CAPITALAND MALL TRUST: Recalibrates as Headwinds Persist

This article by Jennifer Tan (left, Director, Research & Products, Equities & Fixed Income, at the Singapore Exchange) was published in SGX's kopi-C: the Company brew series on 1 April 2016. The article is republished with permission.

CapitaLand Mall Trust portfolio property, Bugis Junction, is directly connected by an overhead link bridge to Bugis+. The integration of the two malls further strengthens its overall attractiveness to shoppers with a combined net lettable area of more than 600,000 sq ft of retail space. (Photo: Company)

As the saying goes, he who dares, wins. It is this adventurous streak that defines Wilson Tan, Chief Executive Officer of CapitaLand Mall Trust Management, which manages CapitaLand Mall Trust Ltd (CMT), Singapore’s first real estate investment trust (REIT).

Tan’s insatiable curiosity drives him to try everything once, especially when it comes to food – he has sampled everything from starfish, bats and earthworms to porcupines and civet cats.

“You live only once. If you don’t try, you miss out on learning from the experience,” said the 58-year-old.

It also runs in the family – Tan’s two sons and daughter, aged between 25 and 29 years, are equally dauntless. “Everything I have tried, they have tried. Everything they have tried, I may not have tried – like skydiving,” he quipped.

LQM000066 We have to accept that what we know is much more limited than what we do not know, and unless we are prepared to go out and embrace that, we will not live life to the fullest.

- Wilson Tan
CEO

CapitaLand Mall Trust

The spirit of enterprise is key to pushing one’s limits.

“We have to accept that what we know is much more limited than what we do not know, and unless we are prepared to go out and embrace that, we will not live life to the fullest.”

This principle is even more relevant when it comes to managing CMT’s business.

“Life is all about experimenting, with the caveat that you’re not reckless – you don’t hurt yourself and you don’t hurt others in the process,” Tan said. “Not all experiments will produce the desired results, but that’s ok, as long as we mitigate the risks, ensure there’s no negative impact to yourself and others, and learn from the experience.”

The Counterintuitive Call

CMT, which listed on Singapore Exchange in July 2002, is the largest REIT by market capitalisation – at S$7.5 billion. It owns and invests in income-producing assets predominantly used for retail purposes in the city-state. The trust averaged an annualised distribution yield of 5.3% over the last five years.

CMT’s portfolio comprises nearly 3,100 leases by local and international retailers, with a committed occupancy level of 97.6%. It owns 16 quality shopping malls strategically located in suburban areas and downtown Singapore. It also holds 122.7 million units in CapitaLand Retail China Trust (CRCT), the first China retail REIT listed on SGX in December 2006. As at end-2015, CMT has a deposited property size or total asset value of about S$11.1 billion.

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LQM000066

We need to venture out and try. If we do not try, we will never be able to push boundaries, and without pushing boundaries, we will not achieve new possibilities.

- Wilson Tan
CEO

CapitaLand Mall Trust
(Photo: Company)

CapitaLand Mall Trust Management is an indirect wholly owned subsidiary of CapitaLand Ltd.

Tan believes venturing beyond one’s comfort zone can open up new possibilities for the REIT.

“We must all learn to be counterintuitive,” he said.

One example is how CMT revamped the retail concept for IMM Building, located in Jurong East.

“Many people say Singapore is too small for an outlet mall to succeed. If we had remained conditioned by what we have seen in the past, it would not have been possible for us to turn IMM into the largest outlet mall here,” he noted.

Singapore’s Grande Dame of IT and telecoms retail, Funan DigitaLife Mall, which will be shut for redevelopment from July, is another case in point. The vision for the new integrated development comprises a mall that is centred on a holistic consumer experience, possibly encompassing theatres, performances, shopping, art, as well as food and beverage.

“We need to venture out and try. If we do not try, we will never be able to push boundaries, and without pushing boundaries, we will not achieve new possibilities,” he added.

Adapting to constantly changing trends is also one of Tan’s guiding principles.

Having held the posts of Managing Director of NEC Asia Pte Ltd and Group CEO of Singapore Post Ltd between 2007 and 2010, he is familiar with the breakneck pace of change in the technology services industry.

“It’s that need to live on the edge, to continually be relevant, which I have internalised over the years,” said Tan, who holds a Bachelor of Arts degree in Economics from the National University of Singapore.

♦ Tale of Two Strategies

This is particularly pertinent for CMT, as it grapples with a sluggish domestic economy and an uncertain global outlook.

“We are living in the best of times and the worst of times,” Tan noted, referring to the famous opening paragraph of Charles Dickens’ “A Tale of Two Cities”.

