Buys CapitaRetail Singapore

Slightly better than expected 1Q. CapitaMall Trust (CMT) reported a fairly good set of 1Q07 results with revenue rising 1.0% QoQ to S$97.4m. Distributable income growth was better, rising 7% QoQ to S$51.5m with distributable income per unit (DPU) coming in at 3.0 cents. The stronger performance was attributed to better rates for new and renewed leases. For the period, CMT also benefited from lower operating expenses by about 5.2% QoQ. The lower cost was due to high base effect in 4Q06 as a result of one-off marketing and maintenance expenses incurred at Plaza Singapura.

Buying CapitaRetail Singapore. Separately, CMT also announced that it will be acquiring CapitaRetail Singapore (CRS) for an aggregate value of S$710m. As CMT current already owns 27.2% of CRS, the outlay for CRS will be S$516.9m. Presently, CMT’s gearing is about 37%; hence we see no issue with CMT financing this acquisition entirely with debt. We estimate that post acquisition CMT’s gearing will be at about 45% and this is still well within the 60% limit. However in terms of earnings accretion, CRS is unlikely to be a big booster as the assets are bought with a net property income yield of only 4.9%. Assuming full debt funding and cost of debt of 3.5%, we estimate full year DPU accretion at only 0.6 cents. Since the CRS acquisition is likely to complete in June, contribution in FY07 is only expected at about 0.3 cents.

Raising earnings estimates. Based on the above, we have raised our FY07 DPU forecast from 11.92 cents to 12.62 cents and FY08F DPU from 12.10 cents to 12.95 cents. CMT’s growth strategy remains focused on acquisitions, asset enhancement works (AEW) and development. We expect CMT’s maiden venture into development project to be in late 2007, and will probably be in Orchard Turn after the sale of the residential component.

Maintain HOLD. With the CRS acquisition, CMT’s asset size will be boosted from S$4.6bn to S$5.3bn. Furthermore, with the likelihood of CMT acquiring a development project soon, it is on target to achieve an asset size of S$7.0bn. In light of this, we have raised fair value from S$2.85 to S$3.44. CMT is not cheap, trading at a very high price-to-book of over 2.0x and with yield at below 3.5%. We thus maintain our HOLD rating.

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%.

CapitaMall Trust to swell portfolio by 12.5%

And it posts Q1 distributable income of $46.9m

CAPITAMALL Trust (CMT) is taking on new properties, increasing the size of its portfolio by 12.5 per cent from $4.8 billion to $5.4 billion. The injection of new properties will come from CapitaRetail Singapore (CRS). The trust yesterday agreed to buy from various parties the remaining 72.8 per cent of CRS’s Class E bonds and attached preference shares for a total asset price of $710 million.

CMT already owns 27.2 per cent of the Class E bonds and has the right of first refusal to purchase the properties or units in CRS. CRS, which is a private retail property fund sponsored by CapitaLand Ltd, owns three suburban malls – Lot One Shoppers’ Mall, Bukit Panjang Plaza and Rivervale Mall.

CMT yesterday reported a distributable income of $46.9 million for Q1 2007. This is 6.8 per cent higher than its forecast. Distribution per unit (DPU) for the quarter came to three cents, 6.8 per cent higher than its forecast and can be expected to be paid on 29 May. Compared to Q1 2006, the DPU registered was 10.2 per cent higher at 12.17 cents (on an annualised basis).

CMT’s gross revenue for Q1 was $97.4 million, an increase of 27.1 per cent over the same period last year. Net property income came to $66.6 million, up 29.5 per cent compared to the same period last year. Higher gross revenue for Q1 was attributed to higher revenue registered at IMM where leases previously assumed to be vacant were renewed.

The chairman of the Reit manager CapitaMall Trust Management Ltd (CMTML), Hsuan Owyang, said that CMT’s 20 per cent stake in CapitaRetail China Trust also registered a net unrealised gain of over $150 million as at April 19, with CapitaRetail China Trust’s unit price appreciating 165 per cent since its listing in December 2006.

