(Stocks Discussion) SGX: CapitaLand Mall Trust (SGX: C38U)?

Just attended their AGM this morning for FY18! I will leave a few highlights from the meeting, as well as some of the thoughts I have on this REIT.

Before I dive into my analysis, this was the first AGM I had ever attended! The AGM was held at Star Vista, one of the properties of CMT. After reaching at 940AM, the number of retirees and old folks there really surprised me! Due to the strong and steady performance of the REIT, the crowd also wasn't too emotional (maybe because it was too early)

Business Profile

CMT is a very popular and well known REIT, which has performed very well over the years since its IPO. It currently has 15 properties worth $10.5 Bn. Some of their iconic malls include Bedok Mall, Bugis+ and Tampines Mall. They have an extensive network of tenants of 2,800 with a portfolio occupancy rate of 99.2% and 338 million in annual shopper traffic. With such an extensive and mature portfolio, CMT seems to be strong.

Results

Income Stats

Despite a slight dip in 2017, gross revenue had recovered to 697.5 million by 2018, a YOY increase of 2.2%. Both net property income (NPI) and distributable income (DI) both had the highest percentage increase YOY. NPI with 3.2% at 493.5mn and DI with 3.8% at 410.7mn. The strongest contributors were Plaza Sing, Tampines Mall and Bugis Junction.

Balance Sheet Data

2018 was a year where CMT had taken on the most amount of debt at 3,683mn, most likely to fund the development of its new properties. Portfolio property valuation also saw a significant increase of more than 10% to 10,076mn due to investment properties related to Funan. The most highly valued properties were WestGate, Plaza Sing and Bugis Junction.

Key Financial Indicators

DPU experienced a significant increase from 11.16 to 11.50 cents, an increase of 3%. This is significant, considering that DPU had remained stagnant in 2016 and 2017 at 11.13 cents and 11.16 cents respectively. Despite the loading of debt, aggregate leverage remained the same as previous years, at 34.2%. This suggest that CMT has a healthy debt profile, and could taken on more debt in the future to grow. An increasing Net Debt/EBITDA suggest that the trust is taking on more debt faster than earnings, but based on their healthy credit profile, I don't think this should be a concern.

Relative Share Price Performance

For 2018, CMT share price experienced a return of 6.1%, despite the STI, FTSE ST REIT and FTSE ST Real Estate decreasing substantially over the year. I believe that this occured because of the defensiveness and maturity of CMT's shopping malls, as well as investor expectations of the RETI's performance with their upcoming malls.

Growth Strategy

Unique Shopping Experience of Mall

What caught my attention the most during the AGM, was the presentation of how Funan will provide an integrated shopping experience with both online and offline features. Instead of fighting e-commerce head-on, I think the mall is right in trying to grow omni-channels with Funan itself, such as housing online presence such as Alibaba and having 24 hour shopping pick-up points.

Interestingly, Funan will also include showers for fitness enthusiasts and bike stops so that cyclist can make Funan their last stop. The mall will even include a rooftop soccer court.

In my mind, this is probably the right strategy to adopt, since this kind of unique retail / lifestyle experience can't be adopted. I also like how the malls also have a strategy to draw both weekday and weekend crowds, and focus less on just attracting the best tenants, but drawing crowds in just for the mall experience.

Potential Divestment of J-Cube

Unlike the other properties, J-Cube isn't performing so well, and management is open to having the mall being divested, just like it had with Sembawang Shopping Centre last year. The reasons for the more lacklustre performance could be due to how crowded the retail space is with JEM, IMM and Westgate. However, Prof Richard J. Magnus cited how government plans to develop the residential place in Jurong will drive high footfall in the long run, and that they are open to different possibilites regarding J-Cube.

Interesting Questions Asked

“What if Jewel cannibalises the other malls?

This I believe, is quite a valid risk, since CMT has Tampines Mall and Bedok Mall already. CEO Tony Tan agreed that Jewel might cannibalise their other malls, citing that the hype of Jewel will most likely draw crowds from around the island. However, he argued that once the hype dies down, it is unlikely that Jewel will continue to cannbalise. Also, he mentioned that in the long run, the target audience for Jewel would be tourists and locals at the airport. Hence, their other malls serve different markets.

