Is CapitaLand Mall Trust overpaying for stake in Westgate mall?

Singapore street in Bugis neighborhood with CapitaLand Mall Trust building; taken August 2018.Singapore’s Bugis neighborhood with CapitaLand Mall Trust building.

CapitaLand is getting the “sweeter deal” in its sale of 70 percent of Westgate mall to CapitaLand Mall Trust, Nomura said in a note on Tuesday, adding that the agreed valuation was higher than expected.

CMT is set to acquire the 70 percent of Infinity Mall Trust it doesn’t already own for S$805.5 million from CapitaLand, including other costs, in a deal which will give the trust complete ownership of Westgate mall in the Jurong Lake District, the trust manager said on Monday. The acquisition price was based on an agreed market value of S$1.128 billion for all of Westgate, it said.

“While the deal is not a total surprise to the market, the agreed valuation of Westgate is likely higher than what the market had expected (initial net property income yield of just 4.3 percent),” Nomura said.

The investment bank also noted that CMT has yet to decide on the debt-equity mix for the deal, with it estimated that if more than 40 percent of the purchase price is funded with new equity, it could be dilutive to unitholders.

It estimated a 40:60 equity-to-debt funding mix would be dividend per unit (DPU) neutral and raise CMT’s aggregate leverage to 36.8 percent from 31.5 percent as of the second quarter, while a 30:70 mix would add 0.05 Singapore cent, or 0.4 percent, to DPU, but raise gearing to 37.6 percent.

“While the exercise is essentially one in which CMT recycles its capital from an older asset (Sembawang Shopping Centre) to a newer one (Westgate), and the worst of negative rental reversion at the latter could be behind us given the recent asset-enhancement initiatives to increase enclosed retail space at the mall, it remains to be seen if this would convince unitholders that the positives are worth the price,” Nomura said.

CMT sold Sembawang Shopping Centre for S$248 million in June.

On the flip side, CapitaLand is expected to book a net gain of S$99.2 million, or 10.7 percent of first half of 2018 earnings, on the sale, Nomura said.

Shares of CMT were down 1.38 percent at S$2.14 at 10:25 A.M. SGT, while CapitaLand was up 1.18 percent at S$3.44.

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