Strong Sponsor, strong REITs — CapitaLand (C31)

A strong Sponsor equates to a powerful backer, one that can propel forward fundamentally strong REITs under its charge. It is akin to quoting your gang boss’s name to rivals; if they make an impression. The advantages are aplenty.

Besides injecting its own properties into the initial portfolio of the REIT, Sponsors generally enable the REIT to leverage on its strong network and pipeline of property assets by right of first refusal. In times of (financial) crisis, it becomes more apparent. Strong Sponsor-backed REITs are better poised to weather through difficult times (e.g. sourcing for credit, rights issue exercises).

In short, I would be enticed to invest in REITs under a strong Sponsor like CapitaLand. Why so?

CapitaLand owns and manages a well-diversified global portfolio (S$134.7 billion as at 30 June 2020) which includes commercial, retail, industrial / logistics, integrated and urban development as well as lodging and residential. While Singapore and China remains focused as its core markets, it continues to expand its presence across more than 220 cities in over 30 countries, such as India, Vietnam, Australia, Europe and the USA.

CapitaLand manages, in addition to over 20 private funds, 7 listed REITs / business trusts — 6 listed on SGX, 1 on KLSE.

REITOwnership /
interest
Country of
operation
Valuation
(USD$mil)
CapitaLand Commercial Trust24.9%Singapore,
Germany
1,125
CapitaLand Mall Trust27.2%Singapore1,381
CapitaLand Retail China Trust18.3%China200
CapitaLand Malaysia Mall Trust36.9%Malaysia123
Ascendas Reit16.6%Singapore,
Australia,
UK,
USA
1,542
Ascendas India Trust16.0%India186
Ascott Residence Trust39.9%15 countries
worldwide incld.
Singapore
803

In the recent Singapore Governance and Transparency Index (SGTI) assessment and ranking of listed companies on their corporate governance disclosure and practices, timeliness, accessibility and transparency of financial results announcements.

CapitaLand Reits leads the top 3 positions in governance and transparency under the REITs and Business trusts category. 5 of its REITs are in the top 10 list. These are strong plus points to consider when investing in their businesses.

Comparing the NAV/unit versus the current share price, the undervaluation might provide opportunity for investment, as the REITs make a slow recover due to COVID-19 in the hospitality and retail sectors.

REITNAV/unit as
at Q2 2020
Share Price as
at 18 Aug 20
CapitaLand Commercial TrustS$1.79S$1.62
CapitaLand Mall TrustS$2.01S$1.88
CapitaLand Retail China TrustS$1.63S$1.16
CapitaLand Malaysia Mall TrustRM 1.25RM 0.68
Ascendas ReitS$2.20S$3.43
Ascendas India TrustS$1.11S$1.32
Ascott Residence TrustS$1.23S$0.89

Right of first refusal over Sponsor’s assets

A strong Sponsor has a pipeline of new and future properties to potentially inject into the REITs, usually under a right of first refusal agreement between the Sponsor and the REIT. The REIT gets the right to purchase first before the open market when the Sponsor sells its property asset. For the REIT, more properties means higher valuation (capital gain) and more rental income (dividend yield) in future.

The Sponsor is also obliged to ensure that the properties to be injected in the REIT are matured and rental income stable. This frees up capital for the Sponsor to take up new projects and development works — a win-win situation for both.

CapitaLand has a strong and diverse portfolio of income-generating properties world-wide. In China alone, CapitaLand owns/manages 48 shopping malls. Out of these, CapitaLand Retail China Trust (AU8U) only manages 13. It’s Gearing Ratio (Aggregate Leverage) is 33.6% as at 2Q 2020. There is potential to inject more retail assets from the Sponsor in future.

Source of equity

Rights issue is one of the common exercises to raise funds from existing shareholders. Sponsors usually support by subscribing to their pro-rata entitlement of rights units. We have seen how the Sponsor grants right of first refusal over its assets to the REIT. Similarly during a rights issue, the REIT grants the Sponsor the right to subscribe to part or all of the excess rights.

Sponsors are usually one of the major shareholders. As such, Sponsor inject funds directly into the REIT by way of rights issue. Sometimes the Sponsor’s percentage holding of the REIT may be increased as a result of subscribing to the excess rights.

CapitaLand Commercial Trust (C61U) had carried out rights issues in 2009 (reduce CCT’s existing borrowings during the 07-08 global financial crisis) and 2017 (fund the Asia Square Tower 2 acquisition), and in both times over-subscribed.

Source of direct/indirect credit

Besides rights issue (which also tend to cause share dilution to existing holders who do not subscribe), the REIT could source for credit directly from financial institutions. The REIT could tap on Sponsor’s existing relationship with certain financial institutions, otherwise the presence of a strong Sponsor may entice financial institutions to be more willing to lend. The last resort, if all else fails, is the ability to borrow money directly from the Sponsor itself.

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