CapitaLand China Trust (AU8U) Earnings Call Transcript & Summary

Hi, good morning, everyone. Welcome to CapitaLand China Trust Virtual Briefing on the proposed participation in CLCR as an IPT. So thank you for join us today. I'm Nicole, IR for CLCT. I have with me today, Gerry, CEO; and Wenpei, AVP of IPM. So thank you all. For the next 45 minutes -- 30 to 45 minutes, we'll start with a short presentation to provide an overview, basically sharing a little bit more about what we have been -- what we have released last week and followed by a Q&A session. So once the presentation concludes, we'll open the floor for questions -- so let me hand the time over now to Gerry.

Good morning, everyone. Thank you for joining us on a Monday morning. This presentation is really a follow-up of our April announcement. So last week, we we've announced us signing the Equity Transfer Agreement. That basically is the next milestone in terms of our proposed participation in CapitaLand Commercial C-REIT. Okay. So let me just go through some of the items, some of the information that perhaps we did go -- we did not disclose or were not able to disclose in the April announcement. So for this announcement last week, one of the things that you would have seen is that we have CLCT has entered into the ProjectCo Equity Transfer Agreement for the sale of CapitaMall Yuhuating to CLCR, and we have described a little bit more detail on how it is to be done. In fact, we disclosed there are 2 stages, right? So the first stage is that CLCT will enter into this ETA with Changsha Kaiting, which is a CMA entity for the sale of the Changsha ProjectCo equity interest to this Changsha Kaiting. That's step one. Then step 2, CapitaMall Yuhuating will be transferred to CLCR through Changsha Kaiting. Changsha Kaiting itself will enter into another conditional ETA with the eventual purchaser, which is -- which will become eventually a part of CLCR. You may ask why is there a 2-step process? And the reason is that the C-REIT regime is such that it requires the originator of the C-REIT to basically have a reinvestment obligation. The reinvestment obligation is 85% of net proceeds. And by doing this 2-step process, the originator will no longer be CLCT directly. We are transferring the originator reinvestment obligation, in fact, to the entities that purchased our Yuhuating Mall in the first ETA. So in fact, the obligation will be passed to CMA. So in this way, CLCT will be free to use the proceeds that are generated out of this divestment, including remitting offshore to Singapore to pay debt and to undertake unit buyback and other general working capital purposes as we deem fit. So that's one additional thing that we disclosed. The second thing that we made clear is that our subscription into -- of the strategic stake into CLCR will be 5%. That will come up to about less than 20% of the proceeds that we are receiving from this sale, right? I think that's about SGD 20 million, okay? So that's the additional information that we have provided. If I look at the next chart, where we gave a clearer structure of the post-transaction look of how CLCR is structured and managed. You would see that, again, we talk about CLCT having 5% strategic stake. Collectively, the whole CapitaLand Group will hold at least 20%. So that's what's required under the C-REIT regime. The other question that is bound to be asked or thought about is, and I think the last announcement, some of the stakeholders as well as analysts have asked this, which is whether there's double fee in terms of fees being charged at CLCT as well as CLCR, right, for our holding of the CLCR units. The answer to that is there will be no double fee. There will be no double fee. So that will be charged in that way. There's only one set of fee that will be charged at the CLCR level, okay? So I hope that makes it clear. The other thing to note is the last announcement in April, we also said that CapitaLand continues to have an active role, and that role really is about managing the projects. As you can see, see the CapitaLand Investment continues to be the operation management or the asset management entity of the project in Changsha as well as the other project in Guangzhou that will be part of the initial portfolio for CLCR. Okay. I will not go into much depth in terms of transaction rationale. I think I covered that in the April announcement. But the most important thing, I think, to highlight is this is strategic. It unlocks the value of our mature retail asset, Yuhuating. And it also, in the long term, give us an additional channel for capital recycling through CLCR, which we can directly assess now that we have a strategic stake in it. So we have a strategic stake, but we're not an originator just to reemphasize that. So let me just go straight to maybe some other details about transaction structure. The transaction structure, as you can see, is actually the approvals that we are seeking are 2, right, which are changed together. The approvals are the proposed divestment, which is CLCT divesting CapitaMall Yuhuating into CLCR in the 2 sectors that I mentioned as well as CLCT subscribing for the 5% of the IPO of CLCR. So