14 things I learned from CapitaMall Trust’s 2017 AGM
CapitaMall Trust (CMT) is Singapore’s first and largest retail REIT. CMT first listed in July 2002 and now owns a portfolio of 16 retail properties and malls that includes some of the most popular retail properties and malls in Singapore like Plaza Singapura, Raffles City, Clarke Quay, and Bugis Junction. CMT’s total portfolio value as at 31 Dec 2016 is $10.3 billion.
With the government making headlines recently about the possibility of making Orchard Road car-free to reinvigorate the shopping belt due to the weakening retail scene in Singapore, I wanted to know how CMT planned to navigate the choppy waters ahead.
Here’s are my key takeaways from CapitaMall Trust’s 2017 AGM:
- Gross revenue grew 3.1% to $689.7 million. The increase was mainly due to IMM Building which posted 10.4% growth year-on-year, and Bedok Mall which posted 306% growth year-on-year. The sharp rise in Bedok Mall is due to the full-year revenue recognition for FY 2016. However, overall growth for CMT was mitigated by a 25% drop in gross revenue for Sembawang Shopping Centre, JCube and Rivervale Mall collectively, and a 66.3% drop for Funan which closed on 1 July 2016 for redevelopment.
- Net property income (NPI) grew 2.9% to $479.7 million. IMM Building and Bedok Mall were again the main drivers while Sembawang Shopping Centre, JCube, Rivervale Mall, and Funan all posted lower NPIs.
- Although total distributable income increased from $392 million in 2015 to $394.3 million in 2016, distribution per unit (DPU) fell from 11.25 cents to 11.13 cents. The slight fall is due to the issuance of 72 million new units used for the acquisition of Bedok Mall which was completed in Oct 2015. CMT’s dividend yield, based on its closing price on 30 Dec 2016, is 5.90%. (For CMT’s current dividend yield, please view our S-REIT data.)
- IMM Building’s improved performance is due to its successful repositioning as an outlet mall. In addition, CMT decision to build a link bridge to the mall proved successful as shoppers were more willing to walk to the mall as long as there was shelter. (So Singaporean!)
- J-Cube is a laggard after it repositioned itself as a student destination as it “turns out” that “students don’t spend money”. They’re now targeting families sending kids to tuition classes. CMT views J-cube as a long-term play on the Singapore-KL highspeed rail as the mall is expected to be the closest one to the railway station.
- Funan is likely to have an underpass connecting to City Hall MRT to draw in the crowds, but CMT has to pay for the construction. Funan will be structured into three separate trusts in case there’s a need to divest part of the property (e.g. one of the office towers), but CMT will retain overall oversight. The management feels that Funan’s “live-work-play” approach is the right model to overcome the threat of e-commerce.
- CMT views that asset enhancement initiatives fall into two categories. One that can be measured using a return on investment (e.g. increasing net lettable area) and one that is maintenance CAPEX to prevent negative rental reversions (e.g. Plaza Singapura needed an uplift after 40 years).
- CMT’s portfolio occupancy rate is 98.5% which is comparably higher than the island-wide rate of 92.5% for retail spaces. Plaza Singapura, Bedok Mall, and Bugis+ all boasted 100% occupancy rates while four other malls enjoyed 99.99% occupancy rates.
- CMT plans to increase the F&B component in their malls and thinks the sweet spot is between 30% to 32%. There’s an upper limit as F&B customers typically eat and leave without shopping, hence it creates empty malls in-between meal times.
- Annual shopper traffic to CMT’s malls increased 2.3% to 347.4 million. According to CMT, its urban malls do not depend highly on tourists — contrary to popular belief that urban malls are affected by tourist number. Using surveys and sales receipts, tourists accounted for 50% of shopper traffic in Clark Quay, but only accounted for 12% and 10% in Raffles City and Bugis+ respectively.
- CMT managed a positive rental reversion of 1.0% for leases expiring in 2016. In comparison, Frasers Centrepoint Trust (FCT) and SPH REIT reported rental reversion rates of 9.9% and 5.4% respectively. However, this is possibly due to CMT’s method of measuring reversions. CMT measures the difference between the final year of the outgoing lease against the first year of the incoming lease. In comparison, FCT and SPH REIT measure reversions using the midpoint of the outgoing lease and the midpoint of the incoming lease. Hence, the reversions capture any rent escalation during that period. However, CMT expects weak rental reversions to continue at some of its malls until the economy improves.
- Gearing ratio is at 34.8% and the management feels that the level is reasonable considering many other S-REITs have ratios above 35%. [While that may be true, CMT has a higher gearing ratio than it pure-retail peers — FCT (28%) and SPH Reit (26%)]. One unitholder asked what the management felt was an appropriate level of gearing and the CEO replied that they’re happy to gear up to 40%. This is still below MAS’s limit of 45% and leaves a $900 million headroom which is sufficient for any potential acquisitions.
- Average term to maturity is 5.3 years and average cost of debt is 3.2%. In comparison, FCT’s average term to maturity is 2.7 years and its cost of debt is 2.1%. It seems CMT has chosen to pay higher interest rates for more certainty while FCT has decided to take advantage of the low interest rates at shorter terms.
- A unitholder asked if ION Orchard would be injected into CMT in the near future. The management replied that this was unlikely as it’s currently a cash cow for CMT’s sponsor, CapitaLand.
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