Analysts upbeat on CICT offer for Ion Orchard, say investors should subscribe in fund-raising exercise

SINGAPORE - Unit holders of Singapore’s largest real estate investment trust (Reit) are encouraged to subscribe for a preferential offer to raise funds for the acquisition of a stake in one of the Republic’s most prestigious shopping malls.

CapitaLand Integrated Commercial Trust (CICT) on Sept 3

proposed to acquire a 50 per cent stake in Ion Orchard

from its sponsor CapitaLand Investment (CLI) for $1.85 billion. The other 50 per cent will continue to be held by Hong Kong developer Sun Hung Kai Properties.

The total outlay for the deal will be $1.1 billion, after factoring in transaction-related expenses and adjustments for 50 per cent of a secured bank loan taken out by Ion Orchard.

Analysts view the acquisition favourably, saying it will enable CICT to diversify into the luxury retail segment in Singapore and increase the payout per unit for unit holders from 2025 onwards.

They also noted that the Reit is currently undervalued and encouraged unit holders to take up their share of a preferential offer to raise the proceeds needed for the acquisition.

Still, investors and unit holders should be aware that they are being asked to fork out more cash for CICT at a time when

retail spending in Singapore has softened

, and as shoppers from China are cutting down on luxury bills due to economic uncertainty.

And while interest rates are expected to come down, borrowing costs are still higher than before. With central banks hiking rates over the last two years, Reit prices have generally fallen and picked up only recently.

CICT’s proposal to acquire the Ion Orchard stake will include the Ion Orchard mall, Ion Orchard Link, Ion Art Gallery and Ion Sky rooftop bar from real estate investment and management firm CLI, which is seeking to divest selected assets in its portfolio and recycle the capital into new properties.

In fact, the divestment of Ion Orchard to CICT will take CLI’s total capital recycling in 2024 to $3.6 billion, surpassing its annual capital recycling target of $3 billion.

CICT is proposing to finance the move partially with net proceeds from a pro rata non-renounceable preferential offer of 377.3 million new CICT units priced at $2.007 per unit, compared with the trust’s last closing price of $2.14 on Sept 2.

This will be in the ratio of 56 preferential offering units for every 1,000 existing units held by eligible unit holders, raising $757.2 million.

Meanwhile, the remaining proceeds for the acquisition will be raised through

a private placement of 171.7 million new CICT units priced at $2.04 each

, or around $350.3 million.

On Sept 4, CICT said the private placement was 3.7 times subscribed with “strong demand” from new and existing institutional, accredited and other investors.

The private placement and preferential offering will see a total of 549 million new units issued to raise $1.1 billion.

CLI, the largest unit holder of CICT with a 24 per cent stake, has provided an irrevocable undertaking to fully subscribe to its entitlement under the preferential offering. 

Existing unit holders will be asked to approve the acquisition at an extraordinary general meeting to be convened in November. Not subscribing for the new units will see their holdings in the trust diluted.

Analysts at OCBC Investment Research are positive about the deal.

They said in a Sept 4 report that while Ion Orchard is not fully occupied, with a current committed occupancy rate of more than 96 per cent, rents at Orchard Road malls are expected to maintain their current uptrend despite retail uncertainty.

“From a credit perspective, CICT’s aggregate leverage ratio of 39.8 per cent as at June 30 remained above our coverage average but still at a manageable level,” they added, noting that “76 per cent of its borrowings have also been hedged and its average term to maturity for its debt is still among the longest in the Singapore Reit sector.”

Morningstar equity analyst Xavier Lee noted in his Sept 3 report that the addition of Ion Orchard into CICT’s portfolio of suburban and downtown malls will expose it to the luxury retail segment in Singapore.

He said: “We think the mall has a balanced tenant mix, ranging from luxury brands like Louis Vuitton, Tiffany & Co, Cartier and Rolex to mass-market brands like Zara and Uniqlo.

“We expect the mall to be a key beneficiary of the ongoing recovery in Singapore tourism, with the implementation of visa exemptions boosting visitor arrivals from China.”

Mr Lee said CICT is currently undervalued and he is valuing CICT at $2.32 per unit over the next 12 months. He expects payout per unit to increase by 1 per cent from 2025.

Shares of CICT ended at $2.09 on Sept 5, down from $2.14 before the proposal was announced, while CLI closed at $2.79, up by more than 4 per cent since the announcement.