CapitaLand Mall Trust - RHB Invest 2020-07-23: Walking A Tightrope

CAPITALAND MALL TRUST (SGX:C38U)

CapitaLand Mall Trust - Walking A Tightrope

CapitaLand Mall Trust's 1H20 results were broadly in line with market expectations. While shopper traffic pace has picked up post Phase 2 reopening, it remains far from normal and there are also clear signs of pressure on mall occupancy and rents.
We expect the retail sector outlook to remain challenging in the mid-to long-term with COVID-19 accelerating structural headwinds. However CapitaLand Mall Trust’s quality assets, strong sponsor backing and proposed merger should mitigate risks.

CapitaLand Mall Trust (SGX:C38U)'s 2Q20 DPU declined 28% y-o-y on the back of rental rebates partially offset by CapitaLand Mall Trust releasing SGD23.2m retained in 1Q. For 1H20, DPU fell 49% y-o-y (27% y-o-y including SGD46.4m of income retention).
CapitaLand Mall Trust has so far committed to rental support (including tax rebates and government grants) of SGD154.5m, of which SGD76.5m is the REIT’s share, most of which has already been provided in 1H20.
Based on management’s estimates ~60% of its tenants are SMEs that qualify for the mandatory 2-month rent relief (from landlord). It expects to get clarity on the exact number of tenants in 3Q.
Less than 1% of CapitaLand Mall Trust's tenants have so far submitted for rent deferral under COVID-19 Bill and pre-termination of leases so far remains minimal ( < 2%).

Management’s key priority amidst challenging market conditions will be to sustain high occupancy levels and be more flexible on rents. It is also open to explore alternative lease structures ie higher turnover rent proportion during the early period of lease tenure, short-term lease extensions for new market entrants, tenants adopting omni-channel strategies, and tenants impacted by COVID-19. As such, CapitaLand Mall Trust expects variable rent component to increase steadily from current 5% of total.
YTD, CapitaLand Mall Trust's portfolio occupancy fell 1.6ppts to 97.7% mainly due to lower occupancy at Clarke Quay, Bedok Mall and The Atrium at Orchard.
CapitaLand Mall Trust's 1H rent reversions were flattish at +0.1%, but lower than 1Q (+1.6%) indicating 2Q rent reversions were in negative territory. Shopper traffic post Circuit Breaker is picking up, with better heartland malls reaching ~80% of normal levels but weaker ones still below 50%.

CapitaLand Mall Trust's portfolio value dropped 2.5% compared to Dec 2019 on the back of lower rental growth assumption by valuers (and taking into account new leases signed). Cap rates have so far remained steady as there have been no major transactions since COVID-19. We believe there is further room for valuation decline in 2H20 with possible cap-rate expansion of 15-25bps.
Overall, we expect a 4% decline in portfolio value for 2020F.
Merger plans still on track with intentions to conduct the EGM and trust scheme meeting before the long stop date of end-September. Delay from the initial timeline is mainly due to management’s shift in focus on operational challenges amid COVID-19.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-07-23

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