CapitaLand Ascott Trust (CLAS) is proposing to divest Citadines Central Shinjuku Tokyo for JPY25 billion ($222.7 million), resulting in net proceeds of about JPY 21 billion.

The proposed divestment, which is part of CLAS’ portfolio reconstruction strategy, is 100% premium over the book value and approximately 40.4% premium to the average of two independent valuations. The exit ebitda yield is 3.2%.

CLAS says that it will be able to deploy this capital into more effective uses such as repaying higher-interest debt, funding asset enhancement initiatives (AEIs), reinvesting in higher-yielding properties and/or for general corporate purposes.

Looking to invest in overseas properties? Explore projects available for sale around the world

It also enhances CLAS’ financial flexibility to distribute divestment gains or mitigate the short-term impact of AEIs or macroeconomic downturns, when appropriate. The transaction is expected to be completed by 4QFY2025.

CLAS’ aggregate leverage is expected to improve from 39.6% as at June 30 to 37.8%, while debt headroom is expected to be $2.0 billion on a pro forma basis, assuming that the net proceeds are used to repay debt.

Post-divestment, Japan will contribute about 16% to CLAS’ gross profit, down from 18%, says Serena Teo, CEO of CLAS and CapitaLand Ascott Business Trust Management.

“After evaluating the property’s age, substantial capital expenditure required and the potential income loss during renovation, we are proposing to divest Citadines Central Shinjuku Tokyo at this opportune time. It will enhance our financial flexibility to further optimise our portfolio,” she adds.

The proceeds can be used to pay the JPY5 billion debt associated with the Shinjuku property, and to pare debt in general. “There will be some associated yen debt in the property, which will be paid down first. After that, some of the remaining proceeds would be used to pay down more expensive sterling debt, and some will probably be retained in Japan for us to do investment,” Teo says.

On a pro forma basis, the accretion to distributions per stapled security (DPS) from the acquisition is likely to be 1%, and the accretion to NAV will be 1.7%.

Read also: Late Rolling Stones drummer’s 12ha Devon country estate listed for GBP2.75 mil

During a results briefing on July 29, Teo had indicated a preference towards the living sector in Japan, in cities such as Tokyo, Osaka and Fukuoka.

“After selling this asset, we do have another asset in Shinjuku, Citadines Shinjuku Tokyo, and other assets in Tokyo,” Teo adds, referring to Ibis Styles Tokyo Ginza and Sotetsu Grand Fresa Tokyo-Bay Ariake. “So we are not totally exiting from Shinjuku.”

According to the SGX announcement, the ML Estate, a unit of Mizuho Leasing, is the purchaser and is an unrelated third party to the vendors or CLAS. However, CJKK, an indirect wholly-owned subsidiary of CapitaLand Investment, is providing acquisition and investment management services to ML Estate in relation to the proposed divestment. Additionally, CJKK has informed the CLAS managers that it has entered into an Exclusivity Agreement with the purchaser where the purchaser has agreed to grant CJKK (or such third party designated by CJKK) the right to preferentially negotiate and acquire the property. During the term of the Exclusivity Agreement, the Purchaser will not engage in any sales activity with any third party other than with CJKK and will, as soon as practicable, execute a sale and purchase agreement for the property substantially.

Although CJKK is not a direct party to the proposed divestment or the Sale and Purchase Agreement, CJKK is providing acquisition and investment management services to the purchaser for this transaction. Hence, the transaction is an interested party transaction requiring an EGM. Analysts reckon more details will be in the circular, which is likely to be issued in September for an EGM later that month.

Since the sale is likely to be completed by 4Q2025, Teo says the impact on CLAS’s cost of debt is unlikely to be much lower than the 2.9% announced for 1H2025 and 2Q2025 on July 29.

Units in CLAS closed 1 cent lower or 1.105% down at 89.5 cents on July 31.