Can CapitaLand Mall Trust Outperform the Singapore Stock Market?

CapitaLand Mall Trust (SGX: C38U) is Singapore’s first and largest retail real estate investment trust (REIT). Some of the malls in its portfolio include Tampines Mall, Junction 8, and Plaza Singapura.

In 2017, the REIT under-performed both the FTSE ST REIT Index (SGX: FSTAS8670), and the Straits Times Index (SGX: ^STI). The indices gained 20.6% and 18.1%, respectively, for the year, while CapitaLand Mall Trust’s unit price increased by just 13%.

Part of the under-performance could be due to the REIT’s muted financial performance and the slowdown in the retail environment. In 2017, CapitaLand Mall Trust’s gross revenue declined by 1.1% to S$682.5 million, while net property income (NPI) dipped by 0.3% to S$478.2 million.

I looked through the Growth Strategies section of CapitaLand Mall Trust’s 2017 annual report to understand what it takes for the REIT to grow, and consequently, have its units beat the market. Here are three things that I learnt.

Organic growth

CapitaLand Mall Trust earns income through step-up rent, gross turnover rent, non-rental income, and higher rental rates for lease renewals and new leases.

Gross turnover rent (GTR) is usually around 5% of CapitaLand Mall Trust’s gross revenue. GTR provides a variable rent component for the REIT, and if its underlying tenants’ sales increase, CapitaLand Mall Trust will be able to receive higher GTR. The REIT said that the GTR component is a “useful management tool which aligns CMT’s interests with those of [its] tenants.”

Most of the leases at CapitaLand Mall Trust’s malls have a “rental structure which encompasses step-up rent plus a small component of gross turnover rent or a larger component of gross turnover rent only, whichever is higher.”

Non-rental income comes from operating car parks and vending machines, among other activities.

Asset enhancement initiatives

In an earlier article, my Foolish colleague, Jeremy Chia, pointed out that a REIT can grow its rental income by increasing the yield on its current lettable area through asset enhancement initiatives (AEIs).

This applies to CapitaLand Mall Trust, as one of its strategies to grow is by performing AEIs. In its annual report, the REIT shared four ways to increase its portfolio’s yield and productivity:

1) Converting lower-yield space into higher-yield space;

2) Reconfiguring retail units to optimise space efficiency;

3) Maximising the use of common areas, and converting mechanical and electrical areas into space to be rented out; and

4) Upgrading amenities, sprucing up the facade, and adding play and rest areas, among others.

In 2017, CapitaLand Mall Trust completed a significant AEI at Bukit Panjang Plaza. The mall’s roof garden was relocated to Level 4, and the public library was expanded on the same floor to “increase the mall’s communal and recreational space to better serve the needs of the community.”

Creating better retail experiences

With the proliferation of e-commerce, CapitaLand Mall Trust must stay ahead of the curve, unless it wants to become irrelevant to shoppers. To increase shopper traffic in a challenging environment, the REIT aims to:

1) Align the tenant mix with the trend of the market to make sure there is always a “good combination of attractive and popular retail outlets in CMT’s malls”;

2) Introduce new retail concepts to keep things fresh and alive;

3) Improve connectivity to public areas, upgrade restroom facilities, harness technological innovations, and so on;

4) Come up with innovative marketing and promotional events to encourage repeat spending through loyalty programmes and also to bring in the crowd;

5) Have “attractive shopfronts and visual merchandising design ideas”; and

6) Build strategic alliances to strengthen retail experiences.

Various marketing programmes – such as CapitaStar, CapitaVoucher and CapitaCard – have helped to pull traffic to CapitaLand Mall Trust’s malls; the malls registered a healthy annual shopper traffic flow of 346.3 million in 2017. Although this fell slightly by 0.3% from 2016, I think it’s still an admirable performance amid the headwinds in the retail sector.

As of 31 December 2017, CapitaStar had more than 850,000 members, compared to over 770,000 members a year ago. CapitaVoucher performed well in 2017 too; its sales grew 13.1% to a record of over S$78.8 million worth of committed spending.

The Foolish takeaway

With the introduction of new retail concepts, innovative loyalty programmes, enhancing property yields through AEIs and redevelopments, coupled with the strategic location of its 16 shopping malls, I believe CapitaLand Mall Trust can outperform the market over the long-term, even if it faces short-term headwinds.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended units of CapitaLand Mall Trust. Motley Fool Singapore contributor Sudhan P owns units in CapitaLand Mall Trust.