CMT’s $250m bond issue fully taken up

To meet overwhelming response, lead manager may choose to exercise upsize option to raise size of issue to $350m

CAPITAMALL Trust’s (CMT) $250 million offering of three-year unsecured convertible bonds has been fully snapped up by institutional and accredited investors.

The base offering size of the bonds, due April 2014, was raised from an initial $200 million – as announced at the launch – to $250 million because of the strong demand, said CMT.

‘We are encouraged by the strong response to the issue of our convertible bonds,’ said Simon Ho, chief executive officer of CapitaMall Trust Management Limited (CMTML), manager of CMT. He added the issue was to ‘optimise’ overall debt structure and ‘diversify’ funding sources.

To meet overwhelming response, the lead manager may choose to exercise the upsize option within 30 days from March 10, 2011 to further raise the size of the issue by up to $100 million, to $350 million. The sole bookrunner and sole lead manager for the issue is Credit Suisse (Singapore) Limited.

The conversion price for the bonds stands at $2.2692 per unit and will offer an interest of 2.125 per cent per annum, payable on a half-yearly basis.

The funds raised from the bond issue will be used primarily for debt refinancing, which includes the refinancing of an existing convertible bond of $550 million that has a put option on July 2, 2011 at 105.43 per cent of the principal amount. The put option is currently out-of-the-money.

Moody’s sees ‘no impact’ on CMT’s rating as a result of its latest bond issue.

They added though the new bond issue could raise CMT’s debt-to-assets ratio beyond that incorporated in the trust’s current rating, the redemption of the entire existing convertible bond of $550 million with fresh proceeds and available cash is expected to take leverage back to levels in line with current ratings.

Moody’s Investors Service currently has an A2 corporate family rating or A3 senior unsecured debt rating for CMT.

The only other major debt maturing in the next 12 months, other than the put option pertaining to the existing convertible bond, would be CMT’s 40 per cent share in term loans drawn under a term loan facility granted to RCS Trust by a special-purpose company, Silver Oak Ltd.

However, analysts generally feel this is not a source for worry and is likely to be manageable by the trust going forward.

CMT shares eased two cents to end at $1.81 yesterday amid a broad market retreat.

Taking advantage of demand for fixed income securities, CMT is issuing up to $350 mln convertible bonds due 2014. (110,170,985 new units will beissued upon full conversion if $100 mln upsize option not exercised, and 154,239,379 if exercised.)

• This is “cheap” money for CMT, with coupon rate of 2.125%, and conversion price of $2.2692 a unit, 24% above current market price, and 48% above latest NAV of $1.53.

• Earlier indications were for issuance of up to $300 mln worth of CB; 1.625-2.125% coupon and 20-25% conversion premium, ie CMT settled for higher end of premium but higher coupon.

• We maintain BUY, especially with the imminent IPO of Mapletree Commercial Trust (MCT).

• Indications are that MCT will want to raise S$1 bln and offering a yield of between 5.2% and 5.8%.

• Being almost a single-asset trust (Vivo City, and 2 nearby office blocks), we do not find MCT attractive, especially compared to CMT, which has literally swiped most of the desirable retail malls in this country.

• This in turn implies that to grow, MCT would have to look outside Singapore, a recipe for stock market under-performance.

• CMT’s yield is currently 5.1%.

(MCT is expected to embark on a one-week roadshow of presentations to potential investors beginning Mar 22nd, with listing likely on April 8th.)

Illuminating Bugis

• Acquisition to expand portfolio size by 4%, create synergies with Bugis Junction

• Small but positive move, able to grow organically almost immediately

• Maintain Buy, TP $2.08

4% growth in portfolio value. CMT announced it is purchasing Illuma, a retail and entertainment complex at Victoria Street, for S$295m or S$1593 psf, in line with valuations. All-in cost works out to S$299m or S$1614 psf. The mall, spread out over seven floors with 321 carpark lots, has GFA and NLA of 297,399 sf and 185,190 sf respectively. Under the URA guideline, at least 60% of the GFA has to be used for entertainment purposes. The trust intends to fund this purchase using its cash balance of S$713m as at Dec 2010.

Organic uplift immediately. We view the acquisition price as fair, taking into account the shorter land lease and the potential for a quick ramp-up from the initial yield of 3.8%. Current occupancy at Iluma is 83.7% with about 129 tenants. Major tenants include Filmgarde Cineplex, K Suites, Arcadia and Ebisboshi Shotengai. Iluma is connected to Bugis Junction via an overhead link bridge, creating a seamless connection. With a combined NLA of 606,000sf, the manager intends to transform it into a retail destination, a magnet for both locals and tourists in the Bugis area. The mall has a high entertainment component, which could complement CMT’s Bugis Junction. In the near term, we believe the low-hanging fruit could come from raising occupancy levels at the property. Medium term, pro-active asset management exercises will drive returns, which include reviewing tenancy mix as c50% of its leases are expiring over the next 2 years as well as improving property utilisation rate.

Maintain Buy. We continue to like CMT for its execution track record and we believe it will be able to improve Illuma’s property returns in the medium term. We view this deal as positive for CMT’s growth strategy. However, initial impact on earnings and valuation is limited given the modest asset size (c. 2% of FY2011 NPI, 4% of AUM). Maintain Buy with unchanged TP of $2.08.

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.

CMT plans to boost earnings from Iluma

CAPITAMALL Trust (CMT) intends to boost the occupancy, average rents and net lettable area (NLA) at its newly acquired Iluma shopping mall in Bugis.

The real estate investment trust, which is a unit of CapitaLand, on Monday said that it has agreed to buy the mall from private property group Jack Investment for $295 million.

Speaking to analysts and reporters yesterday, CMT chief executive Simon Ho said that the trust is likely to invest in asset enhancement works to boost the net property income from Iluma.

But the amount of investment that will be required has not been determined yet, he added.

Iluma is located at Victoria Street opposite Bugis Junction, which is one of CMT’s existing properties. The mall has a net lettable area of 185,190 square feet and is connected by a link to the second storey of Bugis Junction.

Iluma’s current occupancy stands at 83.7 per cent, lower than Bugis Junction’s 100 per cent. Average rents for prime retail space in Iluma also range from $15-$19 per square foot per month (psf pm). At Bugis Junction, average rents for prime space range from $16-$29 psf pm, CMT said.

Iluma has an NLA efficiency (ratio of NLA to gross floor area) of around 62 per cent, lower than CMT’s portfolio average of about 68 per cent, said Mr Ho. He plans to boost the NLA efficiency.

DMG & Partners Securities said in a report yesterday that CMT, through its retail management expertise, would be able to raise Iluma’s current occupancy from 83.7 per cent to match Bugis Junction’s current 100 per cent. The firm has a ‘neutral’ call and a target price of $2.00 on the stock.

CMT shares rose five cents to close at $1.86 yesterday.