these transactions are IPT in nature. So we will be seeking their approval, our unitholders' approval in an EGM that will be disclosed and will in due course. In terms of the independent valuations, we have already gotten indications and gotten valuations for the divestment. So as per the required property funds appendix guideline, we need to do 2 independent valuations. So CBRE and Colliers did them, CBRE at CNY 780 million and Colliers at CNY 748 million. Some questions may be asked why there's a difference. Number one, I would say that the difference is not much. It's less than 10% between the 2 valuation, which so it is within our norm in terms of such valuation. Second thing that we have seen is that between CBRE and Colliers, Colliers did have a slightly higher discount rate. So that explains a portion of that valuation difference. In terms of the divestment consideration, we have mentioned before that there is currently a base floor price in our announcement, which is CNY 748 million. We based that on the lower of the 2 independent valuation because the TFA guidelines is such that we are not able -- we won't be able to sell the asset if it's below the lower of the 2 valuation. So we have set the floor price at CNY 748 million, right? However, right, the final price of the divestment is really depending on the IPO process. So there is certainly a potential that Yuhuating may be sold to CLCR at a price higher than the floor price of CNY 748 million. If we look at what's been the feedback so far from the market as well as the IPO track record of the C-REIT market, it has been relatively positive so far. So we do, in fact, hope that we can get a better price than the full price. And that's certainly something that we view a likely outcome at this stage. And the other thing that I would say is that we will emphasize that the divestment consideration will only be finalized after the IPO units are priced. So that will still be subject to prevailing market conditions and investor sentiments. In terms of time line, we have signed the ETA, the conditional ETA. So that is what has triggered the announcement. The next thing that you can look forward to is the notice of EGM and the dispatch of the circular. That will be in third Q, hopefully, faster, sooner rather than later. Our circular is now being cleared by SGX. And once the approvals are in, we will be in a position to basically give out the notice of EGM and dispatch of circular. We also expect that EGM will be in third Q of 2025. Thereafter, once the EGM approval is obtained, we will get the former CSRC and SSE approval, which are really just conditional on us getting our EGM approvals in place. And then after that, we will formally lease CLCR. That's expected in 4Q 2025. Next, maybe I just share a little bit of the pro forma financial effects that's also in the announcement. We have provided 2 scenarios. There could be multiple scenarios, obviously, but we just wanted to give a few of how it will look like depending on how we use the proceeds that are coming back. So the yellow bars which is the first column, right, post transaction, right, represent if Yuhuating is sold to CLCR at the floor price of CNY 748 million, but we decided to use everything into paring down debt offshore, right? So that's the orange bar, right? And then the red or maroon bar represent if we use part of the money, about SGD 50 million to do unique buyback. So you can see that at the price of -- the floor price of CNY 748 million, you can see that the effects are such that if we use all the proceeds to pay down debt, there will be a slight DPU dilution. And then our gearing will improve by about 120 bps right? Whereas if we use SGD 50 million to buy back our units, right, there will be a DPU accretion, NAV also a slight accretion. And in terms of cutting down gearing, of course, we won't be able to cut up -- pay down as much debt, so gearing more or less stay the same, right? That's at a price of CNY 748 million. Now if we are able to sell at a higher price, we have used CNY 790 million as illustration, right, as an illustration. You can see that the metrics all look substantially better than the examples that we showed in CNY 748 million, right. In terms of NPI yield, exit NPI yield at CNY 748 million, we are selling the asset about 6.8%. At CNY 790 million, it's 6.4%. And I think I mentioned before, about 6.4% is, in fact, part of the cost for such asset because it's already matured for Yuhuating and as well as in the Tier 2 cities. So it wasn't surprising to us that the end result is about 6.4% [ handle ], right? Of course, we hope that IPO process have lots of interest. And if it's very well subscribed, we may, in fact, get a higher valuation for our asset. I think that's pretty much it in terms of the information that I would like to cover today and the additional information that was in last week announcement. I will open up the floor now to take any questions that the analysts or the other participants in the call have.

Thank you. Thank you, Gerry, for your presentation. So we'll now proceed to the Q&A segment. We have the first question from Geraldine, I'd like to pass it to you, please.