I kind of half-agree with Mr Tan’s response, since unless you are a shopping enthusiast, you would most likely have to choose between one of the malls to visit nonetheless. Personally, I have experienced this dilemma myself even between Bedok Mall and Tampines Mall already (I live 10 mins from Bedok Mall). In the short run, consumer appetites might increase to shop more, but I believe that eventually it will taper off and consumers would need to choose between the malls.

“What about overseas expansion?”

This was also a fairly good point made, since the Singapore market is limited and retail density is already quite high. Management responded that the main focus of CMT would still be the Singapore market. Mr Tan argued that the overseas retail space was turbulent as well, which seems to suggest that the option of expanding overseas is not as enviable as it seems to be. Besides, institutional investors were also focused on the local market for the local retail market exposure and the safety of the SGD currency.

Risks

High Malls Concentration

As can be seen, most of their malls are located in CBD, which may potentially cannablise each other. However, I am more concerned about the opening of Paya Lebar Quarter and Jewel in the East (not shown in image)

Having lived in the East all my life, I believe that the retail market there is very saturated already. For eg, Tampines One, Tampines Mall and Century Square are situated right next to each other while sandwiching Tampines MRT Station. Paya Lebar Quarter will also compete with Parkway, Katong Mall, OneKM, Singpost Centre and Paya Lebar Square.

Although Mr Tan responded that the new developments of private condos along the East Coast and the BTO flats next to Bedok Mall will be ready in a few years, it still seems that there are too many malls fighting for the same market.

Limited Singapore Market

As some of the unit-holders pointed out, the market in Singapore is very limited based on our population and the space to develop malls. In fact, Mr Tan agreed that this was the biggest challenge facing CMT, more than e-commerce.

I agree with management’s view to create a more unique retail experienced, but there are some potential pitfalls. Firstly, the malls are still competing with e-commerce sites heavily. Secondly, other malls are starting to adopt such a strategy as well, which means that differentiating CMT’s malls with the rest would become more challenging. Thirdly and probably most importantly, carving out space for such experiences do not generate immediate rental income. By carving out more space for such non-commercial activities like soccer courts, there is less space for tenants to lease which means possibly lower rental income.

Conclusion

As a whole, CMT has performed really well, and should perform even better throughout the year. Yet, I do believe the fight for the Singaporean shopping dollar will only become fiercer. Nevertheless, CMT still seems well poised to adapt to such changes.

My first AGM was interesting so say the least! Didn't get to try any buffet food, but we managed to get $20 CapitaLand vouchers, which we spent on LiHo for the team. At least that was memorable :)

I believe CapitalMall Trust is a long-term strong buy based on the following reasons:

1) Strong Management Team: Since inception, DPU (Distribution Per Unit) has risen by a CAGR of 13.1%. This is attributable to successful active management of the malls under Capitamall Trust through value-creation activities - Refurbishment of the malls, active engagement of shoppers through events such as "Tales of the River at Clarke Quay" to differentiate shopping experience.

2) Upcoming Catalyst: New Funan Digital Mall coming online in Mid 2019 this year that would further boost DPU for Capitamall Trust. Given the rebranding and refurbishment, the rental per sq foot is expected to rise for Capitamall Trust as well, further providing tailwainds to Capitamall Trust.

3) Debt Maturity: Average debt maturity stands at 4.4 years, which seems reasonable and the company is unlikely to face serious cashflow needs in the short term. Even in the need to raise additional debt, the company's A2 credit rating would allow the company to meet its cashflow needs relatively easily.

4) Valuation: Based on DPU oof 11.5 cents, current share price of $2.34/share, Distribution Yield stands at 4.91%. Currently, FTSE Straits Times Real Estate Index 12 month yield stands at 4.5%. Given the high quality asset and strong management team at Capitamall Trust, I believe the company should trade at a premium against FTSE Straits Time Real Estate Index. This would imply a yield below of 4.5%. Given that current yield is higher than that of FTSE Straits Times Real Estate Index, I would believe that it is a good buy.