DBS Group Research 2015-07-23: CapitaLand Mall Trust - Future-proofing the REIT. Maintain HOLD.

Future-proofing the REIT 


  • 2Q15 DPU up 0.7% y-o-y to 2.71Scts. 
  • Weak rental reversions of 4.6% unsurprising. 
  • Debt tenure extended to a mind-boggling 6.1 years. 
  • Maintain HOLD, TP raised to S$2.25. 


Highlights: 


Results in line. 

  • CMT’s 2Q15 DPU rose 0.7% y-o-y to 2.71Scts, bringing 1H15 DPU to 5.39Scts (+2.5%), which is in line with our estimates. 
  • If we include cash retained (S$3.2m) in 2Q14 for comparison purposes, income available for distribution would have fallen 3% y-o-y to S$94m. This was largely attributable to lower occupancy rates at Clarke Quay (85.2% vs 100% in 2Q14) and JCube (82.3% vs 95.5%) as these assets undergo repositioning exercises, as well as AEI-related disruptions at IMM (89% vs 99.3%) and Bukit Panjang Plaza (98.2% vs 100%). 
  • However, this was mitigated by interest savings of S$4.6m and better contribution from Bugis Junction post-AEI. 

Debt tenure extended to a mind-boggling 6.1 years. 

  • As the Trust paid down its S$700m MTN due in April, its weighted average debt expiry profile jumped to 6.1 years, which is the longest ever achieved by any S-REIT. 
  • With > 95% of borrowings at the Trust level swapped into fixed rate debt and no debt refinancing obligations until 2017, CMT is very well positioned to ride out near-term interest rate shocks with minimal impact on its balance sheet and distributions. 
  • This is a vindication of their earlier efforts to take advantage of low interest rates and swap rates in the last 1-2 years, and term out their debt expiry profile, which will give them ample flexibility to pursue various funding options when they acquire Bedok Mall, which we estimate will be 1-2% DPU accretive. 

Outlook: 


1H15 reversions of 4.6% were weak but unsurprising. 

  • Rental reversions were below par for Funan (+2.3%), Raffles City (+1.6%), and JCube (-13.5%). But we note that reversions were better for non-discretionary malls such as Lot One (+6.2%), Tampines Mall (+6.8%), Bukit Panjang Plaza (+7.0%) and Junction 8 (+9.9%). 
  • While reversions were weak, they did not come as a shock. In our 1Q15 results comment, we noted that reversions at certain properties were weak despite the strong headline number of 6.1%. 
  • As more leases are renewed and committed, we are starting to see the effects of rising labour costs and declining retail sales putting pressure on rental reversions, something that the market is widely expecting. 
  • We are very positive about the Manager’s proactive stance in embarking on AEI or repositioning exercises to keep the properties relevant to consumers even amid headwinds in the retail sector. 


Valuation: 


  • We have raised our TP slightly to S$2.25 from S$2.20 as we lower our property expenses and property expenses growth rate assumptions to factor in utility savings into our estimates. 
  • At its current price, CMT is trading at a DPU yield of 5.2-5.4% for FY15-16. 
  • We maintain our HOLD call on valuation grounds. 


Key Risks: 


Occupancy risk. 

  • As several properties undergo repositioning exercises, vacancy rates are expected to go up for a short period of time. 
  • Prolonged lower occupancy rates would impact rental income to the REIT, which would in turn negatively impact distributions. 

Economic risk. 

  • A deterioration of the economic outlook could have a negative impact on retail sales and thus cap landlord's ability to raise rents. 


(Rachael TAN, Derek TAN)

Source: http://www.dbsvickers.com/




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