 per Unit.
3.7 times cover indicates pretty strong demand across the board, which is always a good sign.
And the 3.4% discount to adjusted VWAP is not that big.
A good showing from CICT all round.
Preferential Offering of CICT
That’s just $350 million though.
The remaining $750 million needs to come from preferential offering – which means the remaining unitholders.
Here are the details:
- S$2.007 for each Preferential Offering Unit
- 56 Preferential Offering Units for every 1,000 Existing Units held by Eligible Unitholders as at the Record Date (fractions of a Preferential Offering Unit to be disregarded)
- Record date is 11 September 2024
Will I subscribe for CICT’s Preferential Offering?
The Preferential Offering price of $2.00 is about a 6.5% discount to the latest market price of $2.14.
On that basis alone its worth subscribing – I can literally just sell my existing units on the market today at $2.14 and subscribe at $2.007 down the road for a risk free arbitrage.
That being said.
If you zoom out a little, $2.007 is actually not super attractive given that you had the opportunity load up on this REIT at the 1.9 range just a couple of months back.
CICT pays a 5.44% dividend yield at Preferential Offering price
At the Preferential Offering price of $2.007, after factoring in the DPU accretion.
You’re looking at about a 5.44% dividend yield.
I suppose if you assume that Singapore 10 year yield will drop to 2.5%.
And you assume a 2.5% yield spread for CICT.
There’s still some upside in the sense that it can drop to 5.0% dividend yield.
That’s about a 9% capital gains upside.
Will I subscribe for CICT’s Preferential Offering?
In any case this is not a decision I have to make now.
I’ll watch how the share price plays out the next few weeks, and make my decision closer to the cut off date for the preferential offering.
If CICT’s market price trades much higher than $2.007 then it’s a no brainer to subscribe.
If CICT’s market price trades closer to $2.007, then to be really honest I don’t see a big need to subscribe.
My average buy in price for CICT is well below $2.00, and subscribing at $2.007 is in some ways averaging up for me.
Will I buy more of CICT at 5.2% dividend yield? Are REITs a good buy?
I suppose the other question is whether CICT is a good buy.
At market price of 2.14, that works out to about a 5.2% dividend yield, and you can see from the charts how its in a nice uptrend, having broken out of the recent range.
The bull case for REITs here is well known.
Interest rates going up the past 24 months was bad for REITs.
Therefore interest rates going down the next 12 months is good for REITs.
No brainer right?
For what it’s worth, REITs are one of the largest components of my portfolio today, so like many of you I have benefitted handsomely from the rate cut rally.
What could go wrong for REITs?
But in investing I’ve learned that it pays to be paranoid, and to always ask yourself where the market could be wrong.
Earlier this year, my biggest concern for the REITs was the return of inflation (which would result in higher interest rates).
But today, I think between inflation and slowing economic growth, the balance of risks has shifted to the latter.
I think the bigger short term risk is that US unemployment starts to accelerate, resulting in the Feds cutting interest rates quick and fast.
This of course would be good for REITs.
The wildcard is where does economic growth go in this scenario.
Does economic growth remain resilient, or does it start weaken into recessionary territory?
This has implications for REITs because their underlying cash flow comes from rental income.
If the economy weakens, will rentals still hold up?
Closing Thoughts: Are REITs a good buy?
Like most things in investing, its all about probabilities, and position sizing.
A big part of my portfolio today is in REITs, and within REITs CICT is actually my largest REIT position (see my full portfolio on FH Premium).
Short term at least, the path for interest rates is down, and that should benefit REITs.
So I am holding REITs, but I’m not sure if I want to increase exposure in a big way given how much exposure I already have.
The big risk I will be looking out for though, is further economic slowdown / market risk-off.
Based on latest economic data, I suspect the Feds are slightly behind the curve on unemployment here, and need to cut hard and fast once they start to get ahead of the curve.
Whether this will be sufficient to offset the slowdown, especially in an election year, is a really tough call.
But however it plays out, I would be reacting accordingly.
As always, this article is written on 6 Sep and will not be updated going forward.
My latest macro views and portfolio positioning is shared on FH Premium.
This post is written on 6 Sep 2024 and will not be updated going forward. My latest views on markets, my Stock watchlist and full Personal Portfolio, are shared on FH Premium.
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Hi FH,
They have to pay a div yield of 5.3-5.4% on the new shares and the net property yield is supposed to be around 4.5% or 4.6%. And this is even before deducting for management fees.
I dont see how mathematically, this could be dpu accretive. Unless they are raising rentals by 20% which would still take at least 2 to 3 years to execute across the board.
Thanks,
KK.
The equity raised is only to purchase the equity portion of ION, the property itself comes with debt if I’m not wrong. This could explain the DPU accretion.