During a results briefing on Jan 21, Tony Tan, CEO of the manager of CapitaLand Integrated Commercial Trust (CICT), laid out in no uncertain terms the challenges faced by Singapore’s largest REIT. Formed from a merger completed in October last year, CICT has few rivals. With a market cap of $14 billion and an asset size of $22.3 billion, it is the largest REIT in Asia-Pacific excluding Link REIT.
In the short term, Tan would like CICT’s financial ratios to improve. However, its gearing as at Dec 31, 2020, shot up to 40.6% from 34.4% as at Sept 30, 2020, prior to the merger. This was partially blamed on $1 billion in debt that CapitaLand Mall Trust took on to complete the merger.
Then, because the merger caused debt levels to rise, the net debt/Ebitda (earnings before interest tax, depreciation and amortisation) rose to the low teens, and interest cover ratio fell to 3.8 times from four times as at Sept 30. “Ideally, we would like to defend our A3 credit rating. We will find opportunities to lower gearing. Ideally we want to bring it down below 40%. This may include portfolio reconstitution and we may monetise assets we may not want to hold in the long term,” Tan says.
Gearing is also a function of valuation which in turn is derived from cash flow. CICT’s malls experienced a $22 million rise in valuation since mid-year, as they have stabilised since June 30 last year. Hence, if the economy recovers, rents could stabilise, and valuations could improve.
However, Raffles City — one of CICT’s largest properties — faces challenges. For one, anchor tenant Robinsons has moved out. As a stopgap measure, Chinese department store and retailer BHG and Raffles City have partnered to create a new concept. This includes a health and beauty hall on the ground floor.
“Robinsons’s level one was substantially the beauty trade. That is gone and female traffic will disappear and it is critical to maintain some exposure. Dior stays on and visibility and presence is maintained,” Tan says. “We are also looking at longer term solutions. In the short term, you may see a dip in contribution from the space.”
BHG runs a well known upscale supermarket chain in Beijing and a luxury shopping centre. The company also runs the best performing shopping centre in China. Hence, Tan believes that the BHG-Raffles City collaboration has a shot at success. “In the longer term, we are looking at different combinations,” Tan adds.
In addition to Robinsons’ exit, Accor — which manages the hotels at Raffles City — has a rent review coming up at the end of this year. The main points of the master lease agreement is for a base rent of around 70% to 75%, and variable rent of the remaining 25%.
Covid-19 has affected hospitality assets more than any other sector, and unless there is a sharp recovery in the near term, the rent review is likely to result in lower contributions from the hotels. This could impact Raffles City’s valuation which was largely responsible for the $77 million valuation decline of CICT’s integrated developments to $6,437.7 million as at Dec 31 last year.
All in, portfolio valuation fell by $82 million, blamed on the performance of Raffles City and CICT’s two German properties. In Germany, rents and conditions are still soft and the exchange rate affected the valuation. The Euro was at $1.59 as at December when the translation took place, compared to $1.61 level in June last year. Ironically, the Euro last traded at $1.61.
“The numbers have a lot of noise,” Tan notes. He means that in addition to the currency factor, CICT provided $128.4 million in rental relief for tenants. Also CICT’s high debt levels skewed net debt/Ebitda ratios. Tan believes it should decline to the eight times to 10 times range. “We think the worst is over in terms of valuation decline,” he continues.
Stability of cash flow preferred to high rental reversions
Tan prefers the stability of cash flow coming in, rather than to hold out for higher rents so that the rental reversion figure looks good to analysts. “As a bare minimum we want to keep the stability of cash flow because that will give us a premium in a volatile environment and we will drive growth when the environment has stabilised,” he says.
The retail portion of CICT’s portfolio has occupancy of 98%. “It’s a trade-off. Do you want occupancy or to hang on to your rental? Sometimes the cash flow impact is bigger than the reversion effect. We try to strike the right balance. It is important for the shopping mall business to look uplifting rather than to have a lot of hoarding in the mall,” Tan explains. “On one hand a lot of investors are drilling on the reversion number. But we think that cash flow is important because cash flow impacts a lot of other metrics,” he says. CICT’s retention rate in FY2020 was 84.5%.
In 4Q2020, Tan points out that there has been sequential improvements in rents, demand and tenant sales. The latter is just 5.5% lower y-o-y. Moreover, this year, NPI will not be affected by rental relief which cost CICT $128 million in 2020, through rental waivers.
Growth to resume
This year, CapitaSpring — which is 45% held by CICT — has topped out, with about 75% of the overall construction completed, and is set to receive its Temporary Occupation Permit (TOP) in 2H2021. “At topping out level, committed occupancy at 38% plus 22% in advanced discussions is pretty credible. Between topping out to TOP is around six to nine months and we have room to work on it. With certainty of completion date, we have a high level of confidence that prospective tenants will look at CapitaSpring seriously,” Tan says.
In the meantime, WeWork’s lease at 21 Collyer Quay commences in 4Q2021, and AEI works at Six Battery Road is set to complete by the end of this year. Among the malls, Lot 1 Shoppers’ Mall received its TOP in October last year, and tenants have taken over their space for fit outs. The library and cinema opened in 2H2021.
“We have kick started exploring AEI potential. There are Singapore assets we need to deal with and we’re looking at possibilities but cash flow needs to be stable,” Tan says.
For acquisitions, CapitaLand owns 79 Robinson Road, which is 90% occupied. ION Orchard and Jewel are two malls part-owned by CapitaLand that could form CICT’s pipeline. Tan declined to provide details on properties he is prepared to divest. JCube has been troublesome, and the mall managers have tried a few concepts.
“The original intent was to create a high energy high sport focused concept and we are still working on this. We have to differentiate JCube from Westgate and JEM,” he says. Tan adds, though that the malls in the north of Singapore are “outperforming”.
Any divestment just to pare down debt may not be the best strategy as investors tend to be focused on DPU and yield. “We want to fix a few things by improving the quality of the portfolio and to time the impact of AEI. All this is within our five-year road map. We hope to create a vehicle that is very stable and [enhanced by] inorganic growth.”
CICT — which owns 11 malls, eight office buildings and five integrated developments — announced a full year 2020 DPU of 8.69 cents, down 27.4% y-o-y. DPU in 4Q2020 was 2.63 cents, translating into an annualised yield of 4.57%
