CapitaMall Trust DPU dips in Q4

Trust exploring options to refinance $876.2m of debt

CAPITAMALL Trust (CMT), Singapore’s biggest property trust, said that distributable income for the fourth quarter fell 2.1 per cent as it faced higher finance costs.

Distributable income for the three months ended Dec 31, 2008, was $61 million, down from $62.3 million in 2007. Distribution per unit (DPU) fell to 3.65 cents, from 3.82 cents in 2007.

The trust is a unit of Singapore’s largest property group, CapitaLand. Q4 net property income rose 11.1 per cent to $85.9 million, from $77.3 million in Q4 2007.

Turnover was boosted by Atrium@Orchard, which CMT bought in August 2008, as well as higher revenue from new and renewed leases and from the completion of asset enhancement works.

But finance costs rose 61.4 per cent to $30 million, causing a year-on- year drop in Q4 net income. The increased finance costs were partly due to the convertible bonds CMT issued to fund the Atrium acquisition.

For the full 2008 financial year, distributable income rose 12.9 per cent to $238.4 million, up from $211.2 million in 2007. DPU rose to 14.29 cents from 13.34 cents.

‘The majority of the retail trades across CMT’s portfolio of malls are still faring well for full year 2008, although there were some signs of weakening in discretionary spending towards end-2008,’ said Lim Beng Chee, chief executive of the trust’s manager.

Last year, CMT signed 363 new and renewed leases at average rents 9.3 per cent higher than preceding rentals, which were typically committed some three years ago.

Gross rental revenue locked-in for 2009 already exceeds 87 per cent of 2008’s total gross revenue. ‘This will underpin the net property income for 2009,’ said the trust.

Mr Lim remains confident that CMT’s tenants will continue to stay on in its malls, even as retail sales are expected to drop this year.

The trust will take a pro-active approach to engage its tenants and meet up with them more often, he said.

Mr Lim also pointed out that turnover rent (where CMT takes a cut of tenants’ sales) contributed just 2-4 per cent of CMT’s total gross revenue in 2008.

The trust is also exploring options to refinance $876.2 million of debt before it matures in the second half of 2009.

CMT hopes to refinance all debt in one go and is already in talks with banks. Analysts said that refinancing should not be a problem as another one of CapitaLand’s Reits, CapitaCommercial Trust, was able to refinance at attractive rates recently.

CMT, which owns 14 retail malls in Singapore, last quarter said that it will put some upgrading plans for its properties on hold. The trust in May 2008 also raised its target asset size to $9 billion by 2010 from an earlier forecast of $8 billion.

Yesterday, CMT said that total assets rose 1.9 per cent to $7.2 billion on the latest revaluation.

‘CMT remains one of our top picks in the S-Reit (Singapore real estate investment trust) space,’ said Macquarie Research analysts Tuck Yin Soong and Elaine Cheong yesterday as they issued an ‘outperform’ call on the stock. CMT shares lost two cents to close at $1.48 yesterday.

Relatively Less Attractive, Better Yield Elsewhere

Better Yield Elsewhere: Maintaining our Equal-weight rating on CapitaMall Trust, we have a new lower price target of S$1.52 (from S$2.05). The lower price target reflects our lower rental assumptions for CMT as well as attempts to capture the risk of our bear case panning out as the macro environment remains fragile. Assigning a 20% probability that our bear case may pan out, we have a new price target of S$1.52 for CMT versus the S$1.66 suggested by our base case DCF-driven NAV. While we like CMT’s relatively defensive suburban retail asset portfolio, we find CapitaCommercial Trust (CACT.SI, EW, S$0.81), our new sector top pick’s risk reward more compelling, offering a higher DPU yield of 14.5% and 13.6% for FY09-2010F versus CMT’s 8.7-8.3% DPU yields.

Suburban retail relatively safer but not immune: Suburban malls constitute 46-49% of CMT’s total asset value and net property income, which are relatively more defensive, as suburban malls are less dependent on tourism and consumer discretionary spending, which has been on a downtrend. Given that management will be putting on hold its asset enhancement plans for Funan Digital Mall, Tampines Mall, Jurong Entertainment Centre and Raffles City’s Phase 3 works due to the current market uncertainties, as management is in cash preservation mode, a number of its assets remain undervalued.

