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CapitaMall Trust: When is AK nibbling?

Wednesday, October 8, 2014

Following a recent blog post in which my admiration for CapitaMall Trust's (CMT) management was once again mentioned, with the REIT's unit price having retreated from a recent high of $2.09 a unit, I decided to examine whether it makes sense for me to have some exposure to the REIT soon.

One thing that has held me back for some time is the matter of distribution yield. With an annual DPU of about 10c, give or take a small fraction, at $2.00 a unit, we have a yield of 5% and at $1.80, we have a yield of 5.55%. This is also yield made possible only with financial leverage.

Anyway, I have blogged about how rising interest rates would increase the interest cost for REITs and how it could affect their interest cover ratios and income distributions. It could also affect their valuations as investors demand cap rates which make more sense when a riskier property investment is compared with a more attractive risk free rate.

Well, these concerns could be addressed effectively as long as REITs are able to increase their rental income meaningfully. It would largely be through positive rental reversions and this would hinge upon whether tenants are willing to pay higher rents. I expect that some REITs would be able to do this better than others.

When would tenants agree to pay higher rents?

There are probably many factors involved and only a businessman would have the full answer but factors such as the nature of the business, general economic conditions and availability of suitable alternatives come to mind. Obviously, some factors are beyond the control of even the best REIT manager.

However, for Retail REITs like CMT, if they are able to add value by encouraging shoppers to choose their malls over the competition's, they will create a win-win situation for themselves and their tenants. I believe that CMT is doing a good job of this and the REIT's tenants would appreciate this.

Not much of a shopper myself, it is really after becoming a CapitaStar member and getting the CapitaMalls credit card that I appreciate this as I looked at the REIT through the lens of a business development manager which is the fun part for me.

Then, there is the part that is not as fun for me which are the numbers. I looked at the REIT's debt. CMT has a credit rating of A2 from Moody's. That is a relatively high rating and it helps to ensure that the REIT will have access to cheaper funding.

Correct as of June 2014, here are some numbers:
Gearing: 34.3%
Interest Cover: 4.7x
Ave. cost of debt: 3.6%
NAV/unit: $1.76

The REIT's debt maturity profile shows staggered maturities which is very comforting:

Also, 98.7% are fixed rate borrowings.

It is hard to imagine CMT being caught in any situation where they might have trouble refinancing their debt. Now, this is not saying that it cannot happen, of course, which is why, expecting interest rates to rise from middle of 2015, I think that having a larger exposure to companies which pay stable and meaningful dividends out of their earnings with little or no debt is safer than increasing exposure to leveraged income instruments like REITs.

Next, as REIT investors, we would be familiar with the argument why Industrial REITs must offer a higher yield because their land leases are much shorter (although some could hold some freehold properties which throws a spanner into the wheels of this train of thought). Anyway, I feel that what is more important is a REIT's ability to actually add value even if their land leases are getting shorter over time.

REITs are able to add value through Asset Enhancement Initiatives (AEIs) and developments which max out their existing properties' plot ratios, for examples. AIMS AMP Capital Industrial REIT does a good job of this although it is an Industrial REIT with most of its properties having shorter land leases. So, to have a pro-active REIT management that creates value for unit holders is very important.

Now, coming back to CMT, unless we do not visit shopping malls at all, it would be difficult not to see how CMT have done a good job with their malls. I don't visit all their malls but because I stay in the west side of Singapore, I visit Bukit Panjang Plaza, LOT 1, Westgate, IMM and J-cube quite often. I also visit Bugis Junction, Bugis Plus (former Illuma), Raffles City and, sometimes, Bedok Mall. Oh, recently, I visited Junction 8 a couple of times too. 

If we look at the AEIs that CMT did and are doing now, it is easy to see that they have added value and are going to add more value to the REIT again.

I hope to buy at a discount to NAV but with a strong track record and pedigree, under normal circumstances, it would be difficult for my wish to come true. Then, perhaps, I might be persuaded to take a nibble if I could pay only a smallish premium to NAV.

Click to enlarge.

Could we see a re-test of a many times tested support at around $1.80? Maybe.

See presentation slides: here.

Related posts:


Garfield75 said...

Hi AK,

Though CMT has a high fixed cost borrowings it comes at a higher price. Cost of interest at ard 3.5% is high if u compare to other REITs. With a record bumper supply of retail space... Things r likely to become more challenging , esp. Govt is slowing the popn growth. Govt min wage scheme is likely to add cost to cleaning and security...I reckon it could result in 20-30% increase in cost for these areas. There r also alternative retail space that being considered by entrepreneurs such as HDB space.

AK71 said...

Hi Garfield,

The footfalls have been reducing, I notice.

I am concerned about how the internet has changed the way many people shop. This is a wave that is growing larger by the day and cannot be ignored.

Actually, warehouse spaces although in oversupply now could see increasing demand from businesses as shoppers turn to buying on the internet and having goods delivered to their homes. ;)

Having said this, it will take time and I don't think shopping malls will go the way of the Dodo anytime soon. The malls are increasingly more for certain experiential and social activities which the internet is unable to provide. :)

AK71 said...

