CapitaMall Trust bags Atrium for $839.8m

It will strengthen its retail presence by integrating Atrium, Plaza Singapura

CapitaMall Trust (CMT) yesterday emerged the winner to clinch the Atrium@Orchard with a purchase price of $839.8 million or $2,249 per square foot (psf) of net lettable area (NLA) from the Singapore Land Authority.

This has raised the value of its assets to $6.9 billion and prompted the trust manager to revise its local targeted portfolio size from $8 billion to $9 billion by 2010.

This acquisition confirms an earlier BT report which pointed out CMT as one of the two final contenders for the Atrium and estimated the price of the sale to be $2,200-2,300 psf of NLA.

CMT is set to strengthen its retail presence at the premier Orchard shopping belt, given its plans to create more than 100,000 sq ft of prime retail lettable area at the Atrium.

Situated next to one of CMT’s existing properties, Plaza Singapura, Atrium comprises two Grade A office towers of seven and 10 storeys and some ground floor retail space.

CMT said that it plans to integrate Atrium with Plaza Singapura to create a combined 170 m of prime retail frontage along the Orchard Road strip to create duplex flagship stores and over 900,000 sq ft of net lettable space.

By decanting and converting lower yielding spaces at the Atrium and changing the use of gross floor area, the retail net lettable area on levels 1 and 2 of the property is expected to grow from the current 16,092 sq ft to 100,590 sq ft.

Pua Seck Guan, CEO of CMT, said in a briefing yesterday that the retail enhancement works at Atrium is expected to take place within the next three years.

‘With the improved integrated asset plan and the enhanced direct connectivity from the Dhoby Ghaut MRT interchange station to Level 3 of Plaza Singapura, the values of both assets are expected to increase,’ he added.

He noted that the grade A office space at the Atrium is currently under-rented, which provides opportunities for value creation. The current office rentals are locked in at an average $5.87 per square foot per month (psfpm), resulting in an initial property yield of about 2.1 per cent.

Using the recent renewal of an office lease at Atrium at $13 psfpm as a gauge, Mr Pua said that there is room for average office rental to double to $10-12 psfpm by 2010-2011, even after taking into account rental cap conditions in certain anchor tenants’ leases.

Assuming that all the office leases are being renewed at $10 psfpm today, the estimated property yield today will be about 4.5 per cent, Mr Pua said.

The majority of the leases – some 89 per cent of the total committed NLA – will be up for renewal in 2009 and 2010. Only 7.9 per cent of the total committed NLA is due for renewal this year.

The acquisition of the Atrium, brokered by CB Richard Ellis, is expected to be completed by end-August. The total acquisition costs, including other fees and expenses, will work out to $850 million.

CMT will fund it with the issuance of $650 million worth of convertible bonds and the balance from the $395 million proceeds from its medium term notes programme that it has issued.

Moody’s yesterday affirmed CapitaMall’s ‘A2’ rating but changed the outlook to negative, citing the increase in gearing ratio to 45 per cent from 35 per cent and other execution risks related to the redevelopment of Atrium.

But Mr Pua said that he is confident that the gearing ratio will come down soon.

The five-year convertible bonds (CBs) due 2013, which is fully underwritten by Goldman Sachs, has a coupon rate of one per cent, a yield to maturity of 2-3 per cent per annum and a conversion premium of 20-35 per cent over the share price. Even if the CBs are fully converted, the funding provides yield accretion on a stabilised basis, CMT said.

Yesterday, CMT was trading at $3.51, 12 cents lower than Wednesday’s close before its units were halted, pending the announcement.

Acquisition of Atrium@Orchard

● CMT announced the proposed acquisition of Atrium@Orchard for S$839.8 mn (total acquisition cost S$850 mn) or S$2,249/sq ft. The acquisition is expected to be completed by end Aug 08, and will be integrated with Plaza Singapura (PS) to provide ~170m of prime retail frontage and a combined c.600,000 sq ft NLA of retail space.

● The acquisition is to be funded by S$650 mn CB issuance and MTN proceeds, implying a cash cost of debt of ~1.6% (using 1% coupon rate) to justify the low asset yield of 2.1% for a marginal yield accretion of +1.0% to our 08E DPU at injection. The average cost of debt of 2.75% (using assumed YTM 2.5%), however, implies a potential dilution of 3.0%. Despite that, the acquisition is for strategic reasons, in our view, both geographically and also to lift the yields of the two properties in synergy.

● We believe the attractiveness of the acquisition will pivot on the AEI pending announcement on details. Upon completion, CMT’s gearing will be lifted to 45% and is likely to raise equity for the acquisition of ION orchard in FY09, although ION will draw a greater appeal, we believe. For now, we maintain our estimates. We believe the acquisition will strategically enable CMT to have key presence in downtown core along four adjoining MRT stations (incl. ION Orchard), with Dhoby Ghaut station serving 3 MRT lines by 2010.

