CMT – OCBC

Acquisition of Iluma; turnaround play for CMT

Acquisition of Iluma for S$295m. CapitaMall Trust (CMT) has announced that it has entered into a sale and purchase agreement to acquire Iluma, located opposite Bugis Junction, (one of CMT’s existing properties) for S$295m from Jack Investment Pte Ltd1 . The mall has a NLA of 185,190 sq ft and leasehold of 60 years commencing from 30 Sep 2005. Based on the current rental rates and occupancy of 83.7%, the entry yield is 3.8%. CMT has also committed to lease certain units, specifically the units which house Filmgarde cineplex and a multi-purpose performance hall2 . CMT intends to wholly finance the acquisition through internal sources of funds. Following the acquisition, CMT’s aggregate leverage will remain unchanged at 38.2%. With this inclusion, CMT’s total deposited property will increase from S$8.1b as at 31 Dec 2010 to approximately S$8.4b.

Turnaround play. We attended the analyst briefing yesterday. CMT is positioning the acquisition as a turnaround play. It believes that given its strategic location next to Bugis Junction (the two malls are already connected by an overhead linkbridge) and by leveraging on its pro-active asset and lease management capabilities, there will be further opportunities to improve the occupancy rate, tenancy mix and utilisation of space at Iluma. In terms of rental upside, there’s 16.3% of immediate vacancy and 10.4% and 40% of leases are up for renewal in 2011 & 2012 respectively. It also estimates that Iluma presently attracts shopper traffic of more than 1m per month, compared to 3.2m at Bugis Junction. There is thus scope for more synergistic values to be created through the integration of Iluma with Bugis Junction, with a combined NLA of more than 606,000 sq ft – about the size of Ion Orchard. The combined offerings of the integrated mall will further strengthen its overall attractiveness to shoppers. This bundling approach is similar to what CMT has initiated for Plaza Singapura and the Atrium@Orchard at the moment.

Maintain BUY; fair value estimate of S$2.00. Turnarounds are often difficult to execute and we believe this is likely the case here, at least in the short-term. Without further capex for redevelopment works, it is unlikely that significant rental escalation can happen soon. A gestation period is inevitable and we estimate that it may take till 2014 before occupancyrates and average rents can match those of Bugis Junction. As such, our fair value estimate edged up marginally to S$2.00; maintain BUY.