SINGAPORE (July 22): CapitaLand has announced total divestments of some $3.46 billion this year, exceeding its annual target of at least $3 billion. These include sales to third parties as well as the group’s real estate investment trusts (REITs) and funds.
The group provided this piece of information this past week in a statement related to the sale of an 89.8% interest in Main Airport Centre to CapitaLand Commercial Trust. MAC is a freehold office building in Frankfurt, Germany. It is being valued at €265.0 million ($407.8 million) on a 100% basis in the transaction. Post-transaction, CapitaLand will still hold a 5.1% stake in the property, while CCT will own 94.9%. CCT’s total outlay in this transaction is estimated at €253.4 million. CCT said it expected the acquisition to be accretive to its distributions per unit.
Transactions such as these are an integral part of CapitaLand’s strategy of developing and investing in commercial properties, growing and stabilising the income they generate, and then offloading them to its REITs and funds or third parties to free up capital for new developments and investments offering higher returns. Now, as the group works to bring down its elevated gearing following its acquisition of Ascendas-Singbridge, which was completed on June 30, the pace and manner in which it offloads assets from its books are likely to be closely watched by the market.
Will CapitaLand generate significant gains as it sells assets to its REITs and third parties? Will its REITs be under pressure to raise funds to absorb these assets? Would the large gains generated by these asset sales reinforce the view that minority investors of CapitaLand got a raw deal in the acquisition of Ascendas-Singbridge?
On Jan 14, CapitaLand said it would acquire Ascendas-Singbridge from Temasek Holdings for almost $6.036 billion, to be satisfied by an equal proportion of cash and new shares priced at $3.50 each, which is more than 20% below its net tangible assets (NTAs) of $4.40 per share as at end-2018. On a pro forma basis, its gearing at end-2018 would have come in at 0.72 times as a result of the acquisition, instead of 0.56 times, a difference of nearly 29%. -CapitaLand has said it plans to bring its gearing down to 0.64 times by end-2020, through steady cash flow generation and some asset sales.
Meanwhile, on a pro forma basis, the acquisition of Ascendas-Singbridge would have resulted in CapitaLand’s NTA as at end-2018 falling from $4.40 per share to $4.04 per share, a difference of more than 8%. Clearly, the more conservatively valued CapitaLand’s assets turn out to be, the greater the real dilution its minority shareholders would have suffered from the transaction.
Gains from asset sales?
How conservatively valued could assets held by the CapitaLand group be? Consider this: on Jan 9, only five days before the plan to acquire Ascendas-Singbridge was announced, CapitaLand’s hospitality REIT, Ascott REIT, announced that it would sell Ascott Raffles Place Singapore for $353.3 million for an estimated net gain of $134 million. The huge difference in the price obtained for the property and the valuation at which Ascott REIT was carrying the asset in its books even prompted a letter from a concerned member of the public to the Straits Times calling for an investigation into the matter.
In a response to the letter, the manager of Ascott REIT explained that Ascott Raffles Place Singapore was held primarily to generate stable long-term rental income, and that the valuation at which it was carried in the REIT’s books was based on its discounted cash flow. On the other hand, the sale price simply reflected the highest offer received when the property was put on the block.
Not all asset sales generate such large gains, though. For instance, on June 11, CapitaLand said it would sell three malls to CapitaLand Retail China Trust (CRCT) for a total consideration of $589.2 million. The sale of the malls generated a net gain of $37.6 million for CapitaLand.
Earlier in the year, on Feb 1, CRCT also announced plans to sell a property with limited upside potential in Hohhot, Inner Mongolia and purchase another with better prospects. The consideration for the property it was acquiring was $159.6 million, while proceeds from the property it sold was expected to be $90.8 million. According to the REIT’s manager, there would be no gain or loss over the sale consideration.
Interestingly, assets CapitaLand has divested this year included a major stake in at least one public-listed company. On July 1, it said it would sell its entire 24.09% stake in Hong Kong-listed Central China Real Estate for HK$2.83 billion ($481 million), or HK$4.30 per share. The purchaser of the stake was CCRE’s major shareholder, Joy Bright Investments. Shares in CCRE are currently trading at HK$3.78. The company reported a book value of RMB3.24 per share as at Dec 31.
Other key transactions since the beginning of the year include the sale of a group of companies that held self-storage properties to a third party for $185 million, which was announced on April 23. CapitaLand said the transaction would have no material impact on its earnings or NTAs.
On May 24, CapitaLand said it would divest its interest in companies that hold the Innov Center in Shanghai to a fund called CapitaLand Asia Partners I, at a price that took into account an agreed property value of RMB3,101 million ($621 million). CapitaLand said other pipeline assets for the fund include Pufa Tower, an office development in Shanghai, in which CapitaLand and its partner own a 70% stake.
Higher future ROE?
CapitaLand’s deleveraging target following the acquisition of Ascendas-Singbridge is essentially self-imposed and could change with circumstances. Indeed, the group has said as much.
“This target net debt/equity ratio is not static, as it is a function of future investment and divestment opportunities and capital requirements. Deleveraging occurs in the CapitaLand Group’s ordinary course of business through, among other things, cash generated from its business operations and asset recycling activities,” the company said. “It is envisaged that the enlarged group would continue to remain disciplined in implementing its deleveraging plan after completion.”
DBS is forecasting that CapitaLand’s net debt-to-equity ratio will increase to a high of 0.7 times in 2019, but fall to 0.6 in the coming years. According to DBS analyst Derek Tan, the deleveraging target is attainable for CapitaLand. “Divestments are just one part of the company’s strategy, and these were planned to streamline the balance sheet. In the near future, we expect more divestments from the company, as they do have sufficient assets to divest,” Tan says.
Ultimately, it is CapitaLand’s profitability that will matter to investors. While elevated gearing levels this year will naturally boost the group’s return on equity, the challenge will be for the group to improve its ROE as its gearing is normalised by redeploying capital that is freed up to developments and investments with stronger returns. For 2018, CapitaLand achieved an ROE of 9.3%, up from 8.6% in the preceding year. DBS expects CapitaLand to deliver ROEs of 8.9% to 9.4% over 2019 to 2021.