Retail sales, which affect revenue at some REITs, decreased for four of the past five months, the worst performance in two years, data from Singapore’s Department of Statistics show. Excluding motor vehicles, sales dropped 0.4 percent in July versus the previous corresponding period.

“Singaporeans don’t shop here anymore,” Savills’ Cheong said. “Traveling has become so cheap and they buy more stuff on the Internet. The Chinese have also been avoiding Singapore, Malaysia and Thailand since the MH370 tragedy,” he said, referring to the Malaysia Airlines flight missing since March.

Arrivals of tourists from North Asia, which typically comprise more than a quarter of visitors, slumped almost 13 percent the first seven months of 2014 from a year earlier, Tourism Board data show.


Garfield75 said...

That is really something to watch, tourists numbers r something to watch but ultimately they r not the bread and butter for suburban malls. For sure, shopping mall is not going to disappear.... Fashion and specialty shops which r the key money spinner for shopping malls due to the higher rent tt they command is likely to see a dip in demand with more moving their purchases to online shops. I do not think they can keep up with the 6% plus rental reversion going forward. The worry for malls and retailers is that shopper goes to browse the item in malls and shop on line.

AK71 said...

Hi Garfield,

Yes, I know what you mean.

I used to buy my supplements from outlets in the malls but I started buying online 4 or 5 years ago and have been saving at least 50% in cost. Quite substantial considering the fact that I buy supplements for my whole family. -.-"

AK71 said...

Rents for shops and restaurants in Singapore are expected to fall this year, with prime rents on Orchard Road forecast to recede by 3 to 5 per cent and rents in suburban malls by up to 3.0 per cent, real estate services firm Savills said in a report on Wednesday (Feb 11).

"It appears that landlords in the prime shopping districts are beginning to hold out olive branches to retailers, many of whom are confronted with the twin woes of higher fixed costs and lower sales,” said Mr Alan Cheong, Savills Research senior director for Singapore, in the report.

Much of the new retail space coming onto the market in 2015 will be in central areas, unlike in 2014 when most of the new supply was in suburban areas.


AK71 said...

The collective response from the industry comes as an estimated 310,000 sq feet of secondary retail space, or space which had been occupied before and became available for lease again, is released in the first half of the year, data from real-estate consultancy Cushman & Wakefield showed. Until now, analysts said they have not seen so much retail space being given up within such a short span of time.

“Space consolidation among retailers became more evident since the start of 2015, with several retailers terminating lease contracts prematurely in a move to consolidate operations,” said Ms Jocelyn Hao, Cushman & Wakefield’s director of retail.

Mr Colin Tan, director of research and consultancy at Suntec Real Estate Consultants, added: “If rents continue to stay high, we will see more of such consolidation all through the year.”

By June, casualties in the retail and leisure sector would include the shut outlets of Marks & Spencer and Cold Storage at The Centrepoint, John Little stores at Marina Square and Tiong Bahru Plaza, as well as Japanese department store Isetan at Wisma Atria. Japanese fashion brand Lowrys Farm also closed its eight outlets across the island, while publicly listed group Lifebrandz shuttered five nightspots at The Cannery at Clarke Quay.

In contrast, there were few exits in the previous two years. Last year, Japanese skincare brand FANCL closed all 13 of its standalone boutiques. In 2013, Japanese lifestyle store Francfranc pulled out of the Republic.

At the same time, neighbouring markets such as Thailand and Malaysia are becoming more cost-effective for these brands to set up their regional base. Last year, fashion label H&M gave Singapore a miss, and chose Malaysia as the place to expand its home furnishing and decor business.

The traditional retail sector is facing a myriad of challenges: Manpower crunch, high rentals, intense competition from e-commerce, as well as sluggish tourism arrivals and spending. Both mall owners and retailers are increasingly turning to pop-up stores as a big part of the solution, analysts said.


Unknown said...

Hi AK, what do you think of capitacommercial trust? It has dropped below its NAV, and with the supply demand looking favourable for office rentals, I see some value as the price of the trust falls. Furthermore this is a good brand name management, pay a fair price for a good company?

AK71 said...

Hi Wei Xiong,

I am not sure that an annualised DPU of about 8.5c which gives a distribution yield of about 5.14% (based on the closing price of $1.65 a unit) is attractive enough for me.

There is expectation that there will be a huge supply of office space early next year which might impact DPU growth. There is also competition from business parks (e.g. those owned by industrial properties S-REITs).

So, I wonder if the distribution yield now provides enough compensation for the risk too.

I feel that the unit price would have to come down more in order for me to be interested.

AK71 said...

CAPITALAND Limited is selling Bedok Mall to CapitaLand Mall Trust (CMT) for S$783.1 million, the real estate group said on Tuesday after markets closed.


AK71 said...

"The proposed acquisition of Bedok Mall complements CMT’s current portfolio of mainly suburban malls catering to the necessity shopping segment," Mr Wilson Tan, CEO of CapitaLand Mall Trust Management, said in a statement.

"It will increase CMT’s asset size from S$10.2 billion as at 31 March 2015 to about S$11 billion," he added.