Many thanks for having this call. Maybe just a quick question on the 5% stake. I think you had a price to be about SGD 20 million. Are you able to share assumptions behind this? And as well as just a follow-up on the C-REIT IPO metrics, typically, how much do they [ add ] in accordance to book and as well as listing yield? If you can just give us some color from your understanding.

Okay. The first question, I think, is how do we calculate this 5%, the SGD 20 million?

Yes, yes.

Okay. It is estimate, right? There have been some -- there are some documentation that we have sent in as part of the Chinese prospectus for CLCR listing. So that comes with certain assumptions of valuations, right? So from that, we back calculate to get this net SGD 20 million number. So the other question is regarding the typical use. Am I right for C-REITs?

Yes. Yes. So if you can give us some color, typically, how do they -- how much they lease in accordance to their book values, if it's above or below?

Okay. The typical use right now is about 4% to 5%. In fact, our Chinese prospectives are also in that region, right, the region that we intend to market CLCR. And in terms of the price to book, they are trading right now, the consumption streets are trading at above book. Yes.

Maybe just a clarification. I think the 4% to 5% yield is the trading levels right now, right, in the market for C-REITs. But I also note that there has been a lot of share price outperformance since listing. So would you have an idea typically where do they list that?

I would say currently, the current levels are about 4% to 5% because you would have imagined that maybe the earlier batch would have been slightly higher. And then after that, there's been some market discovery and some uptrading of those initial C-REIT participants. And then as new participants get in and lease, obviously, the yields start to tighten. Here is Wenpei, who is directly involved in the in this work stream.

I think when the consumption risk in China get IPO, I think the DPU yield is around 5 -- I would say high 4. Right now, the trading yield is lower is 4 to 4.2 something. So there's -- you can see from the share price, actually, I think they go up quite well since the IPO.

Yes. So initial batch at listing, maybe about [ 5 ] then it started to tighten.

Okay. Thanks for the color, there's a good chance you'll be able to sell this at higher than the floor price. Yes. Maybe, Gerry, just one another quick one. I think if you look at shares buyback versus reducing Gerry, I think both makes good sense now, but which one are you tilted towards? Yes. That's all for me.

Okay. On that, I think we'll look towards maybe closer to year-end in terms of how our financial position is. But I also say that my priority now is, in fact, if there's no change in terms of financial situation. It's likely that I'll put more towards paring down debt than doing buyback.

Can we have Terence, please? Terence from JPM.

Yes, just maybe following on from Geraldine's question. In terms of putting the proceeds towards share buyback, what will be the key considerations, if to deploy more proceeds towards the buyback?

Okay. I think the key consideration will be, I think our gearing levels, right? I do want to try to keep our gearing far below the 45% mark. So that's something that we will get more clarity as we move closer to year-end and looking at our valuations, looking at FX, looking at general situations. And of course, our share price itself, right, whether it's an attractive level to participate in terms of buying back some units, right? So I think rest assured that at a point in time when we can make the decision when we get the proceeds back, we will use the money in the best interest of unitholders.

And in terms of the valuations, right, I mean, you did explain that there is quite a big range in the valuations and also in the potential sale price. Is there -- like where could the sale price land? And also, is there opportunity to sell even higher than your higher price of CNY 790 million?

It's quite -- it's rather speculative, I would say. But I think, number one, the 2 valuations, I think the difference is about 5%. So I don't -- 4% to 5%. So I don't think it's really our weight in terms of independent valuations for a transaction is concerned, right? As for whether we can sell higher than our illustrative price of CNY 790 million, really, I can't tell, right? If you look at the valuations that we think we can get it at, certainly, there's a chance, right? But I can't commit. It really depends on the market situation at a point in time.

And as you highlighted in your presentation, there is some slight dilution if you were -- to DPU, if you were to utilize the proceeds to repay debt, would you look to offset this in other ways? Or you are okay with that slight dilution given that gearing is coming down?

I would say at this moment, I think a slight dilution should be okay, right? But I would just -- I would say that, again, when we get to closer to the end of the year, I would make a better -- I'll be able to make a better judgment call at that point in time. If the fact that we have some cash coming back, that could be used for a variety of things, right? And that could help if we need to help to support the DPU, yes. But again, I would say that I would have to wait until the end of the year to see how things turnout.

