Will Rising Interest Rates Hurt CapitaLand Mall Trust’s Distribution?

The long-awaited interest rate hike occurred in mid-December last year when the U.S.’s Federal Reserve finally increased benchmark interest rates there by 0.25%. It was the first rate hike in nearly a decade.

For some, it spelled the end of the party for Singapore’s real estate investment trusts (REITs). Singapore is home to some of the largest REITs in Asia. The biggest REIT we have here is also the REIT sector’s pioneer, CapitaLand Mall Trust (SGX: C38U).

As a brief background, CapitaLand Mall Trust is a retail REIT that owns stakes in popular shopping malls in Singapore such as Raffles CityPlaza Singapura, and Bugis Junction. As debt is used by the REIT to partly finance the purchase of the properties that it has, the refinancing of borrowings can be a prime concern.

In a recent earnings briefing for CapitaLand Mall Trust’s results for the fourth-quarter of 2015, the REIT’s management team was asked to describe the current refinancing environment. Tan Lei Keng, the finance head of the REIT’s Manager, addressed this concern:

“On the debt cost, I think a lot of hype about the Fed [US Federal Reserve] and what the Fed is going to do. Actually, after the announcement on the increase, you realize that the [interest] rate came down. The peak was in September last year, the peak actually came down.

Of course, there is anticipation that there is going to be more increases this year, I think what we need to look at in terms of financing cost is – if you look at CMT [CapitaLand Mall Trust] we have, over the past few years, already built the expected increase into our model and we have already done a very long term debt tenure.

Precisely, we knew this was going to happen and will happen. What goes down, maybe can come up, right. And in terms of the current environment, any refinancing, you could expect the rate to go up, but there is also this flight to quality. I think that there are also people who look for quality issuance. And we continue to receive a lot of interest. The pricing was actually pretty good for the tenure that was given to us.

There could be an increase, but it is not going to be significant. In any case, at the CMT level, there is no refinancing due this year. We will be working with CCTML [CapitaLand Commercial Trust Management Limited] for the refinancing of Raffles City, which we own 40%.”

So far, CapitaLand Mall Trust’s average cost of debt has come down from 3.5% in 31 December 2014 to 3.3% in 31 December 2015. A snapshot of the REIT’s debt profile is shown below:

2016-03-07 Capitaland Mall Trust Debt
Source: CapitaLand Mall Trust’s earnings presentation

During the earnings briefing, Wilson Tan, the chief executive of CapitaLand Mall Trust’s Manager, noted that there is no foreign currency exposure on the REIT’s debt. He also said that the debt which is due this year is related to Raffles City, which CapitaLand Mall Trust has a 40% stake in.

At the moment, it would appear that CapitaLand Mall Trust is confident of managing any possible increases in interest rates.

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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.