Acquisitions are an effective method used by REITs to grow their distribution per unit (DPU).
And when it comes to acquisitions, CapitaLand China Trust (SGX: AU8U), or CLCT, has been hard at work.
CLCT’s current portfolio comprises 11 shopping malls and five business parks located across 10 Chinese cities.
The REIT has a strong sponsor in CapitaLand Investment (SGX: 9CI), the investment arm offshoot of CapitaLand Group that started trading in late September.
Because of the pandemic, CLCT announced an expansion of its investment strategy to include commercial and industrial properties in addition to retail malls.
This week, the REIT made its first foray into the Chinese logistics sector with the acquisition of four prime logistics properties for around S$350.7 million.
This acquisition is expected to be completed by the end of this year.
Here’s what investors need to know about this major transaction.
1. Increases proportion of New Economy assets
The acquisition enables CLCT to tap into a larger segment of China’s domestic consumption.
Logistics providers handle a wide variety of goods. As such, the purchase is an effective way to increase the REIT’s exposure to business-to-business (B2B) and consumer-to-consumer (C2C) transactions.
B2B involves businesses buying from one another and routing purchases through logistics warehouses, while C2C involves e-commerce platforms such as Taobao Marketplace, owned by Alibaba Holdings (SEHK: 9988) that facilitate users to buy and sell goods with one another.
Logistics is considered a “New Economy” asset class and the purchase is in line with the REIT’s strategic roadmap to have 30% of its assets under management (AUM) in new economy sectors by 2026.
2. A strong tenant base
The four logistics facilities are located in the provinces of Kunshan, Shanghai, Wuhan and Chengdu.
All are situated close to transport nodes such as airports, highways and railroads.
In addition, the properties boast a strong base of tenants that come from a diverse set of industries.
The logistics and warehouse sector accounts for 57.2% of gross rental income (GRI) for the four properties and is a growing sector as third-party logistics providers are in high demand due to the explosion of the e-commerce and manufacturing sectors.
Next at 37.2% of GRI is the e-commerce sector which is supported by increased online adoption.
Key tenants in this sector comprise established e-commerce platforms and a B2C online retailer.
3. Improves portfolio metrics
This acquisition further diversifies CLCT’s portfolio away from retail.
Before the acquisition, around 85% of AUM consisted of shopping malls.
This percentage will be diluted down to 78.6% post-acquisition, with logistics taking up a 7.3% share of total AUM.
CLCT’s trade sector mix will also be further diversified by the acquisition, with the e-commerce proportion increasing from 1.8% of GRI to 3.5% and adding a new segment Logistics & Warehousing.
Furthermore, more than 80% of the leases for the logistics properties have built-in step-up rental escalation clauses ranging from 3% to 5%.
Finally, CLCT’s AUM will also rise by 8% to S$4.7 billion and the weighted average land tenure expiry for the portfolio will be lengthened by 1.94 years.
Logistics properties have a land tenure of 50 years, 10 years more than the 40 years for shopping malls.
4. A boost to DPU
This acquisition is expected to boost net property income (NPI) and DPU.
Based on the DPU of S$0.0635 for the fiscal year 2020, the estimated increase is around 3.5% or S$0.0022 to S$0.0657.
CLCT had already reported its fiscal 2021 first half (1H2021) earnings, with DPU jumping by 40.1% year on year to S$0.0423.
As such, the trailing 12-month DPU stands at S$0.0756.
If we add the DPU accretion, the trailing 12-month DPU moves up to S$0.0778.
At a unit price of S$1.25, the trailing 12-month distribution yield post-acquisition is around 6.2%.
5. Funded by both debt and equity
CLCT intends to finance this acquisition using a mix of both debt and equity.
In conjunction with the announcement, the REIT has launched a private placement to raise funds for the equity portion of this transaction.
A total of 128.756 million shares were issued at S$1.165 per unit and gross proceeds of about S$150 million were raised.
The net asset value per unit for the REIT will decline slightly from S$1.48 to S$1.46.
CLCT’s pro-forma gearing level post-transaction is expected to be 38.2%, offering the REIT some debt headroom to pursue further DPU-accretive acquisitions.
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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.