CapitaLand Mall Trust - Phillip Securities 2020-01-24: Merger To Axe Growing Pains


CapitaLand Mall Trust - Merger To Axe Growing Pains

The Positives

FY19 NPI grew 1.3% y-o-y on a comparable mall basis.

  • Revaluation gains of S$17.6mn largely driven by better performance at malls – cap rates holding steady except for office component of Funan – cap rate compression of 10bps tied to tapering office supply.

Positive rental reversions of 0.8% for FY 19 amidst weak retail outlook and substantial supply.

  • Rental reversions for FY19 were +0.8% over the initial signing rents (typically committed three years ago). Positive reversions ranging 0.4% to 3.5% were observed for all malls except RCS (-0.1%), CQ (-2.1%) and Bedok Mall (-6.5%).

Portfolio remained high at 99.3% as at 31 Dec 2019.

  • Tenant retention was high at 83%.

The Negatives

Falling tenant sales.

  • Despite an improvement in shopper traffic (+1.4%), tenant sales for 1H19 fell by 1.3%. However, tenant sales psf/month for the top five trade categories that contributed > 70% of gross turnover (GTO) income improved 1.0% in FY19. These were F&B (+2.9%), Supermarket (+1.2%), Beauty & Health (+0.9%), Fashion (-0.4%) and Department Stores (-5.3%).

What’s in the news?

Proposed merger of CapitaLand Mall Trust with CapitaLand Commercial Trust 

  • CapitaLand Mall Trust will acquire all the issued and paid-up units of CapitaLand Commercial Trust (SGX:C61U). The consideration for each CapitaLand Commercial Trust unit comprises 0.72 new units of CapitaLand Mall Trust and S$0.259 in cash, resulting in an illustrative value of S$2.1238 per CapitaLand Commercial Trust share. The consideration implies a gross exchange ratio of 0.82x, based on the issue price of S$2.59 per CapitaLand Mall Trust unit.
  • The new entity, CapitaLand Integrated Commercial Trust (CICT) will be a proxy for Singapore commercial real estate, investing in retail, office or integrated development assets, with overseas developed market exposure capped at 20%.
  • The cash component will be paid using debt facilities. EGMs will be in May 2020 with targeted completion being June 2020.

What do we think?

  • We like it. We view the merger as a strategic and pre-emptive move that paves the way for accelerated growth. The proposed merger provides growth opportunities for CapitaLand Mall Trust and risk diversification benefits for CapitaLand Commercial Trust that would have been challenging for them to achieve individually otherwise. To attain this magnitude of growth opportunity and risk diversification, both REITs must shed their old mandates – the proposed merger provides this opportunity.
  • The merged entity will combine two champions in their respective asset classes, providing a solid foundation to unlock a myriad of scale-related advantages: Growth and Resilience.

Solid Fundamentals

  • A stronger platform encapsulating CapitaLand Mall Trust’s and CapitaLand Commercial Trust’s best-in-class attributes.
  • Capitalise on combined domain expertise to leverage future real estate trends towards mixed-use assets – With more Singapore GLS earmarked for mixed-use and Master Plan 2019’s emphasis towards integrated projects and land use intensification, CICT’s mandate and retail and office expertise opens it up to opportunities in this space.


  • As the 3rd largest REIT in APAC (Market cap: S$16.8bn), CapitaLand Integrated Commercial Trust (CICT) will enjoy enhanced visibility and trading liquidity potential for re-rating and a more competitive cost of capital. CICT’s size will also increase its appeal and relevance amongst the global institutional and retail investor community.
  • Broader investment mandate increases opportunity and optionality.
  • Sizable (higher) development headroom up to S$6bn to embark on larger redevelopments.
  • Higher debt headroom of S$2.9bn allows financial flexibility to move swiftly when competing for assets.


  • Enhanced resilience and stability through market cycles.
  • Reduction in asset and tenant concentration risk.
  • Increased flexibility to undertake portfolio rejuvenation and redevelopment as larger base of earnings provide leeway to withstand DPU drag when assets are redeveloped.


Retail rents bottomed out and started climbing in 2H19.

  • Despite substantial supply coming onto the market in 2019, rents and occupancy showed marginal improvement. Better differentiation, active tenant management and retention will help CapitaLand Mall Trust malls retain their attractiveness as retail space providers. We like CapitaLand Mall Trust for the following reasons:

Balanced revenue from portfolio of 15 downtown and suburban malls -

  • CapitaLand Mall Trust’s earnings are backed by necessity spending at suburban malls, while enjoying exposure to the more discretional and tourism spending at central malls. Maintained consistently high portfolio occupancy of c.99%.

Willing and able to undertake redevelopment projects to create and unlock value –

  • Funan reopening ahead of schedule on 28 June 2019. The redevelopment project cost S$360mn resulted in a mixed-use asset comprising a retail, office and hospitality (not part of CapitaLand Mall Trust’s portfolio) components. Funan realized S$391mn in revaluation gains upon achieving TOP status in June 2018 and a further S$24mn in 4Q19. The redevelopment of Funan helped to refresh, strengthen and futureproof their portfolio. CapitaLand Mall Trust’s track record and expertise as a mall operator is evident from their consistently high portfolio occupancy of c.98% in the last 8 years.

Superior Mall Management: Turning E-commerce threats into online-to-offline (O2O) opportunity –

  • Competition from E-commerce will continue to vie for the same retail pie but CapitaLand Mall Trust has created opportunity amidst struggle. CapitaLand Mall Trust has been very active and in trying to embrace E-commerce players with their Taobao retail concept store at Plaza Singapura (Nomadx) and Funan. Their centrally located malls (Raffles City, Funan, Bugis, Plaza Singapura etc.), in addition to their loyalty program to increase customer stickiness (CapitaStar) makes CapitaLand malls good flagship store locations for e-commerce players who are looking to have and/or build an offline (physical) presence, starting with one central store and expanding via the CapitaLand Mall Trust ecosystem.

Upgrade to ACCUMULATE with unchanged Target Price of S$2.68.

Natalie Ong Phillip Securities Research | https://www.stocksbnb.com/ 2020-01-24
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