CapitaLand Investment Management (CLIM) has announced the distribution of CapitaLand Ascott Trust (CLAS) units to its shareholders.
However, it should be noted that not all CLAS units will be distributed.
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Prior to the distribution, CLIM owns 37.53% of CLAS and CLIM is going to distribute 8.48% of CLAS to shareholders.
Post distribution, CLIM would still own 29.05% of CLAS.
The distribution ratio for this exercise is 0.057 CLAS Units for every 1 CLIM share held. For example, you will receive 57 CLAS units if you own 1,000 CLIM shares.
How will it affect CapitaLand Investment shareholders?
First, the distribution ratio of 0.057 CLAS units for every 1 CLIM share held may result in shareholders receiving odd lots of CLAS units.
This is because CLAS lot sizes are typically in multiples of 100, and the distribution ratio may not result in an exact multiple of 100 for all shareholders.
You may sell the odd lots in the unit share market but the price spread will usually be wider, and brokerage fee may be higher too.
This inconvenience happens only if one decides to sell the CLAS units.
Second, the dividend yield would increase because this dividend in specie is counted as a dividend distribution, even though it is in the form of CLAS units.
At the current distribution ratio of 0.057 CLAS units for every 1 CLIM share held, each CLAS unit is valued at approximately 5.9 Singapore cents. This additional value will add to the 12 Singapore cents ordinary dividend, resulting in an increased dividend yield for shareholders.
At a CLIM share price of $3.88, the dividend yield including the dividend-in-specie would be 4.6%.
Without it, the dividend yield would be 3.1%.
Investors should not assume that special dividends will be given in the future.
Third, CLIM’s retained earnings will decline by approximately S$304 million.
As dividends are typically paid out of retained earnings, a reduction in retained earnings could potentially impact CLIM’s future distribution potential.
That said, it is worth noting that CLIM currently holds around S$10 billion in retained earnings, while the typical annual dividends paid out amount to approximately S$600 million. Therefore, even with the reduction in retained earnings, CLIM has ample funds to sustain its current dividend rate and continue paying dividends in the future.
Why this dividend-in-specie?
CapitaLand has undergone significant transformation and the latest restructuring made CLIM an asset manager rather than an asset owner/developer.
This new direction aligns with CLIM’s goal to be more capital efficient and asset-light, with shedding assets being one approach to achieving this aim.
Many of the financial ratios should look better, especially ROE and ROA.
The shift in strategy is likely to lead to improvements in many financial ratios, particularly in ROE and ROA.
However, in this particular case, the ROE has remained at approximately 6%. While we cannot expect significant improvements overnight, it is reasonable to believe that CLIM’s management will continue to take steps to meet its capital efficiency targets in the future.
Will there be more dividend-in-specie?
Below is a table that shows CLIM’s stake in the various REITs.
It appears that CLIM chose to distribute CLAS units because it has the highest percentage stake in the REIT, aside from CapitaLand Malaysia Trust (CLMT).
It is likely that CLIM aims to keep its ownership percentage in each of these REITs to less than 30%. By distributing 8.48% of its stake in CLAS, CLIM was able to achieve this objective, reducing its stake in CLAS to 29.05% after the dividend-in-specie.
As for CLMT, it may be more challenging to implement a dividend-in-specie since the REIT is listed on Bursa Malaysia while CLIM is listed on SGX.
Given that CLIM now owns less than 30% of the remaining REITs, it seems unlikely that additional dividend in specie distributions will occur in the future.
How will it affect CapitaLand Ascott Trust unitholders?
The distribution of CLAS units to CLIM shareholders should not have a significant impact on existing CLAS unit holders.
This is because CLIM still holds the majority of the stake in CLAS, even after the distribution. Therefore, the new unit holders are unlikely to significantly affect the market for CLAS units.
Even if some of the new unit holders choose to sell their units in the open market, the impact on the price of CLAS units is likely to be minimal. This is because the 8.48% of CLAS distributed to CLIM shareholders is not a significant amount, and not all of the new unit holders are likely to sell their units or decide to do so at the same time.
As a result, existing CLAS unit holders should not be unduly concerned about the distribution of CLAS units to CLIM shareholders.
Conclusion
This dividend in specie is expected to be a one-time event as CLIM’s stake in the remaining REITs is below 30%, making it unlikely that future distributions will occur.
For CLIM shareholders, the distribution of CLAS units provides an opportunity to hold the units for potential dividends. However, if they choose to sell, they may encounter odd lot issues, although this can be resolved by transacting in the SGX unit share market.
Overall, the dividend in specie is a positive development for CLIM shareholders.
