CAPITALAND on Monday announced plans to spin off its $20.3 billion retail portfolio into a separate listed entity. While the move by itself just realigns ownership, some key benefits will be derived for CapitaLand.
However, concerns have since been raised about the impact of the move on CapitaLand's two listed retail property trusts - CapitaMall Trust (CMT) and CapitaRetail China Trust (CRCT). Both trusts might lose out if investor interest switches to the new CapitaMalls Asia (CMA).
CapitaLand, on the other hand, will benefit as it boosts its balance sheet.
CMA's stakes in the malls under its umbrella have a total net asset value of $5.3 billion. Assuming that CapitaLand chooses to float 20-40 per cent of CMA, conservatively about $1.1 billion to $2.1 billion would be raised. This will increase CapitaLand's cash position, lower its gearing and allow it to invest and grow its other core business.
'We view the transaction positively and agree with CapitaLand that the capital raising will enable the group to foster growth in all its businesses - enabling its retail mall division's growth to be accelerated while simultaneously maintaining relative balanced growth with its other business units,' said Nomura analyst Tony Darwell.
But is the deal to the disadvantage of CMT's and CRCT's minority shareholders and retail investors?
The main issue, analysts said, is that CMA is a pure retail play, just like CMT and CRCT. Institutional investors in particular might want to re-allocate their funds.
'Some of them might choose to transfer their shareholdings into CMA,' observed an analyst at a brokerage here.
CapitaLand on Monday pointed out that CMA, which will undertake the development of properties, is a different kind of entity from the two real estate investment trusts (Reits), whose attraction is stable rental income from completed properties. About one-third of the malls under CMA are still under development.
However, institutional investors in search of an Asia-focused pure retail play might want to go with just CMA, which is larger with some 86 malls in its portfolio (compared to CMT's 14 retail assets and CRCT's eight). It is also more geographically diversified and comes with stakes in both CMT and CRCT. And CMA, backed by South-east Asia's largest property group CapitaLand, is by no means a risky play either.
Investors of both Reits reacted to the news on Tuesday by sending CMT down 4.4 per cent and CRCT down 1.7 per cent. CRCT recovered one cent, or 0.9 per cent, to close at $1.18 yesterday, while CMT closed unchanged at $1.74.
So can minority shareholders and retail investors switch to CMA now if they wish? It's debatable. CMT and CRCT are trading above their stock prices seen on March 6 this year, which is arguably when the current recovery in stock prices began. Then, CMT closed at $1.08, while CRCT closed at 60 cents, according to data from Bloomberg. So an exit from the Reits and an investment in CMA is possible - if one bought into those Reits during the downturn.
However, minority shareholders and retail investors who bought into both or either Reit near the boom period, when prices were substantially higher, cannot make an exit without booking losses. These investors don't have the realistic option of making a switch to CMA.
Investors should, however, note that when it comes to day-to-day operations, it looks as if it will be business as usual for CMT and CRCT. The management companies of both Reits will be transferred to CMA, as will the right of first refusal for assets in the pipeline - that is, CMT will have the right of first refusal for CMA's retail pipeline in Singapore while CRCT will have the right of first refusal for CMA's retail real estate pipeline in China.
Source: Business Times, 8 Oct 2009
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