Addition to watchlist - CapitaMall Trust
My current REIT portfolio does not have any retail assets and I have been wondering if I should get some exposure to that to diversify the portfolio further. With the rise of e-commerce, there has been lower confidence in retail properties, and I expect the market to be overly fearful in investing in them. I started my search with CapitaMallTrust (CMT), since it has the reliable Capitaland branding and is quite well known.
Notes on CMT:
Portfolio
CMT has 16 properties:
Heartland
Bukit Panjang Plaza
Tampines Mall
Junction 8
Sembawang Shopping Center
Lot One
Bedok Mall
IMM Building (is this really heartland? i don't know)
JCube
Downtown
Funan (undergoing AEI)
Plaza Singapura
Atrium@Orchard
Clarke Quay
Bugis+
Bugis Junction
JV:
Raffles City (40%) (AEI - to complete in 1Q2018)
Westgate (30%)
The portfolio is quite evenly spread between heartland and downtown properties. One view I see is that downtown retail is not doing well because people don't feel a need to go to downtown malls to buy luxury items since most things are available cheaper online. However, heartland malls are doing better since people go there to buy necessities on the way home. Looking at the crowds in NEX near my place, and the low number of customers in shops on the rare occasion I am in Orchard, I think this view is quite true. Even my shopaholic wife laments that shopping in Orchard is no longer as fun as it used to be. The necessity of buying necessities at a local mall is also dropping as we now have Redmart and Amazon Prime Now, which can deliver these items to the home relatively quickly.
I think what would make a difference is whether these malls can convert from only offering mainstream retail offerings to creating a more unique "shopping experience". (For example, see Sephora's plan to challenge online shopping by revamping their shopping experience). Retail properties, especially in the downtown area, will need to change their lineup to include more activity space beyond cinemas (escape rooms, gyms, etc are all possible), more hanging out space, and more interesting F&B concepts, to compete effectively.
CMT seems to be making this new push with their "live.work.play" concept at the upcoming Funan Mall. I also see this slant in places like Bugis+, and personally I think Plaza Singapore is quite an interesting mall to visit. Whether the management can continue this innovation would be a factor in my decision to invest.
Financials (as at 30 July)
For a benchmark , I took a look at FCT, being another large retail player (though I appreciate its malls are mainly located in the heartlands), for comparison.
Price: 2.03 (FCT:2.11)
DPU: 2.750 (FCT:3)
Yield: 5.488% (FCT: 5.566%)
NAV: 1.91 (FCT:1.92)
Gearing: 34.7% (FCT:30%)
Interest Cover: 4.8x (FCT: 6.25x)
Average Debt Maturity: 5 years [not on weighted average basis] (FCT 2.6 yrs on weighted average basis)
I think the numbers are not great, gearing is quite high. Price is at a premium to NAV and the yield is average for a REIT. I would need to believe in a growth story before I invest under these stats.
Looking at the 1H2017 financials, Net Property Income had dropped 2.6%, but there was a 0.2% increase in distributable income and DPU. The drop in NPI was mainly due to Funan being renovated. In FY2016, distributable income had also risen by 0.2%. Looks like the current prospects are quite stable, even if they are not spectacular.
However, in contrast, FCT had increased its distributable income by 1.8% in the past 9 months. FCT does look better in comparison, but not sure how much difference having the income from Funan would have made here, perhaps distributable income for CMT would have increased even more.
Rental Reversions
About 30% of CMT's income is due for renewal in 2018 and another 30% in 2019. There was -1% rental reversion from 2015 to 2016, and further rental reversions of -1.6% in 1H2017.
A recent broker call highlighted the negative rental reversions and put CMT on a hold recommendation, but noted that management is still optimistic and Funan has got 30% pre-commitments.
One thing I noticed was that a bulk of the rental reversions was from Westgate (-10%) and Bedok Mall (-7.4%). The next bulk of leases due for renewal come from Lot One and Bukit Panjang, which saw positive rental reversions in 1H2017. Wonder if this means the next half year will see a better rental reversion. Will make a note to observe this.
In contrast, FCT's rental reversions for 9M2017 were a positive 4.3% on a similar lease expiry schedule.
I think these numbers show that there is no huge crisis in the retail property space. Taken together with the current premium above NAV, it makes me hesitant to make a bet on retail now.
Conclusion
I think the current market price of 2.03 is abit high, and I am not inspired with enough confidence to that there is enough growth to buy in at a premium. I do think this is a well diversified retail reit, with a management that could possibly take big steps to improve their retail properties, and will watch for a better time to buy in.
If I have the time I will try and look into other retail stocks, but for now, I think the approach is a wait-and-see one.