• Results were affected by rental waivers of S$76.5m granted to tenants affected by the COVID-19 pandemic. However, CapitaLand Mall Trust released S$23.2m, or one-third of the taxable distribution of S$69.6m retained during 1Q20.
• Shopper traffic has recovered steadily since the transition to Phase 2 of reopening and tenant sales are gaining momentum. Recovery is slowly but surely taking root.
• Maintain BUY. Target price: S$2.55.

CapitaLand Mall Trust's 2Q20 Results

• CapitaLand Mall Trust (SGX:C38U) reported DPU of 2.11 S cents, down 27.7% y-o-y but in line with our expectations. Distributable income of S$78.1m was lower by 27.5% y-o-y and included the release of S$23.2m or one-third of the taxable distribution of S$69.6m retained during 1Q20.

Hit by rental waivers.

• Gross revenue dropped 39.8% y-o-y due to rental waivers of S$76.5m granted to tenants affected by the COVID-19 pandemic, partially offset by new contribution from Funan of S$10.7m (commenced operations at end-June in 2019).

Maintained positive rental reversion in 1H20.

• CapitaLand Mall Trust achieved mild positive rental reversion of 0.1% on a portfolio basis in 1H20 (1Q20: +1.6%).
• Major contributors were
  • IMM Building (+2.1%),
  • Clarke Quay (+2.5%)
  • Junction 8 (+1.6%) and
  • Plaza Singapura (+2.9%).
• Mathematically, rental reversion could be at a negative 1.4% in 2Q20. Retention rate was healthy at 90%.

Portfolio occupancy dipped slightly by 0.8ppt q-o-q to 97.7% as at Jun 20 (Mar 20: 98.5%).

• Occupancy at Clarke Quay eased 3.6ppt q-o-q to 92.3%. Some entertainment venues are still not allowed to re-open in Phase 2 due to the higher risk of COVID-19 transmission, causing pre-termination of some leases at Clarke Quay.

Mild decline in capital values.

• CapitaLand Mall Trust recognised decline in fair value of investment properties of S$265m (Funan: -S$33m, Plaza Singapura: -S$49m and Westgate: -S$44m). The paring down was due to expectations of lower rents, while cap rates have remained unchanged.
• Raffles City Singapore, in which CapitaLand Mall Trust has a 40% stake, saw a decrease in fair value of S$47.2m. Thus, NAV/share decreased 4.2% q-o-q to S$2.01.

Aggregate leverage remains low at 34.4%.

• CapitaLand Mall Trust has committed credit facilities in place for refinancing of debt of S$226m due in 2020. Average term to debt maturity is 4.5 years. Interest coverage ratio is also healthy at 4.3x. CapitaLand Mall Trust adopts a prudent approach to working capital management in anticipation of need for rental relief.

Tenant Sales Gaining Momentum

• Management has maintained a cautious view due to the uncertain economic climate. Currently, 95% of CapitaLand Mall Trust’s tenants have resumed operations. Tenant sales are gaining momentum although consumer sentiment remains cautious.

Steady Recovery of Shoppers’ Traffic Post-circuit Breaker

• Shopper traffic and tenant sales in 2Q20 contracted 40.6% and 15.4% y-o-y respectively in 1H20 due to the nationwide Circuit Breaker, which lasted eight weeks (7 April to 1 June). However, shopper traffic has recovered steadily since the transition to Phase 2 of reopening (19 June to 5 July) to 53% of the level prevailing a year ago (downtown malls: 49%, suburban malls: 57%)
• Tenant sales have declined at smaller degree relative to shoppers’ traffic in 1H20 due to strong sales from supermarkets (+18.6% y-o-y) and pent-up demand for books & stationary, IT & Telecommunications and electrical & electronics.

Tenant Relief Package

• CapitaLand Mall Trust has committed a rental relief package totalling S$154.5m (rental waivers bear by CapitaLand Mall Trust: S$76.5m, property tax rebates and cash grants from government: S$78m). The package includes rental relief for qualifying SMEs in accordance with the COVID-19 (Temporary Measures) (Amendment) Act 2020. Management has seek clarification from the authorities on whether the classification of SMEs is based on entity level or group level.
• CapitaLand Mall Trust has also waived turnover rent until June. Tenants who have submitted requests for rental deferral accounted for less than 1% of total NLA.

Flexible Leasing to Adapt to New Operating Environment

• CapitaLand Mall Trust will explore alternative leasing strategies to maximise occupancy, including:
  1. signing short-term extension, and
  2. restructure leases with higher turnover rent and lower fixed rents during the initial years and vice versa during the later years.

Maintain BUY for CapitaLand Mall Trust

• We have lowered our 2020 DPU forecast by 17% (impact of COVID-19 (Temporary Measures) (Amendment) Act 2020) but trimmed our FY21 DPU forecast by 3%. We have assumed that CapitaLand Mall Trust will release another one-third of distributable income retained in 1Q20 of S$23.2m during 3Q20. We estimate payout ratio at about 92% for 2020.
• Maintain BUY. Our target price of S$2.55 is based on DDM (cost of equity: 6.0%, terminal growth: 1.5%).
• CapitaLand Mall Trust's share price catalysts:
  • Gradual but steady recovery in shopper traffic and tenant sales, accompanied by progressive easing of social distancing measures.
  • Asset enhancement initiative for Lot One Shoppers' Mall.

Source: UOB Kay Hian Research - 23 Jul 2020