Elevator Pitch

I upgrade my rating on Singapore-listed retail REIT CapitaLand Mall Trust (OTCPK:CPAMF) [CT:SP] from Neutral to Bullish, as I believe that the trust is already on a gradual path of recovery.

This is an update of my prior article on CapitaLand Mall Trust published on January 29, 2020. CapitaLand Mall Trust’s share price has declined by -25% from S$2.62 as of January 24, 2020 to S$1.97 as of July 27, 2020 since my last update. CapitaLand Mall Trust trades at 0.98 times P/B, which represents a discount to its historical five-year and 10-year mean P/B multiples were 1.09 times and 1.14 times respectively. The stock also offers a consensus forward FY2020 distribution yield of 4.8%.

CapitaLand Mall Trust’s weak 2Q 2020 results were not a surprise, and there are hopes of recovery in 2H 2020. Also, CapitaLand Mall Trust is optimizing its leasing strategies to maximize occupancy in this difficult period. The proposed merger between CapitaLand Mall Trust and office REIT Capitacommercial Trust (OTCPK:CMIAF) [CCT:SP] or CapitaLand Commercial Trust by way of a trust scheme of arrangement to create a diversified commercial REIT to be named CapitaLand Integrated Commercial Trust, is still underway.

Readers have the option of trading in CapitaLand Mall Trust shares listed either on the Over-The-Counter Bulletin Board/OTCBB as ADRs with the ticker CPAMF or on the Singapore Stock Exchange with the ticker CT:SP. For those shares listed as ADRs on the OTCBB, note that liquidity is low and bid/ask spreads are wide.

For those shares listed in Singapore, there are limited risks associated with buying or selling the shares in terms of trade execution, given that the Singapore Stock Exchange is one of the major stock exchanges that is internationally recognized, and there is sufficient trading liquidity. Average daily trading value for the past three months exceeds $25 million, and market capitalization is above $5 billion, which is comparable to the majority of stocks traded on the US stock exchanges. Institutional investors who own CapitaLand Mall Trust shares listed in Singapore include BlackRock, The Vanguard Group, Norges Bank Investment Management, and Schroder Investment Management, among others. Investors can invest in key Asian stock markets either using U.S. brokers with international coverage, such as Interactive Brokers, Fidelity, or Charles Schwab, or local brokers operating in their respective domestic markets.

Weak 2Q 2020 Results Were Not A Surprise

CapitaLand Mall Trust announced 2Q 2020 financial results on July 22, 2020. This set of financial numbers is closely watched because Singapore, CapitaLand Mall Trust’s home market, started implementing partial lock-down measures (referred to as Circuit Breaker) since April 7, 2020. This meant that only a number of CapitaLand Mall Trust’s tenants offering essential services (e.g. supermarkets) were allowed to be open for business during this period.

CapitaLand Mall Trust’s 2Q 2020 results were weak as expected, with the trust’s gross revenue and net property income declining by -39.8% and -48.9% YoY to S$114.1 million and S$68.1 million, respectively. The trust’s distributable income and distribution per unit decreased by -27.5% and -27.7% YoY to S$78.1 million and S$2.11, respectively in the most recent quarter.

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The drop in gross revenue and net property income for CapitaLand Mall Trust in 2Q 2020 was mainly the result of rental waivers granted to tenants (S$74.1 million in the quarter) to help them tide through the difficult period, and lower gross turnover rent (variable rent that is determined based on a percentage of tenants’ sales). The decline in distributable income and distribution per unit was relatively narrower compared with the fall in gross revenue and net property income, because CapitaLand Mall Trust chose to distribute S$23.2 million, which was part of the S$69.6 million of distribution income retained in 1Q 2020, as dividends in 2Q 2020.

On the positive side of things, CapitaLand Mall Trust’s overall portfolio occupancy remained high at 97.7% (-80 basis points QoQ decline compared with 98.5% as of end-1Q 2020) as of end-1H 2020, notwithstanding a -40.6% YoY drop in shopper traffic and -15.4% YoY decline in tenant sales per sq ft in 1H 2020. Tenant sales have declined to a lesser degree compared with shopper traffic, due to strong growth in online sales and specific tenants performing much better than expected such as supermarkets, IT products and home appliances & electronics.

Positive 2H2020 And FY2020 Outlook

CapitaLand Mall Trust’s distribution per unit was S$0.0296 in 1H 2020, representing a -49% YoY decline. If S$46.4 million of the remaining distribution income retained in 1Q 2020 had been released as distributions for 1H 2020, CapitaLand Mall Trust’s adjusted distribution per unit would have been S$0.0435, implying a narrower -25% YoY decrease. There are expectations that CapitaLand Mall Trust is likely to release the remaining distribution income retained in 1Q 2020 amounting to S$46.4 million in 2H 2020. At the trust’s 1H 2020 earnings call on July 22, 2020, CapitaLand Mall Trust emphasized that “if we feel that the risk is low, there is no reason why we should hold the income that is due” as distributions in 2H 2020.