Sector dependent on macro recovery: The market is likely to remain skeptical on the viability of the S-REIT business model given its heavy reliance on credit and will be keeping a watch on the ability and cost of the S-REIT debt refinancing in 2009. For now, we believe S-REITs are likely to trade in line with the STI Index.

Uncertainties over refinancing and rental rate outlook

Refinancing is still our focus for 2009. Going into 2009, refinancing of borrowings will remain the overhanging concern for CMT. CMT had not done any refinancing in 3Q08, but management assured that there is sufficient cash and bank facilities to refinance its borrowings due in December 08 (S$187.5m) and May 09 (S$80m). While previously we had assumed that part of the borrowings be refinanced by the medium term notes (MTN) programme, there is now little investor appetite for MTN, meaning that CMT would not be able to draw down its untapped MTN facility for refinancing.

Credit rating could be at risk. Recent spate of downgrading of S-REITs’ credit ratings reflects the cautious stance that rating agencies had taken on S-REITs and has also raised further concerns on their credit health. In May, rating agency Moody’s confirmed CMT’s A2 rating but revised its outlook to negative due to its weakened financial profile following the acquisition of Atrium@Orchard. We believe that the risk of credit rating downgrade is higher now given the current tight credit market and slowing retail rental rates. A downgrade could potentially raise CMT’s cost of refinancing and affect its future distributions.

Cautious over retail outlook. In light of the worsening economic and job outlook, consumer spending could continue to slow down in 2009. To reflect this, we have already taken a more conservative stance in our retail rental rate expectations and expect annual decline of 5% in rental rates for FY09 and FY10.

Maintain BUY. We remain optimistic that CMT should be able to refinance its near term borrowings, given its portfolio of quality assets, track record of good access to the debt market and backing of a strong sponsor, CapitaLand. Earlier, we have also already factored in an increase in borrowing costs of +100bp for FY09 in anticipation of higher borrowing cost due to the tight credit market. We are expecting a FY09 DPU of 15.1 S-cents which translates into a yield of 9.4%. Based on a 15% discount to our RNAV forecast, we are maintaining our fair value of S$1.94 for CMT. As upside to share price is still 21.4%, we keep our BUY rating on CMT.

Uncertainties over refinancing and rental rate outlook

Refinancing is still our focus for 2009. Going into 2009, refinancing of borrowings will remain the overhanging concern for CMT. CMT had not done any refinancing in 3Q08 but management assured that there is sufficient cash and bank facilities to refinance its borrowings due in December 08 (S$187.5m) and May 09 (S$80m). While previously we had assumed that part of the borrowings be refinanced by the medium term notes (MTN) programme, there is now little investor appetite for MTN, meaning that CMT would not be able to draw down its untapped MTN facility for refinancing.

Credit rating could be at risk. Recent spate of downgrading of S-REITs’ credit ratings reflects the cautious stance that rating agencies had taken on S-REITs and has also raised further concerns on their credit health. In May, rating agency Moody’s confirmed CMT’s A2 rating but revised its outlook to negative due to its weakened financial profile following the acquisition of Atrium@Orchard. We believe that the risk of credit rating downgrade is higher now given the current tight credit market and slowing retail rental rates. A downgrade could potentially raise CMT’s cost of refinancing and affect its future distributions.

Cutting back our retail rental expectations. In light of the worsening economic and job outlook, consumer spending could continue to slow down in 2009. As such, we are now taking a more conservative stance in our retail rental rate expectations and adjust our rental forecast from 0% to -5% per annum for FY09 and FY10.

Fair value lowered to S$1.94. We remain optimistic that CMT should be able to refinance its near term borrowings, given its portfolio of quality assets, track record of good access to the debt market and backing of a strong sponsor, CapitaLand. However, to reflect the tight credit market conditions, we are now factoring a higher increase in borrowing costs for FY09, from our previous forecast of +60bp to +100bp now. Also factoring in our new retail rental rate expectations, our FY09 DPU forecast has been cut by 6.8%, from 16.2 S-cents to 15.1 S-cents. We are also ascribing a 15% discount (no discount ascribed previously) to our RNAV forecast in light of the challenging condition in the retail market. As such, our fair value of CMT has now been lowered from S$2.57 to S$1.94. As upside to share price is still 35.7%, we maintain our BUY rating on CMT.