“There are many opportunities before us, but we are also facing plenty of challenges. We need to evolve and grow constantly. Without metamorphosis, we will be moribund.”

CMT has two key areas of focus – to grow its portfolio of investment properties to produce a continual stream of income, and ensure a steady distribution per unit (DPU) for unitholders.

LQM 000066 Without metamorphosis, we will be moribund.

- Wilson Tan
CEO

CapitaLand Mall Trust

For investment properties to continue growing income for the REIT, they need to be constantly renewed and refreshed through asset enhancement initiatives (AEIs), Tan said.

“In this day and age, shoppers have very short attention spans and their loyalty is fleeting.

“For our AEIs, we have to figure out how to capture the needs and aspirations of consumers – each generation is different from the last, and we must be one step ahead of them.” One method is to curate the tenancy mix in the malls to discover which combination best captures the imagination of shoppers. “This is both an art and a science,” he added.

The operations of each mall – cleanliness, security, marketing – also need to be monitored closely to tune down costs and tune up productivity, ensuring that distributions to unitholders remain stable.

And maintaining a consistent, steady DPU is of paramount importance, given the large number of pension and insurance funds that make up CMT’s investor base, Tan noted.

“The issue that keeps us awake at night is how we go about achieving this. CMT’s one aim in life is to get boring – if we are boring and predictable, that’s when we can deliver safety, security and sustainability to our investors.”

Downside Risks

Meanwhile, risks from slowing domestic growth and the potential rise in interest rates this year cannot be ignored, Tan said.

There is no refinancing due at CMT level in 2016. The management is working with CapitaLand Commercial Trust Management Ltd for the refinancing of RCS Trust’s debts due this year. RCS Trust owns Raffles City Singapore, in which CMT has a 40% stake.

Stock price	$1.925
52-week range	$1.87 - $2.22
Market cap	S$6.8 billion
PE (ttm)	14.6 x
Dividend yield	5.77%
Source: SGX StockFacts

In 2009 and 2011, CMT had high debt towers of around S$1 billion due for refinancing, and 100% of its assets were secured then.

Not only did this provide less financial flexibility, the larger quantum due for refinancing also posed higher risks, as any spike in interest rates meant a significant portion of the trust’s income would be required to service the debt.

Management has since implemented strategies to mitigate any significant jump in rates. Since 2009, management has focused on reducing CMT’s borrowings due for refinancing in any one year to about S$500 million, which was more in line with the REIT’s distributable income, he noted.

It also began diversifying its funding sources by tapping on different investor bases, including retail bonds and currencies. Most of the funds raised were fixed-rate, and any foreign currency debts were swapped into Singapore dollars in terms of interest payments and the principal.

CMT has taken advantage of low swap rates over the last few years to issue notes of longer tenor, thereby extending the maturity of its borrowings.

“Currently, about 84.9% of our debt is fixed-rate, down from 97.8% due to the acquisition of Bedok Mall,” he added.

“Floating-rate debt gives us some flexibility, and when interest-rate patterns change, we can always convert to fixed-rate debt.”

CMT bought Bedok Mall from sponsor CapitaLand last July in a deal that valued the mall at around S$780 million, in a move that supplements its portfolio of mainly suburban malls.

Overall, the trust’s debt profile remains healthy, with an aggregate leverage ratio of 35.4%, and an average borrowing cost of 3.3% per annum as at 31 December 2015. All borrowings at CMT level are unsecured, which provides financial flexibility, Tan noted.

Last July, the Monetary Authority of Singapore (MAS) raised the leverage limit for REITs to 45% of their total assets. Previously, the cap on borrowings was 35% of total assets for REITs that are not rated, and 60% for REITs with credit ratings.

♦ Glass Half-Full

Reflecting current economic conditions, rental reversions for CMT’s malls will continue to face headwinds, Tan said.

“Due to restructuring in the Singapore economy, retailers will face challenges from the standpoint of revenue and cost. This means there is a derivative impact on rental reversions – I would not be surprised to see continued pressure in this area.”

CMT ended 2015 with a rental reversion of 3.6%, compared with an average of 6% from 2010 to the first quarter of last year.

However, this provides more of an opportunity than a disadvantage, Tan said.

“According to the principles of retail evolution and the law of the jungle, those businesses that cannot survive, or find it tough to be viable in the current climate, will be weeded out, which means the organisations that remain will be more relevant to Singapore going forward.”

It’s a glass half-full approach, he added. “The slowdown allows us to go out and recalibrate our business practices. Instead of feeling depressed about the economy, we’ve taken it upon ourselves to increase the pace of our AEIs, and when the upturn resumes, we will be better able to capitalise on it.”

