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Can CapitaLand Mall Trust Live up to High Expectations?

There is much optimism surrounding CapitaLand Mall Trust (SGX: C38U) these days. So far this year, the shopping mall real estate investment trust (REIT) has seen its unit price climb 15%. It now trades at a premium valuation, sporting a price-to-book ratio of 1.28 and a yield of 4.4%.

To put that in perspective, despite the recent run-up in REIT prices, REITs in Singapore still have an average price-to-book ratio of 1.06 and a yield of 6.1%. Out of more than 40 REITs in the market, only CapitaLand Commercial Trust (SGX: C61U) and Parkway Life Real Estate Investment Trust (SGX: C2PU) have lower yields.

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With such rich valuations, can CapitaLand Mall live up to expectations?

A rental boost from Funan

One of the reasons for the retail REIT’s rich valuation is the anticipated income boost that the opening of Funan will provide. The mall opened in late June this year. Because Funan has not been contributing to rental income since it began redevelopment, the opening of Funan will have a significant year-over-year impact on distribution per unit (DPU) on a full-year basis. 

As such, investors can expect at least a mid-single-digit growth from DPU just based on the contribution from Funan.

On top of that, the acquisition of 70.0% balance interest in Westgate that it did not own will continue to provide year-over-year rental income boost until the fourth quarter of 2019.

Turning the tide

However, what could potentially be a game-changer for the REIT is yield-enhancing acquisitions. At a briefing with analysts on 23 July, following its earnings announcement, management mentioned that it was on the lookout for acquisition opportunities both overseas and in Singapore.

It also referred to Jewel Changi Airport as one potential investment it was keen on. 

With its gearing at 34.2% and relatively low cost of debt of 3.2%, it is certainly possible for the REIT to make yield-accretive acquisitions.

The Foolish bottom line

There is certainly much optimism baked into CapitaLand Mall Trust’s unit price right now. However, if it can deliver accretive acquisitions that can boost DPU, and with full-year contributions from Funan, it may be justified to pay such a large premium for the trust now.

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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, CapitaLand Commercial Trust, and Parkway LIFE REIT. Motley Fool Singapore contributor Jeremy Chia does not own shares in any companies mentioned.