CMT's properties include Tampines Mall, Junction 8, Funan DigitaLife Mall, IMM Building, Plaza Singapura, Bugis Junction, Sembawang Shopping Centre, JCube, Clarke Quay and Raffles City Singapore, in which it has a 40 per cent interest.


AK71 said...

CapitaLand Mall Trust (CMT) has raised its distribution per unit (DPU) for the second quarter of this year despite lower net property income.

DPU for the three months to June 30 was 2.71 Singapore cents, 0.7 per cent higher than the 2.69 Singapore cents in Q2 2014.

This was even though the amount available for distribution to unitholders in the quarter slid 2.7 per cent to S$94.04 million.

Gross revenue also fell 2.9 per cent to S$159.6 million and net property income tumbled 4 per cent to S$109.5 million.


AK71 said...

Rental reversions for retail REITs have remained resilient despite a challenging business landscape for retailers. These are adjustments of rentals to market rates, when they expire or at a date earlier decided upon.

However, OCBC Bank said rental reversions would likely moderate in the near term, pressured by continued headwinds. These include sluggish tourist arrivals, uncertain demand due to softening economic growth, manpower shortages and consolidation among tenants. The increasing popularity of e-commerce stands to be another substantial threat.

Therefore, it expects prime Orchard Road rentals to drop by as much as 5 per cent, although suburban rents are expected to remain flat, with a downside risk.

Meanwhile, according to Chesterton, islandwide retail occupancy rate, which stands at about 93 per cent, may come down to about 90 per cent and this could weigh on REITs' earnings.

OCBC Bank said it expects retail REITs with a suburban exposure to outperform those with properties in prime locations as they are less reliant on the tourism market.


AK71 said...

Rivervale Mall at Sengkang will soon have new owners, following CapitaLand Mall Trust's (CMT) decision to sell the property to a private equity fund managed by AEW Asia for S$190.5 million.

CMT, which announced the sale on Thursday (Oct 15), said it will realise a gain of about S$72 million, after taking into account the divestment fee and other expenses. The property had been valued at S$116 million in June this year.

The sale of Rivervale Mall is expected to be completed on or about Dec 15. Upon completion, CMT will be left with a portfolio of 16 operational shopping malls in Singapore.


AK71 said...

On 15 October 2015, CMT entered into an agreement to sell its property, Rivervale Mall, to a private equity fund managed by AEW Asia (unrated) for SGD190.5 million. The trust is expected to receive net proceeds of approximately SGD188 million, after deducting the divestment fee and other related expenses.

"Assuming all proceeds from divestment is used towards debt repayment, we expect CMT's leverage - as measured by adjusted debt to total deposited assets -- to improve to about 36%," says Jacintha Poh, a Moody's Assistant Vice President and Analyst.


AK71 said...

Cautious on retail SREITs, owing to a strong supply till 2017, , the e-commerce threat and labour restrictions driving up tenants’ operating costs. Demand is also a concern amid weak employment and income growth. Revenue & NPI declined on the back of lower occupancies & tapering rent reversions.

Source: Maybank KimEng, 22 Oct.

CMT’s 9M15 shopper traffic and tenants’ sales psf per month increased 4.2% and 4.4%, respectively, despite the soft economic environment. Overall portfolio occupancy improved slightly from 96.4% to 96.8%.

However, rental reversions came in at 4.1% for the 9M15 period, as compared to the 4.6% and 6.1% figures achieved in 1H15 and 1Q15, respectively. This implied a continued moderation in CMT’s rental reversion trend in 3Q15. The main drag came once again from JCube, which saw its rental rates slide 14.1% as compared to its preceding rental rates.

Source: OCBC, 22 Oct 15.

AK71 said...

The one-stop destination for electronic gadgets, Funan DigitaLife Mall, will close its shutters in the third quarter of next year as its owner, CapitaLand Mall Trust Management, has plans to turn it into a new integrated development over three years.

The redevelopment of the shopping mall could potentially increase its floor area by as much as 80 per cent, according to property firm SLP International. Property analysts have also said some uses for all that extra space could be in food and beverage retail, office leasing, and even serviced apartments.

Chestertons Managing Director, Donald Han said: "This building is about 30 years old. I think it's timely for CapitaLand to relook into redeveloping it from scratch, rather than doing additions and alterations.

“There's huge potential for them to look into integrated or mixed use, such as to look into potentially keeping some component of the retail, and then on the upper podium of the retail, there could be a combination of serviced apartment uses. It could also potentially be hotel use, potentially even some form of office."

CapitaLand has remained tight-lipped on its plans, but it sees the new development as playing "a big part in the rejuvenation of the Civic District", which is currently undergoing a S$740 million Government-funded makeover.

It is in the vicinity of the newly-opened National Gallery, which is housed in the City Hall and former Supreme Court buildings, and the refurbished Capitol Building, now known as Capitol Singapore, an integrated luxury lifestyle development.


CL said...

"It could also affect their valuations as investors demand cap rates which make more sense when a riskier property investment is compared with a more attractive risk free rate."

How would it affect their valuation?

AK71 said...

Hi Chris,

The statement is self explanatory.

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