LQM 000066 We could consider the Internet as a threat, but the issue really is how we harness and ride this horse.

- Wilson Tan
CEO

CapitaLand Mall Trust

In this way, any economic downtime does not go to waste, he pointed out.

Another key strategy for CMT is tapping the potential of digital media.

“We need to be digitally more savvy. We could consider the Internet as a threat, but the issue really is how we harness and ride this horse,” Tan said.

CapitaLand’s CAPITASTAR loyalty programme – which boasts over 2.6 million members across the five Asian countries where CapitaLand malls operate, and includes more than 800,000 members in Singapore – is one approach to better understand shopper behaviour.

“This gives us more granularity on consumer preferences within our malls, and helps us become more relevant to them,” he added.

Its online order and delivery platform Food to Go, which involves participating food and beverage outlets at Raffles City Shopping Centre, is another initiative. The current beta programme runs until 30 June, and plans for enhancements are underway.

“We’re always looking at developing new digital business models and offering them to our tenants, so they can leverage them to boost revenues and traffic,” Tan said.

Looking ahead, CMT will continue to pursue opportunities to grow its DPU.

“We are open to organic growth or M&A, by acquiring properties from our sponsor or externally, or a greenfield proposition,” he said. “Our focus remains on Singapore because we understand the market well and have economies of scale.”

Financial results

Year ended 31 Dec (SS$ m)	FY2016	FY2015	FY2014	FY2013
Gross revenue	689.7	669.0	658.9	637.6
Net property income	479.7	466.2	448.4	438.7
Distributable income	394.3	392.0	375.3	356.2

Quarter ended 31 Dec (SS$ m)	4QFY2016	4QFY2015	yoy chg
Gross revenue	169.3	180.4	-6.1%
Net property income	116.2	125.7	-7.6%
Distributable income*	102.1	101.9	0.2%

	31 Dec 2016	30 Sep 2016
Average Leverage Ratio	34.8%	35.4%%
Interest Coverage Ratio	4.8 x	4.9 x
Average Term to Maturity	5.3 years	5.5 years

Source: Company data

* Excludes capital distribution retained for general corporate and working capital purposes.

	Outlook & Risks
CMT has a strong portfolio of quality malls, most of which are strategically located near public transport hubs and large population catchment areas, or in popular shopping and tourist destinations. This, coupled with the large and diversified tenant base, will contribute to the stability and sustainability of occupancy rates and rental revenues. CMT will explore opportunities to strengthen its portfolio through active asset management, acquisition of properties and greenfield developments. Going forward, the manager of CMT will continue to focus on sustaining distribution per unit (DPU) growth.

CapitaLand Mall Trust Ltd

CapitaLand Mall Trust (CMT) is the first real estate investment trust (REIT) listed on Singapore Exchange Securities Trading Limited (SGX-ST) in July 2002. CMT is also the largest REIT by market capitalisation, S$7.7 billion (as at 30 September 2016) in Singapore. CMT has been affirmed an ‘A2’ issuer rating by Moody's Investors Service on 16 July 2015. The ‘A2’ issuer rating is the highest rating assigned to a Singapore REIT.

CMT owns and invests in quality income-producing assets which are used, or predominantly used, for retail purposes primarily in Singapore. As at 30 September 2016, CMT's portfolio comprised a diverse list of more than 2,900 leases with local and international retailers and achieved a committed occupancy of 98.6%. CMT's 16 quality shopping malls, which are strategically located in the suburban areas and downtown core of Singapore, comprise Tampines Mall, Junction 8, Funan (formerly known as Funan DigitaLife Mall), IMM Building, Plaza Singapura, Bugis Junction, Sembawang Shopping Centre, JCube, Raffles City Singapore (40.0% interest), Lot One Shoppers’ Mall, 90 out of 91 strata lots in Bukit Panjang Plaza, The Atrium@Orchard, Clarke Quay, Bugis+, Westgate (30.0% interest) and Bedok Mall. CMT also owns 122.7 million units in CapitaLand Retail China Trust, the first China shopping mall REIT listed on SGX-ST in December 2006.

CMT is managed by an external manager, CapitaLand Mall Trust Management Limited, which is an indirect wholly-owned subsidiary of CapitaLand Limited, one of Asia’s largest real estate companies headquartered and listed in Singapore.

For its full year results for the financial year ended 2016, click here.

The company website is: www.cmt.com.sg

The ccompany's Stock Facts page is here.

CAPITALAND MALL TRUST: Recalibrates as Headwinds Persist

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