CapitaLand Mall Trust & CapitaLand Commercial Trust - UOB Kay Hian 2020-09-07: Resuming The Quest For Scale & Resiliency


CapitaLand Mall Trust & CapitaLand Commercial Trust - Resuming The Quest For Scale & Resiliency

Delayed but not derailed.

Terms of mergers remain unchanged.

  • The proposed merger of CapitaLand Mall Trust and CapitaLand Commercial Trust will create a diversified commercial REIT named CapitaLand Integrated Commercial Trust (CICT) through a trust scheme of arrangement. The consideration for each CapitaLand Commercial Trust unit comprises 0.72 new CapitaLand Mall Trust units plus S$0.259 in cash. CapitaLand will retain its sponsor stake of 29.1%.
  • Benefits from the merger include:
    1. Enlarged scale. The merged entity will double in size to 24 properties with AUM of S$22.4b (integrated development: 5, office: 8 and retail: 11). CapitaLand Integrated Commercial Trust will become the largest REIT in Singapore and the second largest REIT in the Asia Pacific region. CapitaLand Integrated Commercial Trust will become the best proxy for S-REITs. In addition, the enlarged scale positions will allow CapitaLand Integrated Commercial Trust to take on large-scale integrated developments. CapitaLand Integrated Commercial Trust has large development headroom of S$5.8b, assuming unitholders approve higher cap of 15% for redevelopment of existing buildings.
    2. Attractiveness of integrated developments. The merged entity will own five integrated developments, which accounts for 29% of the combined portfolio (eg Funan and Raffles City Singapore). There is a shift towards integrated developments due to intensification of land use (scarcity of land) and attractiveness of integrated developments (captive eco-system that supports work, live and play culture). This shift that was emphasised in URA Master Plan 2019 is expected to accelerate post COVID-19 pandemic.
    3. Reduced concentration. The combined portfolio has eight office properties, 11 retail properties and five integrated developments (a total of 24 properties), which account for 38%, 33% and 29% of portfolio valuation respectively. Asset concentration risk is reduced. NPI contribution from the top 5 properties is reduced from CapitaLand Mall Trust’s 50% and CapitaLand Commercial Trust's 82% to CapitaLand Integrated Commercial Trust’s 43% post-merger.

Remains grounded in Singapore.

  • 96% of the combined portfolio resides in Singapore, while the remaining 4% is located in Frankfurt, Germany. For overseas expansion, CapitaLand Integrated Commercial Trust will focus on developed markets, such as Europe and Japan. Overseas exposure will be capped at 20% of portfolio valuation (or S$4.5b).

DPU accretive.

BUY CapitaLand Mall Trust.

Retail and office space remain relevant.

  • Management sees shopping mall culture remaining entrenched in Singapore, serving the needs of its catchment areas. They also alluded to decentralisation of commercial activities (urban transformation planned for Jurong Lake District and Bishan Sub-Regional Centre). Shopper traffic has recovered at larger retail malls - IMM Building and Plaza Singapura / Atrium@Orchard have seen traffic return to 82% and 73% respectively of pre-COVID-19 levels in the week ending 30 Aug 20. On a portfolio basis, CapitaLand Mall Trust’s shopper traffic has recovered to 58% of pre-COVID- 19 levels.
  • Singapore CBD will play a central role due to the concentration of quality office stock and comprehensive business eco-system. Many companies may adopt a hybrid of alternative office workspace solutions. The trend towards mix-use precincts and integrated developments is catalysed by more flexible work arrangements and increased focus on health and wellness. Both tenants and consumers benefit from the comprehensive and commentary offerings. Government land policy is supportive, with GLS sites earmarked for mixed-use rising from 22,800sqm between 2012-15 to 85,800sqm between 2016-19.

Sector Catalysts

  • Environment of persistently low interest rates, which will keep interest fixated on yield plays, such as S-REITs.
  • Limited new supply for office, logistics and retail segments in 2020.
  • Risks: Prolonged second wave of COVID-19 infections.

Jonathan Koh CFA UOB Kay Hian Research | Loke Peihao UOB Kay Hian | 2020-09-07
SGX Stock Analyst Report BUY MAINTAIN BUY 2.550 SAME 2.550