I would like to pass the time to Vijay, please.

I have 3 questions. My first question is, who will be the REIT manager and the property manager for the CLCR? Sorry if I have missed it.

Okay. Let me [indiscernible]. REIT manager for CLCR, right? Okay. So if you look at the transaction structure, let me get back to that slide. So actually, there is an independent REIT manager [indiscernible]. So if you can see that there are a few entities here, CITIC -- sorry, ChinaAMC, which is actually under CITIC itself is what we call the C-REIT manager, right? There are other -- another manager called ABS Manager, which is basically in charge of the ABS scheme, and that's under CITIC Securities. But the equivalent of what we deem as a REIT manager is the C-REIT manager, which is by China AMC, which is an independent third-party -- this REIT manager. And if you look at this chart, in fact, we get back to this, you can see that ChinaAMC here is a CLCR manager. So this is at the initial listing, this is what will be how the whole structure be managed.

Okay. At the start, CapitaLand or CLCT will not have any interest in the REIT manager at this point of time. But eventually, you plan to gradually move into the REIT managers or CLI might move into the REIT manager. Is that the direction?

I think it's a question for CLI to answer. But I think generally speaking, yes, the group does want to control the REIT manager that they are sponsoring in terms of the REIT that they are sponsoring.

Okay. But property manager would still be you, CLI?

That's right. Yes. Those 2 that one is quite clear. You can see that CapitaLand Investment under CRSM, right? That's still the same.

Okay. My second question is that this Changsha Kaiting would be the holding vehicle throughout the life of this REIT or is it a temporary vehicle? And if I want to look at from a growth perspective, if you want to divest malls moving along into this entity, you would be putting this -- your divestment into Changsha Kaiting and then Changsha Kaiting eventually over a period of time would be divesting it into CLCR. Is that how should I look at it? And there are some restrictions in terms of how much CLCR can acquire as you move along. Maybe can you give us some color on that?

Changsha Kaiting is a conduit actually. It's the conduit that we are selling through CMA into CLCR. So after the listing transaction, Changsha Kaiting will no longer be holding the assets, right, lotting in particular, right? So that's -- just to make that clear because it's a 2-step process, Changsha Kaiting is the first step. And then Changsha Kaiting itself is the second step to sell to the CLCR eventual entities, right? Then to your question of if in future, we are doing more injections, right? Of course, that's -- again, it's crystal balling, but one potential possibility is, again, we repeat the same step where we do this 2-step process and we go through the CMA entity again, and then they will go through again this CLCR and ABS process to inject the asset directly into CLCR through the second -- through a 2-step EPA process.

Got it. And is there any restriction in terms of how much CLCR can acquire in a particular year?

There is no size restriction. The restriction, I think we spoke about is there's currently a 1-year restriction from an injection and IPO of the assets to the next follow-on injection.

My last question is that in one of the slides, I saw that CLCR is purely going to be a retail assets. Is that a requirement? Or is there -- I mean, could you have made it as a retail logistics and business park portfolio eventually so that you might be able to spin off some of your business parks and logistics assets?

Currently, the regulation is such that they only allow single asset class C-REITs. So it has to be a single asset class. So at this point, the group has decided to use retail -- the retail asset class as the first pioneering effort to establish this C-REIT initiative.

Can I pass the time to Terence from UBS.

Can I check, is there any distinction between, let's say, from a city tiering or asset performance standpoint that would explain potentially why this could be less comparable to the comp set you referenced?

[indiscernible].

I guess with regards to -- I guess, there was a citation of some of the listing yields low falls, but the assumption is we are comparing apple-to-apple. I mean, we could be, but my point is what's the apple-to-orange comparison? Because I see some of them potentially like they have, let's say, higher same-store sales growth to offer. And I'm not sure how this portfolio will stack up against those incumbent C-REITs.

Yes. I think -- thank you for the question. I think you rightly point out that, in fact, there's a difference in terms of the yields for different assets in different locations. So our particular asset is it's second-tier cities. So it's about 6% in terms of yield. For example, the other asset by the sponsor, right, it's a first-tier city, right? So it does get a tighter yield of 4% to 5% yield. It's also a bigger asset in terms of the contribution for the initial portfolio, right? So if you come to some of the other C-REITs that have been -- that are in more the 4%, those are, in fact, the higher-tier cities, whereas the 5% is probably the -- will be the ones that are in lower-tier cities. So ours is, in fact, a little bit of mix because ours is part maybe about 1/3 second-tier city and 2/3 first-tier city.

