CMT – OCBC

Retail Bond Issue – A First for S-REITs

Retail Bond Issue. CapitaMall Trust (CMT) has recently announced the establishment of S$2.5b Retail Bond Programme. As a start, it is offering S$200m 2-year retail bonds at a fixed coupon rate of 2%. In the event of oversubscription, CMT may increase the size of the retail bond to S$300m. This issue marks the third corporate retail-bond offering (after SIA and CMA) in less than six months. One of the reasons for doing so is to lock in the low interest rate (fixed rate) before further rate hikes. As of 31 Dec 2010, CMT has an average cost-of-debt of 3.7%, with about 98.7% of total debt on fixed rate basis. On the back of the successful offering from its sponsor CMA, we view this move positively as it helps to lower the average cost-of-debt for CMT. Recall that CMT has S$601.2m convertible bonds due in 2013, with a put option on 2 July 2011. It also has an additional S$346.4m of CMBS and S$38m RCF1 maturing in 2011. We think the proceeds from the retail bond issue may be used to repay some of these borrowings. We have thus lowered our average cost-of-debt estimates by 15bps for our valuation, in anticipation of the successful take-up of the retail bonds.

Operational Performance. Despite the financial crisis, we have seen both CMT’s gross revenue and net property income (NPI) growing at a CAGR of 6.6% and 10.2% respectively since FY2008. If we exclude the newly acquired properties (Clarke Quay & Atrium@Orchard) during this period, the CAGR is around 3.3% & 7.1% respectively. Notably, properties such as Junction 8, Plaza Singapore and Bugis Junction have all registered NPI CAGR of more than 5% over the past two years. In terms of rental rates, CMT also registered positive rental reversions of 9.3%, 2.3% & 6.5% in FY2008, FY2009 & FY2010 respectively. Shopper traffic remains strong at around 200-230m per annum. CMT malls are strategically located in catchment areas (with an established or growing population) and well connected to public transportation systems. Going forward, with the enhancements works at Jcube & the Atrium@Orchard in focus, we are confident that the REIT manager will continue to exploit good value from its assets for unitholders.

Valuation. CMT’s share price has fallen 6.7% YTD. It is presently trading at a PBR of 1.17x PBR, versus its historical PBR of 1.35x since listing. We think the discount is unwarranted, considering CMT’s track record of impeccable property selection and operational management. We upgrade CMT to a BUY rating on valuation grounds, with an increased RNAV-derived fair value of S$1.98.