CMT – DBS

The Primer on S-Reits

90% distribution to manage AEI cashflows. CMT reported 1Q07 results in line with expectations. Gross revenue grew by 27% y-o-y and 1% sequentially, with higher contributions from the acquisition of a 40% interest in Raffles City. Net property income grew by 30%, in line with the expansion of its asset portfolio. Mitigated by higher interest costs and asset management fees, distributable income grew by 25% y-o-y. However with 90% payout of distribution income to stabilise operating cashflows for ongoing asset enhancement initiatives, DPU arrived at three cents per share (ex on 26 Apr) which translates to annualised yield of 3.3%.

Buys out CRS, on track for S$7bn. CMT has announced that they are acquiring the remaining 73% stake in CapitaRetail Singapore Fund (CRS), a securitisation structure which incubates Lot One Shoppers Mall, Bukit Panjang Plaza and Rivervale Mall, based on total asset price of S$710m, at an average property yield of 4.9%. Planned AEI is already in place for Lot One with decantation expected to add another 10,600 sf, and we expect plans to be unveiled for the other two malls. Moving forward, we expect retail asset Clarke Quay and the iconic Orchard Turn development to form the pipeline to reach portfolio target of S$7bn by FY09, together with 20% strategic stake in CRCT as an alternate growth vehicle into the China retail sector.

But value creation through AEIs still the way to go. For investment property assets, retail malls in our view have the most scope for asset enhancement initiatives. CMT continues to illustrate this view, with an array of AEIs in progress. Reconfiguration of IMM and a new two storey annex is on-going, as well as Tampines Mall, Plaza Singapura and Junction 8. Sembawang Shopping Centre has begun redevelopment works expected to complete by 1Q08. With these AEIs scheduled for completion by 1Q08, they are expected to increase NPI by another S$15m, translating to 9.8% initial yield on capital expenditure, delivering more accretion than acquisitions at marked to market prices and imply value creation by another S$146m, assuming market cap rate at 5%.