Proposes Merger With CapitaLand Commercial Trust, Maintain HOLD

• CAPITALAND MALL TRUST (SGX:C38U) has announced a merger with CapitaLand Commercial Trust (SGX:C61U) via a scheme arrangement to create the largest S-REIT and third-largest commercial APAC REIT with a SGD16.8b market cap backed by a SGD22.9b AUM.
• The new CapitaLand Integrated Commercial Trust (CICT) aims to embark on more sizeable mixed-used acquisitions (in Singapore and other developed markets) with its higher SGD2.9b debt headroom.
• We see a successful transaction offering CapitaLand Mall Trust and CapitaLand Commercial Trust unitholders a 1.6% and 6.5% DPU boost, and possible scale benefits in the medium-term.
• For now, Singapore’s retail fundamentals are weak on lower tenants’ sales outlook. We fine-tuned DPUs, and lift DDM-based Target Price slightly to $2.70.
• SPH REIT (SGX:SK6U) and FRASERS CENTREPOINT TRUST (SGX:J69U) are our preferred retail S-REITs plays for their higher yields and more visible DPU growth profile.

Focus Is Now on Scale, Limited Deal Visibility

• The exercise will see CapitaLand Mall Trust acquiring all CapitaLand Commercial Trust units for SGD8.2b - 88% to be financed by units and 12% in cash at a 0.82 gross exchange ratio; its leverage is set to rise from 32.9% to 38.3% post-merger. Its sponsor CapitaLand (SGX:C31) will maintain its interest at 29.1% in the combined REIT which will own 15 downtown, suburban malls in Singapore and ten prime office assets (eight in Singapore, two in Frankfurt, Germany).
• The deal expands CapitaLand Mall Trust’s AUM into a broader commercial (office) asset class, while lifting its pro-forma DPU and NAV by 1.6% and 1.5%. The process will complete in 1H20 after approval from unitholders.

Retail Fundamentals Weak

• CapitaLand Mall Trust reported 4Q19 results which were in line with consensus, with DPU up 4.0% y-o-y, backed by higher contributions from Westgate and Funan (from Jun 2019). Portfolio occupancy improved from 98.9% to 99.3%, and improvement was broad-based. Rental reversion for FY19 was slower at +0.8%, versus 1.2% for 9M19.
• Its occupancy cost has improved y-o-y from 18.4% to 18.2% in FY19, but its rental growth outlook remains weak against slower tenants’ sales, which were down 1.4% y-o-y despite the 1.4% rise in shopper traffic.

Source: Maybank Kim Eng Research - 22 Jan 2020