Got it. And maybe with regards to timing, just curious if there is some kind of urgency underlying this with regards to the potentially being a "deluge" of let's say, sponsors coming to market. If I look at like CR Land, China Resources Land, it seems like they are also trying to go hard at trying to raise money. So just your thoughts on timing in this current cycle.

I think my own view is the timing is quite favorable, right? If you look at -- well, the key reason why domestic liquidity is, in fact, buying is it's captive liquidity for new options, a lot of the insurers can really only buy maybe corporate bonds or government debt. So government debt is below 2%. It's about maybe 1.6% now, 1.5%, 1.6% now that's long-term government debt. And then for the corporate bonds, particularly the ones that they feel safe to buy, which is a lot of the SOE bonds, right? Those are maybe 2-plus percent. There are foreign players who are very creditworthy who are also launching bonds there, which are also 2-plus percent. So when they compare that to a C-REIT, right? That is, in fact, 200, 300 basis points pick up. So there continues to be quite strong demand. In fact, there was a recent case of 80x oversubscription for one of the C-REIT -- recent C-REIT, consumption REIT listing. So I think the timing is still good, right? As far as you see, there seems to be a pipeline of people trying to release asset. I mean this is a function of the fact that the market is vibrant, right? And the market has been growing quite significantly every year. And it has been absorbing well, right? So I'm not surprised that people who have assets, quality assets would want to take advantage of this development and continue to see how they can tap the market. For us, of course, for CapitaLand, of course, we can say that we are in a unique position because we would be in the -- we would be the first foreign sponsored retail C-REIT in the market. And as far as foreign mall operators are concerned, I think there are a few strong companies with our heritage in terms of more operations, more management, more investment as well as our general reputation in China being very strong. And there's been a lot of encouragement, in fact, from the government authorities to ask us to push forward to try to list it as soon as possible.

Got it. And just pardon me, I couldn't really understand the idea of single fee, i.e., no double dipping. I see this chart, right, so CLCT would hold a 5% stake in CLCR. The question is, will CLCT be charging a base management fee to unitholders on the 5% stake in CLCR?

No, we will not -- CLCTM will not be charging a management fee on the 5% stake.

[indiscernible].

Can you hear me?

Yes, very clearly.

Just 2 questions. The first is on the REIT manager. Kin, you mentioned that CLI is likely to take a stake, but is there any restriction in terms of no more than 50% for a foreign company or anything of that such that we should be aware about? And secondly is on the long-term growth prospects of CLCT, right? Let's say there's an asset by CMA or CLI that they want to divest a retail mall in China. How should we think about the conflict of interest and which asset -- which entity should it go into?

Okay. Maybe the 2 questions. Thank you, [indiscernible], for the questions. For first question, maybe let me clarify. I think I did not say that CapitaLand Investment will buy the current manager, which is ChinaAMC. ChinaAMC is a pretty big company part of CITIC Securities. So I did not say that. But there are -- I mean, CL itself do intend -- and this is a licensing issue. So one of the objective is, of course, in each REIT jurisdiction that is active in, you want to have get the license to eventually be able to be the REIT manager for those REITs that it's sponsoring. So I can't say that the eventual solution is that for them to buy a part of ChinaAMC, but there could be different solutions, right, including -- it could be buying, it could be getting their own license, it could be a variety of things. But I certainly did not say that they are certainly buying AMC. So one thing.

One thing. But is there a possibility for a joint venture kind of in this REIT manager?

I can't comment on that seriously. It's too speculative. It certainly something that you should ask CLI itself, yes. But I do know, as I said generally that the group -- from a group perspective, they want to get the right licenses to eventually own the REIT or partially own the REIT manager, yes.

I understand. But is there any regulation that prohibits like a foreign entity, you cannot have more than 20% in the REIT manager. Any regulations of that sort that we should be aware?

I'm not too aware of it because I mean I'm not part of the team that are looking at the licenses, right? But I do know that you need to get a license, right?

