Can CapitaMall Trust Continue To Grow? – Part 2

I wrote on the first part of this REIT in an earlier article. The first article covered the seven biggest malls under its portfolio. In this second part, I would like to go through the rest of its property portfolio.

As a recap: CapitaMall Trust (SGX:C38U) has doubled over the last five plus years. The share price has only recorded returns of about 20% from 1 January 2009 to the closing price on 10 October 2014. However, over the past five financial years, the REIT has also paid out a total exceeding 52 Singapore cents in dividends. When reinvested, the total returns of CapitaMall runs up to 100%. By comparison, the capital gain returns of the SPDR STI ETF (SGX:ES3), a proxy for the Straits Times Index (SGX:^STI), was 74% for the same duration.

So, while the returns from CapitaMall has been fashionable — as Foolish investors, we should look behind the curtains to understand how sustainable the dividends are, and how it can grow.

A closer look

To get a sense of the resilience of the property portfolio, we can look at the gross revenue by property of the REIT. In this article, we will look at the seven largest contributors to the REIT. Below is the growth of the gross revenue for the past five financial years. capitamall trust graph 3

Source: REIT earnings presentation

From the chart above, it would seem like most of the seven malls show either stable or growing gross revenue over the period displayed. For the financial year ended 30 December 2013 (FY 2013), the seven malls made up 31% of the REIT’s gross revenue.

Although the seven malls are smaller contributors to the gross revenue, the group collectively accounted for 56% of growth in gross revenue for the past five financial years. In particular, JCube and Bugis+ were new acquisitions, while Westgate was a co-development project.

We would ideally like to see the revenue dollars drip down to the bottom line. For that, we look into the Net Property Income (NPI) of the properties.

capitamall trust graph 4

Source: REIT earnings presentation

To get a sense of the bottom line, we can look at the growth of the net property income (NPI) by property. The NPI is defined as the gross rental revenue of a property minus all related expenses.

In the case of Capitamall Trust, the NPI has mostly followed the rise of the gross rental revenue.  The exception would be Westgate, which opened in 3 December 2013. It would instructive to look at the progress of Westgate as it could be one of the drivers of both gross revenue, and NPI in the near term. Overall, the group of seven malls also made up more than half of the rise in NPI for the last five years.

A quick look ahead

As mentioned before, CapitaMall owns a sizeable portion of the mall space around Jurong East MRT, including the Westgate, IMM building, and JCube. As such, some cannibalizing of tenant sales may occur.

This could be why the REIT is also in the midst of implementing AEI on JCube. CapitaMall is one of the cool REITs which webcast its earnings presentation. For the webcast for the second quarter earnings for FY2014, Chief Executive Officer Wilson Tan shared that JCube will be revamped to strengthen it position as a leisure and entertainment zone. It plans to create a new shopping experience referred to as “street shopping”. For that, the REIT plans to use short-term leases of up to three months to a year to entice new store owners, and younger entrepreneurs. This has been planned for commencement in September this year.

CEO Tan was particularly enthusiastic about the changes in JCube. He felt that the experience of constantly updated stores has to potential to instill the kind of vibrancy comparable to Pasarbella at Turf Club road. According to the CEO, it will be beneficial to consumers and store owners as well. Besides that, an announcement on coming AEI changes for Funan DigitalLife Mall is expected soon.

Foolish take away

As lifelong students of Foolish long term investing, it pays to look under the hood to understand whether a rise in the REIT’s share price is supported by the quality of growth that we are looking for.

CapitaMall Trust offers the individual investor access to 2,941 rental leases (as of 30 June 2014) in some of the most popular malls around Singapore. It has steadily increased of distribution per unit (DPU) over the years. Owing to the size of its property, further growth may not match up with the growth of the last five years. As such, the share price paid to own this REIT might be a more important factor.

As of 10 October 2014’s closing price of $1.91, CapitaMall Trust traded at a price-to-book ratio of around 1.09, and has a dividend yield of around 5.5% (based on a trailing twelve months distribution per unit of 10.52 Singapore cents).

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.