Consistency is key

Event

• CapitaMall Trust (CMT) reported a 7.1% yoy increase in its net property income to $101.2m for 3Q10, due in part to its acquisition of Clarke Quay. The result is in line with our expectations. A DPU of 2.36 cents a share was also announced, taking year‐to‐date DPU to 6.88 cents a share. The consistent performance looks set to last as more organic growth is expected in 2012 and 2013. Maintain BUY.

Our View

• CMT continues to enjoy positive rental reversions with an average growth of 2.1% in rents from renewals or new leases signed so far this year. Its portfolio occupancy rate remains a robust 99.6%, dragged down only slightly by the newly acquired Clarke Quay.

• In addition to active lease management, asset enhancement initiatives at JCube and The Atrium@Orchard will propel organic growth in 2012 and 2013, respectively. We believe this should more than offset the marginal increase in financing costs, assuming that the convertible bonds are put back by holders in 2011.

• The retail industry in Singapore should continue to post stable performance as consumer confidence strengthens. The Retail Sales Index showed that retail sales, excluding motor vehicles, grew by 6.2% in August, marking the tenth consecutive month of yoy growth. As long as this continues, it should augur well for CMT’s tenants.

Action & Recommendation

While we continue to expect CMT to deliver similarly steady performance in the future, further positive catalysts may come from its possible participation in greenfield development projects, in partnership with its sponsor CapitaMalls Asia. Maintain BUY with a DDM‐derived target price of $2.27.

Taking a prudent step

• 3Q10 distribution income up a marginal 4.0% qoq, within expectations

• Proactive actions taken to manage FY11 refinancing exposure

• Maintain Buy and TP $2.09

In line with expectations. 3Q10 revenue of $148m was 4.0% higher qoq, while NPI improved by 2.5% to $101m. Performance was boosted by the additional income from Clarke Quay, acquired in early July 2010 and a more robust leasing environment. Renewals and new leases totaling to 247,891 sf, contributed an incremental $1.5m to topline on positive rental reversion of 2.1% yoy while portfolio occupancy was up 0.1ppt qoq to 99.6%. Footfalls at CMT’s malls increased by 3.2% yoy on the back of improving consumer sentiment and tourist arrivals. Gross turnover psf grew 5.6% YTD. Distributable income improved 2.8% to $75.2m (DPU: 2.36cts) based on c95% payout ratio as the group retained $10.1m of tax-exempt income from CRCT to be paid out in FY11.

Mitigating refinancing risk in 2011. In FY11, the group will face 2 major refinancing exercises comprising $346.4m share of Raffles City CMBS and the $550m CBs with a put option in July 2011. To manage potential DPU dilution from the premium payable on the CBs if/when it gets put, the group had deferred payment of tax-exempt income from CRCT into next year and is currently reviewing its refinancing options. While we expect interest expense to rise post loan roll-over, this is likely to be partially mitigated by cheaper funding sources for its CMBS. Operation-wise, 4Q earnings are likely to be lifted upon the completion of its AEI works at Raffles Place from Oct and positive rent renewals from the remaining 6.9% of NLA this year.

Maintain Buy. We are adjusting our FY10 and FY11 DPU to reflect the push back of CRCT’s dividend income. We believe CMT will continue to be one of the main beneficiaries of rising retail sales given its major estimated 25% share of retail space in Singapore. Our DCF-backed TP of $2.09 translates to an FY11 yield of 5%. We maintain our Buy call on CMT with a total return of 8.5%.

CapitaMall Trust posts steady Q3 results

Addition of Clarke Quay in July helps boost revenue 6%

CAPITAMALL Trust (CMT) delivered steady results for the third quarter ended Sept 30, supported by higher rents at its malls and contributions from a property bought in July.

CMT yesterday posted a gross revenue of $148.2 million, which is 6 per cent higher than that a year ago. The bulk of the increase came from Clarke Quay, which CMT bought on July 1.

Higher rental rates for new and renewed leases at other malls contributed to the rest of the increase. The average rental growth rate across CMT’s portfolio from January to September, on a compounded annual basis, was 2.1 per cent. This exceeded the 0.8 per cent for the financial year ended Dec 31, 2009.

‘Growing tourist arrivals, supportive domestic demand and the resultant pick-up in consumer confidence will ensure that the retail market remain positive for the rest of the year,’ said James Koh, chairman of CMT’s manager. CMT’s distributable income to unitholders was $75.2 million, inching up 0.3 per cent from last year. Distribution per unit (DPU) was 2.36 cents, also up 0.3 per cent. The DPU ‘was in line with consensus and our estimates’, said Standard Chartered analysts Regina Lim and Wong Yan Ling in a note. Unitholders can expect to receive the Q3 DPU on Nov 29.

The annualised DPU was 9.36 cents. Based on CMT’s closing price of $2.02 yesterday, the annualised distribution yield works out to 4.6 per cent.

The occupancy rate of CMT’s portfolio was 99.6 per cent as at Sept 30, slipping slightly from the 99.8 per cent as at Dec 31 last year. CMT said that acquisitions, asset enhancements and participation in development projects are some ways in which it will try to grow its DPU.

‘CMT now has $840 million of cash and can invest $1.28 billion in assets before reaching 40 per cent gearing,’ Ms Lim and Ms Wong wrote. Its gearing ratio was 37.2 per cent as at Sept 30, up from 34.8 per cent three months ago. ‘We think management will seek development projects as these provide yield on cost of 6-6.5 per cent compared with typical acquisition yield of 5-5.5 per cent,’ they said.

CMT repurchases $100m of bonds

CAPITAMALL Trust has repurchased convertible bonds (CBs) with total principal amount of $100 million (plus accrued interest) for a total cash consideration of about $105.25 million.

The repurchase was funded in cash from internal resources. ‘We saw an opportunity to proactively reduce our debt exposure for next year,’ said Simon Ho, CEO of CapitaMall Trust Management Ltd (CMTML).

The CBs repurchased were part of the $650 million CBs – with a coupon rate of one per cent and a yield to maturity of 2.75 per cent per annum – that were issued on on July 2, 2008, to help the trust fund its acquisition of The Atrium @ Orchard.

The settlement of the repurchase of the $100 million CBs took place yesterday and the repurchased CBs have been cancelled, leaving the outstanding aggregate principal amount of CBs currently at $550 million, CMTML said.

The CBs, due 2013, have a conversion price of $3.39. On the stock market yesterday, CMT closed three cents lower at $2.11.

CMT recently issued four-year and seven-year notes under its Multi-currency Medium Term Notes Programme, which took its gearing to 37.2 per cent. With the repurchase of the CBs announced yesterday, the trust’s gearing will drop slightly. ‘After this repurchase, CMT continues to have enough cash for its asset enhancement initiatives as well as general working capital,’ Mr Ho said.

The trust acquired The Atrium in May 2008 for $839.8 million, or $2,249 per square foot of net lettable area. In July this year, CMT unveiled plans to invest about $150 million in asset enhancement works for the asset. The first three levels of The Atrium will be converted to retail use and linked to Plaza Singapura. A canopy will be built along the open plaza between the two properties to maximise their combined 170-metre-long frontage along Orchard Road.