CapitaLand China Trust (CLCT) (SGX:AU8U) used to focused on retail properties and malls in China but has expanded its mandate to include other property types in early 2021.
And the management has moved fast to acquire 4 logistics properties located in
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- Chengdu
- Kunshan
- Shanghai
- Wuhan
Why does CLCT want to expand into logistics properties?
In our previous analysis of CLCT, we mentioned that one of the risks is the rising trend of e-commerce which can become a threat to the malls,
eMarketer has also reported that in 2021, bricks-and-mortar sales would likely fall by 9.8%, after an 18.6% drop last year.
If this trend continues, CLCT having majority of its portfolio concentrate in retail malls will surely be affected and is definitely something CLCT investors should look out for.
This could be one of the reasons why CLCT has decided to expand its investment portfolio to other assets classes instead of relying solely on retail.
Hence, expanding to new economy assets such as logistics properties allows CLCT to adjust to the new trend and to hedge against a possible fall in mall rental rates. CLCT has been consistent with this acquisition.
CLCT’s exposure to the new economy assets will increase from 15.3% to 21.4% of its asset under management (AUM) after the acquisition of these 4 logistics properties is completed.
For the 4 logistics properties under consideration, the major tenants are involved in logistics and warehouses to distribute goods from coastal cities to inner cities, as well as e-commerce players to deliver items to individual consumers.
But CLCT is not stopping here and we should see more acquisitions in the near future. Their goal is to have 30% of their AUM in new economy assets and 40% in integrated developments/commercial assets.
Retail will be reduced to 30% by 2026.
Is this a good deal?
We have already covered that this acquisition is aligned with CLCT’s new strategic direction to be less dependent on retail malls.
There are more positives to this deal.
First, CLCT is paying 0.6% below the actual valuation of the properties. This isn’t a fire sale in the logistics property market, despite the Evergrande issue.
Second, the net property income will go up by 12.8% which is more than the AUM going up by 8%.
Third, this is distribution per unit (DPU) accretive acquisition and CLCT’s DPU will increase by 3.5%, from 6.35c to 6.57c.
How will CLCT’s acquisition be funded?
The acquisition will be funded 60% by debt and 40% by equity.
The amount isn’t large enough to warrant a rights issue. Instead, a private placement of S$120 million is sufficient. CLCT will be issuing 103,005,000 new units in CLCT to institutional, accredited and other investors at an issue price of between S$1.165 and S$1.199 per new CLCT unit.
That’s a discount of 4.1% to 6.8% from the last closing price of S$1.25.
I expect the private placement deal to be completed by the following day of this announcement as the amount isn’t large and REIT placements have always been very popular among investors.
Conclusion
CLCT has been making moves to adjust to the new economy. A possible fall in mall rental rates is a risk for them, so they are hedging their bets by expanding into logistics assets. Moreover, this acquisition will be DPU accretive and enjoy a slight discount on the valuation.
CLCT is undergoing a major transformation and investors should keep an eye on this REIT as it continues to evolve with our changing world!
For a deeper analysis of CLCT’s full business valuation, read our CapitaLand China Trust (SGX: AU8U) Analysis here.
Disclaimer and disclosure: This should not be taken as investment advice. The views belong to the author and he is not a financial advisor. He has a stake in CLCT at the point of writing.
