SINGAPORE - CapitaLand will sell three shopping malls in China for 2.96 billion yuan ($589.2 million) to CapitaLand Retail China Trust (CRCT), both mainboard-listed companies said in bourse filings on Tuesday (June 11) morning.

CapitaLand's subsidiary, CapitaRetail China Investments, and three associated companies entered into a conditional agreement with CRCT to divest their interests in the three companies that hold three malls in China - CapitaMall Xuefu and CapitaMall Aidemengdun in Harbin, and CapitaMall Yuhuating in Changsha.

The sales will generate proceeds of around $239.9 million and a net gain of about $37.6 million for CapitaLand, which is CRCT's sponsor.

Meanwhile, to acquire the three companies, CRCT will spend around $505.4 million, subject to post-completion adjustments. It will acquire the Changsha mall company for around 646 million yuan, and the two Harbin malls' companies for 1.43 billion yuan and 354 million yuan.

The China-focused real estate investment trust (Reit) intends to finance the proposed transactions with a combination of debt and equity with an objective to achieve accretion. It will decide the financing plan details at a later date, but is likely to maintain its gearing ratio at around 35 per cent or increase it to at most 38 per cent, said Tan Tze Wooi, chief executive officer of the Reit's manager, at a media and analyst briefing on Tuesday.

If CRCT taps debt financing, which may include a small portion of onshore yuan-denominated borrowings, it intends to keep its overall cost of borrowing within 2.9 to 3 per cent, Mr Tan said.

In support of CRCT, CapitaLand intends to take up its pro-rata entitlement, if equity fundraising is included as part of the funding for the acquisition.

As at Tuesday, CapitaLand holds some 38.04 per cent of CRCT's units. This includes its indirect interests in CapitaLand Mall Trust, which owns 12.29 per cent of CRCT.

The transactions - which are conditional upon CRCT unitholders' approval - are expected to be completed in the third quarter of 2019. The completion of each transaction may take place on different dates.

The properties' total agreed value of 2.96 billion yuan represents a discount of 1.3 per cent to Cushman & Wakefield's independent valuation of three billion yuan, and a 0.2 per cent discount to JLL's independent valuation of 2.967 billion yuan.

If acquired, the malls will give an implied net property income (NPI) yield of 6 per cent, higher than CRCT's existing portfolio NPI yield of 5.7 per cent.

Besides being yield-accretive, the acquisition is also expected to increase the Reit's distribution per unit, Mr Tan said at the briefing.

After the divestment, CapitaLand will continue to benefit from the three malls' "strong and steady" yields and participate in their future growth through its stake in CRCT, said Lucas Loh, president and chief executive officer of China, CapitaLand Group.

CapitaLand will also continue to manage the three malls.

"Asset recycling is a key part of CapitaLand's strategy to enhance returns and rejuvenate our portfolio," said Mr Loh.

The three multi-tenanted malls have established anchor tenants and a speciality retail mix, and will boost the number of leases in CRCT's portfolio by 52 per cent.

At Tuesday's briefing, Mr Tan gave a rental reversion outlook of 5 to 6 per cent for the malls.

The acquisition will increase the contribution of multi-tenanted malls to CRCT's portfolio gross revenue by 1.8 per cent to 93.5 per cent, while the maximum gross revenue contribution by the top two properties in CRCT's portfolio will decrease from 44.9 per cent to 36.0 per cent on a pro forma basis.

With a total gross floor area (GFA) of 248,282 square metres (sq m), the three malls will expand CRCT's portfolio GFA by almost a third (30.7 per cent).

The 99 per cent average occupancy of the three malls is "well above" the market average, CRCT said.

Between 2016 and 2018, CapitaMall Xuefu, CapitaMall Aidemengdun and CapitaMall Yuhuating registered a compound annual growth rate (CAGR) of 6.5 per cent, 8.7 per cent and 6.3 per cent in tenants' sales respectively.

For CRCT, the accretive acquisition will diversify its footprint in China from eight cities to 10, and give it exposure to two rising provincial capital cities - Harbin in Heilongjiang province, north China, and Changsha in Hunan province, central China.

Post-acquisition, CRCT's enlarged portfolio will comprise 14 shopping malls, up from the current 11. Its portfolio size will grow by 18.6 per cent to $3.8 billion, while NPI will gain 22.8 per cent to 959.3 million yuan on a pro forma basis.

There will also be significant scope for repositioning and asset enhancement in the next few years as anchor leases reach expiry at the three China malls, said Mr Tan.

At the briefing, he noted that CRCT will target a similar growth rate for its next few cycles of acquisitions, which is to increase its portfolio size and NPI by around 20 per cent.

Shares of CapitaLand were trading up 11 cents or 3.32 per cent at $3.42 on Tuesday as at 1.38pm, while units of CRCT were trading down two cents at $1.54.