SINGAPORE (Apr 15): Although retail REITs have not been immune to the global market sell-off, experts believe that near-term disruptions from the Covid-19 outbreak have already been priced in.
In particular, CGS-CIMB Research believes that CapitaLand Mall Trust’s (CMT) valuations have already priced in the fundamental downsides of the virus, as it hovers nearest to its global financial crisis (GFC) trough.
In a Tuesday report, CGS-CIMB analyst Eing Kar Mei opines that CMT remains well positioned to “sail through the tough times and emerge stronger later”.
“Its potential merger with CapitaLand Commercial Trust (CCT) would further enhance the stability of the group and put it in a better position to grow via acquisitions and asset enhancement initiatives (AEIs),” says Eing.
To be sure, the brokerage identifies how CMT, the only listed retail REIT during the SARS period in 2003, survived the outbreak with minimal impact.
“[CMT’s] same-store revenue and net property income (NPI) increased by 5.7% and 3.1% year-on-year respectively in FY2003,” says Eing, adding that rental reversions for the year increased by 6.2%.
Fast forward to the present outbreak, Eing believes that CMT, like other counters, will undeniably be impacted by the Covid-19 outbreak. Nonetheless, she believes that the REIT is in a favourable position compared to its peers.
“The situation remains fluid, and it is difficult to predict income with certainty,” acknowledges Eing.
“In this situation, we prefer REITs with a strong balance sheet and less forex exposure. Based on these criteria, CMT stands out among its peers,” she adds.
Eing highlights how 82% of CMT’s debt is on a fixed rate, compared to its peers’ fixed-rate debt proportion range of anywhere between 53% and 89%. In addition, while other REITs are in the midst of discussing debt refinancing strategies with their respective bankers, CMT has already refinanced its debts due in FY2020.
“Based on our estimates, CMT’s cash balances could finance about 10 months of operating and interest expense obligations,” says Eing.
“In conserving more cash, aside from reducing the non-essential operating expenses, CMT can also opt to pay out its REIT manager’s management fee in units [instead of cash],” she adds.
Apart from solid cash balances, Eing notes that CMT has room to draw down on its credit lines to cover operating expenses. The REIT currently has the capacity to additional debt to cover 3.9 times its FY2020 operating expenses at 40% gearing.
In addition, CMT, along with Mapletree Commercial Trust (MCT), has a portfolio that consists only of assets which are secured.
“With 100% unencumbered assets, CMT is tied to fewer debt covenants and has a lesser risk of refinancing its debt, compared with its peers,” says Eing.
As such, CGS-CIMB is reiterating its “add” call on CMT with a target price of $2.24, and has cited the REIT to be its preferred sector pick due to its strong balance sheet and reduced forex exposure.
As at 10.39am, units in CapitaLand Mall Trust are trading one cent lower, or 0.6% down, at $1.80. This translates to a price-to-book (P/B) ratio of 8.6 times and a dividend yield of 6.1% for FY2020F according to CGS-CIMB valuations.