Putting on the acquisition hat

CapitaMall Trust (CMT) has entered into a sale and purchase agreement with the Singapore Government to acquire The Atrium@Orchard at S$839.8m or S$2,249psf. The Atrium comprises two Grade A office towers of seven and ten storeys with ground floor retail space. It is zoned as a commercial development. It is located above the Dhoby Ghaut MRT interchange station and adjacent to Plaza Singapura, which is part of CMT’s portfolio. Dhoby Ghaut MRT station is served by North South Line, North East Line and Circle Line (ready in 2010). The acquisition is expected to complete by end-Aug 08.

Value creation through asset enhancement initiative (AEI). The Atrium will be amalgamated with Plaza Singapura to create an integrated development with 170m of prime retail frontage along Orchard Road and NLA of over 900,000sf. About 100,000sf of prime retail NLA on Levels 1 and 2 of The Atrium will be created by decanting lower yielding spaces. Management plans to utilise some of the additional retail space for duplex flagship stores fronting Orchard Road. Renovation works will be carried out progressively from 2009 to 2010. State land between the two buildings will be covered by shelters to create an “open plaza” concept. The AEI will also benefit Plaza Singapura by improving traffic flows from the MRT station.

Upside from positive rental reversion. Average office rental for The Atrium is expected to double from existing S$5.87psf pm to S$10 to S$12psf pm by 2010 and 2011. This is not surprising given that an office lease at the premises was recently renewed at S$13psf pm. Management estimated that The Atrium will provide property yield of 4.5% assuming all leases are renewed at S$10psf pm.

Has secured financing for the acquisition. Total acquisition cost of S$850m will largely be funded by 5-year S$650m convertible bonds fully underwritten by Goldman Sachs. The convertible bonds carry coupon of 1% with yield-tomaturity at 2% to 3%. Conversion premium is 20% to 35%. The balance of S$395m will be funded by its Medium Notes programme, which was already issued over the past two months.

High gearing a concern. CMT has grown its asset size from S$6b to S$6.9b via this acquisition and has revised its local target asset size from S$8b to S$9b by 2010. Gearing has increased from 35.3% to 45%. Management appears eager to move on to acquire Clark Quay (NLA: 262,230sf) and Orchard Ion (NLA: 660,000sf). CapitaLand is likely to monetise its investment in Orchard Ion once it is able to demonstrate stability of rental income. The injection of the two abovementioned assets will likely put a strain on financial resources given aggregate price tag exceeding S$3b. There may be some concerns that CMT has sidetracked from its focus on retail malls but management plans to progressively convert more office space into retail space.

Impact on earnings. We have revised our FY09 DPU forecast by 5.1% to 16.5 cents. We have factored in contribution of The Atrium as an office building and the impact of positive rental reversion. We are not able to assess impact of AEI as management did not provide guidance on construction costs involved. There may be government approval required to convert office space into retail space. CMT provides FY09 distribution yield of 4.71%. We have fine-tuned our dividend discount model to reflect risk of more fund raising exercises for the pipeline of acquisitions when both the equity and debt markets are fairly weak. Our new target price for CMT is S$3.72. Downgrade to HOLD due to limited upside.

CMT Q1 annualised DPU up 15%

92% of forecast net property income for 2008 locked in, says trust manager

CAPITAMALL Trust (CMT) has announced a distribution per unit (DPU) of 3.48 cents for the first quarter ended March 31.

This represents, on an annualised basis, a DPU of 14 cents – 15 per cent higher than for the previous corresponding period – and a distribution yield of 4.02 per cent based on the unit price of $3.48 on Monday.

Pua Seck Guan, CEO of CMT manager CapitaMall Trust Management Ltd, said: ‘The top-line numbers achieved by CMT remains very strong, supported by robust rental renewals and multiple asset enhancement initiatives.’

While Mr Pua expects organic growth driven by asset enhancement programmes to continue to ‘take centre stage in the coming quarters’, he revealed that as at March 31, over 92 per cent of its forecast net property income for 2008 has already been locked in.

He added: ‘With a gearing of 35.3 per cent, we have a capacity to acquire at least $1.2 billion worth of assets through 100 per cent debt funding, without resulting in a change in our corporate rating of A2 assigned by Moody’s Investors Service. We will continue to actively pursue yield-accretive acquisition opportunities to grow our local target asset size to $8 billion by 2010.’

As at April 21, CMT had an asset size of about $5.9 billion.

CMT’s gross revenue for the first quarter came to $121.1 million, an increase of $3.9 million or 3.4 per cent over its forecast.

Net property income of $84.7 million for the quarter exceeded forecast by 8.2 per cent or $6.4 million. CMT added that IMM and Bugis Junction outperformed forecasts by 11.5 per cent and 15 per cent respectively.