Market consensus expects CapitaLand Mall Trust’s distribution per unit to decline by -21% YoY from S$0.1197 in FY2019 to S$0.944 in FY2020, prior to rebounding by +26% YoY to S$0.1191 in FY2021. Apart from the release of distribution income retained in 1Q 2020, another positive factor driving higher distribution payout in 2H 2020 is that Singapore has transitioned into Phase 2 of Circuit Breaker starting on June 19, 2020, which implies a relaxation of lock-down and social distancing measures in the country.

CapitaLand Mall Trust noted at its 1H 2020 earnings call on July 22, 2020 that over 95% of its tenants have already commenced operations. The trust also disclosed in its 1H 2020 results presentation slides that “average shopper traffic has recovered to 53% of the level a year ago” for the period between June 19, 2020 and July 5, 2020. CapitaLand Mall Trust also added at the recent earnings call that some of “the better ones (shopping malls) are achieving close to 80% recovery in terms of shopper traffic.”

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The trust’s rental reversions went from a positive +1.6% for 1Q 2020 to +0.1% for 1H 2020, implying negative rental reversions in 2Q2020. On the positive side of things, CapitaLand Mall Trust only has a relatively low 7.6% (in terms of gross rental income) of its leases up for renewal in 2H 2020. More importantly, under 1% (in terms of Net Lettable Area) of CapitaLand Mall Trust have applied to defer their rental payments under the Singapore Covid-19 (Temporary Measures) Act 2020, and less than 2% of the trust’s tenants have chosen to terminate their leases early prior to expiry. At its 1H 2020 earnings call on July 22, 2020, CapitaLand Mall Trust also highlighted that currently, leasing “demand is reasonable” for “some of the very popular malls that we have.”

Potential Changes To Leasing Strategies In The Spotlight

As highlighted in the preceding section of this article, there are positive signs of recovery for CapitaLand Mall Trust in 2H 2020. Nevertheless, the Singapore retail market is still expected to suffer in the near-term, due to the economic fallout brought about by Covid-19. With that in mind, CapitaLand Mall Trust has indicated that it is flexible in making changes to its leasing strategies to maximize occupancy rates without comprising too much on rental rates.

One example is that new multi-year leases (or restructured existing leases) could have a higher gross turnover rent component (implying lower fixed rent) in the early years and a lower gross turnover rent component in the later years of the lease period. Another example is that CapitaLand Mall Trust could provide the option of short-term lease extensions for specific tenants such as new start-ups, rather than the standard three-year lease term.

Gross turnover rent currently accounts for 5% of CapitaLand Mall Trust’s total rent, and the trust expects the proportion of gross turnover rent to increase in the near-term as it optimizes its leasing strategies. CapitaLand Mall Trust highlighted at its 1H 2020 earnings call on July 22, 2020 that it wants to ” work alongside with tenants to make sure that we are able to structure something that is a win-win” and “flexibility on leasing structure” is important.

Proposed Merger Still Underway

In my prior article on CapitaLand Mall Trust published on January 29, 2020, I mentioned that CapitaLand Mall Trust is proposing to merge with office REIT CapitaLand Commercial Trust to create a diversified commercial REIT to be named CapitaLand Integrated Commercial Trust.

The proposed merger is still underway, despite Covid-19. Extraordinary general meetings to approve the proposed merger are still planned to be held prior to end-September 2020. CapitaLand Mall Trust also stressed at the recent earnings call that Covid-19 and the decline in the trust’s investment properties valuation (discussed in the next section of this article) do not trigger any material adverse change clauses.

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I remain positive on the proposed merger, as the larger combined REIT is likely to have a greater capacity to pursue opportunities in integrated developments and overseas markets.

Valuation

CapitaLand Mall Trust trades at 0.98 times P/B based on the trust’s net asset value per share of S$2.01 as of June 30, 2020 and its share price of S$1.97 as of July 27, 2020. As a comparison, the stock’s historical five-year and 10-year mean P/B multiples were 1.09 times and 1.14 times respectively.

Notably, the value of CapitaLand Mall Trust’s investment properties (as determined by independent third-party valuers semi-annually) declined by -2.7% between December 31, 2019 and June 30, 2020, which was largely attributable to the valuers’ expectations of lower rental growth going forward.

CapitaLand Mall Trust offers consensus forward FY2020 and FY2021 distribution yields of 4.8% and 6.0% respectively. Future distributions are supported by the trust’s relatively comfortable gearing at 34.4% as of June 30, 2020, which is well below the statutory gearing limit of 45% for Singapore REITs.

Risk Factors

The key risk factors for CapitaLand Mall Trust are weaker-than-expected shopper traffic, tenant sales and rental reversions due to the economic fallout brought about by Covid-19, a further decline in the value of its investment properties as determined by independent third-party valuers on an semi-annual basis, and lower-than-expected distributions in the future.

Note that readers who choose to trade in CapitaLand Mall Trust shares listed as ADRs on the OTCBB (rather than shares listed in Singapore) could potentially suffer from lower liquidity and wider bid/ask spreads.

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Disclosure: I am/we are long CAPITALAND MALL TRUST [CT:SP]. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.



Via SeekingAlpha.com