Can CapitaMall Trust Continue To Grow?

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.

CapitaMall Trust is a Real Estate Investment Trust or REIT. Being a shareholder of a REIT gives you partial ownership to all the real estate that it owns. In the case of this REIT, it has 16 shopping malls under its umbrella. As per the Monetary Authority of Singapore (MAS), REITs are mandated to distribute at least 90% of its profits as dividends to enjoy tax transparency. I also wrote about a few pointers for picking REITs here.

So, while the returns from CapitaMall has been fashionable — as Foolish investors, we should look closer at the company 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 1

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 69% of the REIT’s gross revenue.

There was a noticeable dip in gross revenue for The Atrium @ Orchard  in FY 2011 and FY2012. However, the dip was due to asset enhancement initiatives (AEI) works which appears have boosted gross rental revenue in FY2013. Offices make up 42.3% of gross rental for The Atrium @ Orchard, and this means there could be more revenue volatility in the future.  All properties displayed gross revenue growth exceeding 10% except for Plaza Singapura and IMM building. The Atrium @ Orchard, and Raffles City were the biggest contributors of gross revenue growth in an absolute basis.

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 2

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 IMM building, Bugis Junction, and The Atrium. Bugis Junction’s NPI may have been affected by AEI works at Bugis+ during this time. The NPI for all seven grew more than 10% with the exception of IMM building.

Finally, Foolish investors might also want to look at the debt profile of the REIT. The gearing ratio, type of funding, and interest coverage ratio may be of interest. To do that, we can look at the latest quarterly earnings presentation on 30 June 2014.

Gearing Ratio 34.3%
Interest Cover* 4.7 times
Weighted Average Debt Maturity 4.2 years
Unsecured borrowings 82.9%
Average Cost of Debt 3.6%
Fixed Rate Borrowings 98.7%
Total Borrowings $3.6 billion

 Source: REIT earnings presentation; Macquarie Asian Conference Presentation; Interest Rate cover calculated as net investment income before interest and tax divided by interest expense for the first half of 2014

With the weighted average debt maturity at 4.2 years, and fixed rate loans above 98%, it would seem like CapitaMall Trust might be relatively well protected from any increases in bank interest rates in the near future. Foolish investors should keep an eye out for its refinancing activities in FY 2015 and FY 2016 when about 40% of its borrowings comes due. Compared to Fraser Centrepoint Trust (SGX:J69U), Capitamall has a higher average cost of debt, but a longer weighted average debt maturity profile.

Finding sustainable funding may be one of the important factors for an REIT. To this point, with a significant amount of loans which are unsecured, therefore the REIT might have the option to pledge its properties in the future to raise capital.

A quick look ahead

Development of Westgate Tower, and Westgate Mall may be where growth will come from in the near term.

The REIT is also in the midst of implementing AEI on the fledgling IMM building, JCube, Bugis Junction, Tampines Mall, and Bukit Panjang Mall. An estimated $120.5 million will be spent on AEI works, so we may have to monitor the returns on this investment, and how it drives gross revenue and NPI.

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.

CapitaMall is one of the cool REITs which webcasts its earnings presentation. For the webcast for the second quarter earnings for FY2014, Chief Executive Officer Wilson Tan shared plans to reposition the IMM building as an outlet shopping center. It has 60 outlet stores now, and may have more after its next phase of AEI. CEO Tan also shared that the IMM building has seen a significant amount of Malaysian cars in its car park, which may signal interest in outlet shopping.

CapitaMall Trust is also looking at opportunistic opportunities for acquisitions of properties, and greenfield development projects.

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 the years that have past. 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).
Read the next article here, which covers the rest of the malls under its portfolio, and how these malls drove most of the gross revenue growth for CapitaMall in the last five years plus.

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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.