Rental renewal rates for the quarter registered growth of 10.4 per cent over preceding rental rates and 4.3 per cent over forecast rental rates.

For 2008, CMT said that a significant amount of asset enhancement initiatives will be in progress at various malls across its portfolio amounting to some $179.1 million in capital expenditure.

These include on-going works, such as the redevelopment project at Sembawang Shopping Centre, which commenced in Q107 and is expected to be completed by Q408, Lot One Shoppers’ Mall, which commenced in Q307 and is expected to be completed in Q408, and upcoming works such as the redevelopment of Jurong Entertainment Centre, as well as enhancement schemes at Bugis Junction and Plaza Singapura.

CMT said that vacancy voids may have a varying impact on operational costs in the coming quarters in 2008. As such, CMT has retained $5.5 million of its taxable income available for distribution to unitholders for the quarter.

CMT said that the retained taxable income would provide a sustainable pool of funds that would help negate the impact of fluctuating operational cash flows, thereby providing unitholders with stable 2008 quarterly distributions.

At the end of trading yesterday, CMT unit price was up five cents to close at $3.53 per unit.

1Q08: Organic growth from asset enhancements

Organic growth driven by asset enhancements. CapitaMall Trust (CMT) reported gross revenue of S$121.1m in 1Q08, an increase of 24.2% yoy. Revenue contribution from Bugis Junction, IMM Building and Raffles City grew 11.4%, 15.4% and 19.5% yoy respectively, benefiting from asset enhancement initiatives undertaken in FY07. 194,978sf of retail space representing 6.9% of total NLA was renewed at 10.4% over preceding rental rates in 1Q08. Net property income gained a faster 27.2% to S$84.7m in 1Q08 due to efforts to curb expenses, which was particularly successful at IMM Building.

Distributable income grew 27% yoy to S$65.4m. CMT announced DPU of 3.48 cents for 1Q08, an increase of 16% yoy, while retaining S$5.5m of its taxable income for distribution in subsequent quarters.

Enhancing Lot One and Bugis Junction. CMT will invest S$179.1m in FY08 for asset enhancement programmes. At Lot One Shoppers’ Mall, Levels 1 and 2 of the16,500sf four-storey retail extension was completed and tenants have commenced business. Level 1 of the retail extension will be connected to Chua Chu Kang MRT station. CMT will replace current opaque façade of the retail block at Bugis Junction with glass parapets to improve visibility of shops. Void areas at Levels 1 and 2 will be utilised for retail space and a mini-anchor space will be reconfigured to create six specialty shops.

The redevelopment of Sembawang Shopping Centre (SSC) with NLA of 128,413sf is on schedule for completion in 4Q08. CMT will decant 42,610sf of residential area and shift more retail space into the high-yielding basement, Level 1 and Level 2. 80% of total NLA has been committed and anchor tenants are Giant Hypermart, Daiso and Kopitiam.

Creating office blocks at Funan DigitaLife and Tampines Mall. CMT has received provisional permission to utilised unused gross floor area (GFA) of 385,500sf for Funan DigitaLife, which has only utilised 3.8 of its allowable plot ratio of 7.0. The unused GFA will be deployed for building a 4-storey office block with estimated net lettable area (NLA) of 277,630sf on top of the existing mall. NLA for retail will also increase by 14% from 296,601sf to 338,360sf. CMT was also granted an increase in plot ratio for Tampines Mall from 3.5 to 4.2. The additional GFA of 95,000sf will be utilised to build an office block on top of the existing mall. We expect construction to be completed by 2H 2010 and have factored in contributions from the two office blocks starting 1Q 2011.

Completed refinancing. CMT has refinanced S$312.8m bonds due in Feb 08 with S$320m term loan due in Aug 09. Interest rate for the term loan was fixed at 3.1%, lower than previous all-in rate of 4.3% for the bonds. CMT has also issued S$155m fixed rate note due in 2010 with interest rate at 3.25%. The company has largely completed the required refinancing for FY08. Current gearing is 35.3% and interest cover is comfortable at 4x in 1Q08.

Acquisitions in the pipeline. CMT is on track to increase asset size in Singapore from current S$5.9b to S$8b by 2010. Potential acquisitions in the pipeline from sponsor CapitaLand include Orchard Ion (NLA: 660,000sf), Clark Quay (NLA: 262,230sf) and One-North (GFA: 258,000sf). CMT will expand overseas with long-term target to have 30% of assets from overseas markets.

CMT provides FY08 distribution yield of 4.27%, a healthy spread of 1.92% over 10-year Singapore government bond yield at 2.35%. We have adjusted the terminal growth for our two-stage dividend discount model from 3.0% to 3.2% to reflect management’s ability to enhance rentals and capital values for its portfolio of retail malls. Our new target price for CMT is S$3.95.