CICT’s S$3.9 billion Paragon buy draws scrutiny over timing, funding risks at EGM

[SINGAPORE] Unitholders of CapitaLand Integrated Commercial Trust (CICT) pressed hard for answers at an extraordinary general meeting (EGM) to approve its proposed S$3.9 billion acquisition of Orchard Road mall Paragon, after raising questions over the timing of the deal and longer-term plans for the freehold asset. 

Among them was Ng Ee Peng, who was chief executive of CapitaLand’s commercial and fund management business units from 2000 to 2002. At the EGM on Wednesday (Jun 10), he had questions over the longer-term plans for Paragon, given the size of the acquisition and broader shifts in tourism and retail, including the rise of experiential travel and competition from e-commerce.

“It can’t be that you are just (spending) S$4 billion (for the property) to keep it in situ,” said Ng. “There must have been some plans for it to add value to the portfolio because I don’t think the acquisition is the end of the journey.” 

He also pointed to the rejuvenation of Orchard Road, saying that CICT would be the “biggest player there to take a lead” in reshaping the precinct. Ownership of the freehold asset gives CICT the option of a redevelopment in the prime central location in the longer term.

In response, Tan Choon Siang, chief executive of the manager, said that these were issues that the manager monitored closely as one of Singapore’s largest retail landlords. 

He noted that tenant mixes at CICT’s malls have been shifting towards more dining, entertainment and experiential offerings, to keep pace with changing consumer preferences. 

“Specifically (regarding) Paragon… we are not ready to announce any plans,” he said, adding that this would require further study of the tenant mix, asset plan and discussions with stakeholders. 

He cited Plaza Singapura’s asset enhancement initiative (AEI), slated to begin in the third quarter. “We started the planning for that 12 to 18 months ago, and we only announced it in April.” 

Tan added: “We have not even completed the (Paragon) transaction… So I’m afraid… we (do not) have exact answers for you.”

The manager’s chairperson Teo Swee Lian said, with a laugh: “We really held (Tan’s) feet to the fire.” She then added that there were “some plans”, but that it was premature to share them.

She noted that CICT sees “good potential” in Paragon and is taking a longer-term view of the acquisition.

“No perfect time”

Several unitholders also pressed the manager on the deal’s timing. Some asked whether CICT could have waited for asset prices to soften, given the current macroeconomic uncertainty and geopolitical tensions. 

Tan said that there was “no perfect time” to buy or sell an asset, and that the Paragon acquisition should be viewed together with CICT’s proposed S$2.48 billion divestment of Asia Square Tower 2 to IOI Properties. 

“If the price goes down, it might also mean that the price goes down for the other assets that you’re trying to divest, so there’s always a balance.”

He added that the transactions were structured as a package since selling the office tower without a good use for the proceeds would be dilutive to unitholders if the funds were used solely to pare debt. 

Interest savings from debt repayment would not fully offset the income lost from divesting the asset, Tan explained. 

He pointed to CICT’s divestment of Bukit Panjang Plaza, which was completed in February for S$428 million. For such smaller transactions, the dilutive impact from using proceeds to repay debt would be relatively limited, he said. But for a divestment as large as Asia Square Tower 2, the impact would be more significant. 

Tan also clarified that the Paragon acquisition and Asia Square Tower 2 divestment are not conditional upon each other. 

Should the divestment fall through while the Paragon acquisition proceeds, CICT would face a funding gap, he acknowledged.

But Tan said that the risk of this appears low, as IOI Properties’ controlling shareholder – the Lee family, with an around 66 per cent stake through its vehicle Progressive Holdings – has undertaken to vote in favour of the transaction. 

Unitholders also sought clarity on whether the manager would require further capital expenditure for future refurbishments or AEIs at Paragon. 

Tan said that the manager does not expect major capital expenditure beyond regular maintenance over the next few years.

“When you look at Paragon, you can’t say it’s not well-maintained,” he noted. “But there are definitely areas for improvement.” Some “business-as-usual” maintenance capital expenditure had been factored in.

Portfolio concentration

Additionally, unitholders flagged concerns over CICT’s portfolio concentration, noting that the real estate investment trust (Reit) has a strong presence in the downtown core but is less represented in the suburbs.  

Following the Paragon acquisition, Orchard Road assets would account for 33 per cent of CICT’s retail portfolio by net lettable area, up from 26 per cent. Its exposure to the broader downtown area, comprising Orchard Road and Downtown Core, would rise to 64 per cent, from 60 per cent. 

Tan said that the manager was not taking a bet on any single location or asset class.  

“People are buying into CICT for its strong, stable, diversified core, which is what we are today,” he said, adding that this has helped the Reit deliver strong distribution per unit growth. 

He also pushed back against the suggestion that CICT was not keen on suburban retail assets, pointing to the manager’s latest project in Hougang Central with a consortium of other developers. 

“Any opportunities that come up in the suburban retail space, we will definitely be keen to take a look,” Tan noted. 

Despite the stream of questions, unitholders voted overwhelmingly in favour of Paragon’s proposed acquisition. The ordinary resolution was passed with 99.96 per cent of votes cast in favour, and just 0.04 per cent against it. 

Units of CICT closed at S$2.33 on Wednesday, up 2.2 per cent or S$0.05.