This license is I see much more difficult than Singapore, you get [ LFMC ] license to be at least mandated. In China, it's called mutual fund license. It's a -- I mean a cool asset [ manager ].

Okay. So the next question that I will take, which is you're talking about future assets, right, future assets from the sponsors. Okay. I think, first of all, you need to recognize that CapitaLand as a group has about -- maybe about SGD 40 billion to SGD 50 billion of assets in China. That's across different asset class. Retail alone, I think, is about SGD 18 billion, in terms of assets. So that's a big, big pie, right? I mean our own valuation, our own asset size right now is just only below SGD 5 billion. So certainly, there are growth opportunity both from -- for CLCT as well as CLCR. And you can see in the different announcement and releases that we jointly put up that has been communicated that CapitaLand Investment will continue to support the growth of both CLCT and CLCR, right? That's one. Two, continue to -- we continue at CLCT continue to have our existing ROFR, which basically a ROFR on the series of funds that CLI has -- and that's -- in those funds, we have about maybe CNY 18 billion of retail assets that we directly have a ROFR over. So that still is one advantage that we have that our other vehicles do not have, including CLCR, right? So that continues to exist for us. Third, if there is, in fact, some assets that are not covered by the ROFR and then for whatever reasons, even though the pie is so big that us, CLCR or even some other funds within the CapitaLand investment umbrella that looks at China wants to be a part of, right? We do have a robust process in CapitaLand. There's an IC process that make sure that such opportunities are look at fairly by any of the qualifying entities. For us, of course, we focus on China. So most of China assets will come -- would be basically shown to us, right? And then for CLCR because it focused on retail, right, it's a retail asset, they will probably be able to look at it. And then we'll see that everyone will get an opportunity to evaluate. And generally speaking, the entity, the CL entity that best fits the situation, best fits the sellers' requirements would usually prevail in fact, will prevail. And that's, of course, not just a function of price. It's sometimes a function of deal certainty, speed, approvals that are needed and the fit in general, yes.

Yes. My concern is, okay, let's just run through the scenario where maybe 2, 3 years down the road and you are still trading maybe close to where you are trading in terms of valuation. And of course, the CLCR might be trading at a tighter yield, right? Then there's an asset that -- there's different kind of assets that both entities can buy because of the difference in cost of capital, right? So then let's say CLCR started to buy some Tier 1 assets. And given your cost structure, you can only acquire some of the maybe Tier 1.5 or Tier 2 cities assets. Then will the market start to look at, oh, maybe this is a better vehicle, [ favorable ] in that sense?

I think...

The better quality assets. What would you say...

Number one, we try to address part of it as the fact that we are taking a part of CLCR, right? That's one way that we're trying to address it. But number two, one big part of the difference is CLCR is a pure domestic vehicle, right? The investor base are only domestic. Only PRC domestic investors can invest in it, right? CLCT continues to be CapitaLand's vehicle that targets global investors outside China domestic investors, right, that are interested in having a China play, right? So that certainly is one key difference. Also, of course, we are able to diversify and able to take different sort of risk spectrum. And in fact, we can do more AEIs, brownfield, even greenfield if required, whereas CLCR is very focused on investing in very mature income-producing assets. So their limit is -- and their mandate is more restricted than ours.

I can add on just 2 more points. In terms of the size of the follow-on so far, right? If you look at some of the C-REITs, the follow-on offering issuance size is around CNY 415 million to about CNY 1.8 billion. So I think, firstly, the follow-on size for C-REITs for now, I mean, it looks really quite small. You cannot really buy very chunky assets from there. And also the second thing is in terms of -- maybe in terms of acquisitions for CRCT, we can react a lot faster. We can do placement and we can be a lot faster from a fundraising perspective. Of course, if we have to do the EGM, it will still be a bit longer, but it will not be as long as from a C-REIT perspective, where they easily, their follow-on process could be about 6 months to about 8 months around there. So in terms of the speed of responding to an acquisition, we are much faster as well. So size and speed, I think also are some of the key sort of difference in terms of when people are looking -- when CRI is looking to look for someone to acquire those assets are things that they will also be considering. Okay. Do we have any further questions? Well, if we don't, I really appreciate everyone's time today. Please feel free to reach out to me if you have further questions. So thank you all, and have a good day.

Thank you.