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.
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Could we see a re-test of a many times tested support at around $1.80? Maybe.
See presentation slides:
here.
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