On the proposed acquisition of the three suburban malls here, Mr Hsuan said these had ‘substantial value creation opportunities’.

The current average property yield for the three malls is 4.9 per cent, and the properties are yield accretive when compared against CMT’s annualised distribution yield of 3.2 per cent (as at April 19).

Chief executive of CMTML Pua Sek Guan said that all the three malls have 100 per cent committed occupancy rates. He spoke of plans for asset enhancement and said: ‘The proposed construction of a retail extension block at Lot One, which will add approximately 10,600 sq ft of net retail space is expected to drive higher returns to unitholders.’

Lot One already has a net lettable area of 204,203 sq ft with major tenants including NTUC FairPrice, Shaw Cineplex and Food Junction. The asset enhancement is expected to cost $26.4 million and produce an ungeared return of investment of approximately 10 per cent.

Enhancements are under way at five of CMT’s 10 malls, which are expected to mean increased rents. At Tampines Mall, where the first phase of works is taking place, average rental under the Phase One asset enhancement initiative is expected to rise by 87 per cent from $10.53 psf to $19.74 psf, and add $900,000 to gross incremental revenue per annum.

CapitaMall buys retail mall stakes for US$192m

SINGAPORE – CapitaMall Trust, Singapore’s largest property trust by market value, said on Friday that it would pay $290.3 million (US$192 million) to buy remaining stakes in three retail malls in Singapore.

A CapitaMall statement said that it will buy the balance of 72.8 per cent of Class E Bonds in CapitaRetail Singapore Ltd, a private property fund owned by parent CapitaLand Ltd. Together with the 27.2 per cent interest that CapitaMall had already bought since 2003, the trust will own 100 per cent of CapitaRetail, which in turn owns three shopping malls in Singapore worth $710 million.

CapitaMall said the purchase would boost its total assets to $5.4 billion, from $4.8 billion as at end December 2006, and was in line with its plans to increase its portfolio to $7.0 billion by 2009. The trust plans to finance the acquisition initially by debt but is considering various other options for long term financing. — REUTERS

Continues to deliver

Consistent set of results, in line with expectations. CMT reported FY06 results in line with expectations, with DPU growing 14.3% y-o-y to 11.69 cents. We have previously highlighted that there would be kicker for 4Q06 DPU of 0.27 cents due to 10% retained earnings from 1Q06 for asset enhancement of IMM. As a result, CMT would distribute 4Q06 DPU of 3.35 cents. 4Q06 also saw revaluation of assets of S$239.6m and S$499m for the full year, raising NAV per unit to S$1.87 which further expands portfolio base and increase debt capacity.

Steady asset performance. Active leasing management for the CMT portfolio continues to pay off, with renewals and new leases achieving rental kicker of 8% for the CMT portfolio for FY06. Portfolio occupancy continues to be healthy at 99.5%. Asset enhancement initiatives continue to be underway for CMT, with AEI for IMM, Bugis Junction, Tampines Mall and Sembawang Shopping Centre expected to raise NPI by S$18.6m when completed by 2Q08. Moving forward, enhancement of JEC is also in the pipeline.

Outlook for physical market remains positive. The revaluation would expand the portfolio base on its balance sheet and provide further headroom in terms of debt capacity for acquisitions. Outlook remains positive, with double-digit retail rental growth expected by market watchers.

Maintain Buy, TP S$ 3.64. We continue to like CMT for its strong pipeline of acquisitions backed by strong sponsor Capitaland, consistent delivery of asset enhancements, alternate growth channel in China’s retail sector through CRCT and exposure to positive fundamentals in the Singapore hotel sector through Raffles City asset. We are revising our target price up to S$ 3.64 based on DCF valuation after raising NPI assumptions backed by enhancements. Maintain Buy.