SINGAPORE (Sept 10): The competition in Jurong East is intense. Jurong East MRT station has five malls within a 10-minute walk. Westgate is connected directly to the station and Jem is almost connected to it. The Big Box is connected via J-walk, and JCube is across the road. IMM — the most popular mall in Jurong East — is about a 10-minute walk from Westgate via J-walk.
Westgate — which is likely to be fully owned by CapitaLand Mall Trust, subject to unitholders approval at an extraordinary general meeting — attracts about four million visitors a month. Jem, developed by Lend Lease and owned by the Asia Retail Investment Fund 3, is its fiercest competitor. Young adults prefer Jem because of its fashion choices. More mature shoppers see no difference between them but prefer Westgate because, in general, CapitaLand malls are generous with their CapitaStar points.
Westgate is undergoing minor asset enhancement initiatives (AEIs), which will cost a total of $6 million. Tony Tan, CEO of CMT’s manager, has indicated that the mall will be getting new tenants. “We’re in the process of amalgamating some space and bringing in a mini anchor on Level 3 to differentiate [ourselves from] the neighbouring offerings,” Tan says.
The AEIs include enclosing open-air areas on Levels 2 and 3. The property manager has decided to air-condition the area for the comfort of restaurant patrons. Tan says, “Ten restaurants will be enclosed into air-conditioning. So, hopefully, our tenants can trade better. It will also affect the circulation [of shoppers].”
Westgate is quite a porous mall in that some areas are open 24 hours a day so that commuters and shoppers can walk from the office buildings to other areas, including along the J-walk, which connects Westgate, Jem, Jurong Community Hospital, Ng Teng Fong General Hospital, the Big Box and the Devan Nair Institute. As some of the walk-through areas will be affected by the new enclosure, the property manager will add escalators from the drop-off point.
Ratings agency could downgrade CMT
On Aug 27, CMT announced it was acquiring from CapitaLand the 70% of Westgate it does not own, for $805.5 million. Of this, unitholders will pay a $7.9 million acquisition fee to the manager in units. The property valuation agreed upon by CMT and CapitaLand is $1,128 million, or $2,746 psf. The cash component is likely to be around $406 million, Tan says, and CMT is likely to assume debt of $392 million.
In June, CMT completed the sale of Sembawang Shopping Centre for $248 million. “We completed the divestment of Sembawang Shopping Centre in June, allowing us to redeploy our capital. This is in line with our strategy. We look at areas where we can optimise returns, including divestment, and rejuvenate the portfolio with a higher premium asset,” Tan says.
Westgate’s price appears to be steep, though. At the agreed-upon valuation, the net property yield is 4.3%, according to the CMT announcement. The NPI yield based on annualising Westgate’s 1HFY2018’s NPI is 4.17%. Also, the valuation of Westgate is up 14% since end-June. Tan says this is probably because of a further compression of capitalisation rates by 10 basis points. As at end-June, Westgate’s cap rate was 4.6% and its valuation was $991 million, or $2,408 psf.
On Aug 28, Moody’s Investors Service revised CMT’s ratings outlook to negative from stable, although CMT still has the highest rating of A2 among Singapore real estate investment trusts. ”The negative outlook reflects our expectations that debt leverage is likely to increase, following the proposed acquisition of the remaining 70% stake in Infinity Mall Trust, which holds Westgate. The acquisition, assuming fully debt-funded, will increase debt by around $800 million,” Moody’s says in a report. “CMT’s credit metrics will weaken, following the proposed acquisition of the remaining 70% stake in IMT, which in turn will reduce its headroom within the A2 rating.”
As at June 30, CMT’s gearing was 31.5%. Assuming AUM of $11.14 billion versus debt of $4 billion, and a fully debt-funded acquisition, gearing will rise to 35.9%. “We can do [the acquisition] with debt or with debt and equity. We have the headroom to do it with 100% debt, but we will keep our options open,” Tan says.
During CMT’s 1HFY2018 results briefing, Tan had said the REIT’s A2 rating was very important. According to Moody’s, CMT’s net debt/Ebitda (earnings before interest, taxes, depreciation and amortisation) would weaken to 6.9 times if Westgate is fully debt-funded. The trigger for a ratings downgrade is a net debt/Ebitda ratio of seven times.
Moreover, next year, CMT will have to fully meet its obligations regarding the Funan integrated development, which is scheduled for completion in 2HCY2018, but which Tan has said could well be earlier. While the valuation of Funan may keep gearing levels in check, the project will not be stabilised and cash flow will take time to build up. Thus, Moody’s expects that net debt/Ebitda is likely to cross the key seven times level to 7.2 times or higher. The importance of CMT’s A2 rating implies that the REIT is likely to use a mix of debt and equity to fund Westgate.
CMT’s manager has a general mandate with which it can issue up to 20% of its units outstanding in the case of a placement, and as much as 50% in the event of a rights issue.
A fully debt-funded acquisition could add 0.12 cents, or 1.1%, to distribution per unit, assuming cost of debt of 3%. For 1HFY2018 ended June 30, CMT’s DPU was 5.59 cents. A mix of debt and equity would imply less accretion to DPU. Credit Suisse calculates that debt and equity funding could be slightly dilutive.
Based on CMT’s unit price, which is in the $2.12-to-$2.17 range, it could issue 185 million to 187 million new units to pay for the $406 million cash component of the acquisition, Credit Suisse suggests. While there could be a 0.5% dilution to DPU, gearing would stay low at 32.7%. The buffer for net debt/Ebitda of seven times would increase, and CMT’s outlook could revert to stable. Credit Suisse maintains a “buy” rating for CMT and expects DPU growth of 7% for FY2019 after the completion of Funan.
An expensive acquisition?
In 2011, CapitaLand and CMT acquired the Jurong Gateway site for $969 million, or $1,012 psf per plot ratio. The total development cost was around $1.5 billion, making the site a lot more expensive than Jem. In 2010, Lend Lease acquired the Jem site for $748.89 million, or $650 psf ppr. In 2014, CapitaLand and CMT divested Westgate Tower for $579.43 million.
For its part, CMT has revalued its stake in Westgate downwards, from $319.2 million (100% at $1.064 billion) as at end-2016 to $289.5 million as at end-2017. As at June 30, CMT’s stake in Westgate was valued at $297.3 million (100% at $991 million). In 2015, CMT acquired Bedok Mall for $783.5 million. It was revalued down to $781 million as at end2017, but has rebounded to $782 million. Bedok Mall’s NPI has stabilised, and rose 2% to $20.2 million in 1HFY2018.
“When we acquired Bedok Mall, it was relatively newer and bought close to the end of its first renewal cycle. Westgate has gone through a [downward] adjustment and is closer to the bottom of its cycle,” Tan says.
Rental reversions for Westgate fell 2.1% y-o-y in 1HFY2018, although the reversions for CMT’s portfolio stayed stable at 0.8%, but Tan says tenant sales at Westgate rose 2% y-o-y compared with a marginal decline for the portfolio.
Analysts are too focused on rental reversions, Tan suggests. “Reversion is just a number, it’s very tactical. Sometimes, it’s because of change of trade, but the trade may add more vibrancy to the mall. It’s more important for the entire mall to trade well,” he says.
Sponsor CapitaLand, which holds 29% of CMT, is expected to recognise a net gain of $99.2 million from the sale of Westgate to CMT. According to a CapitaLand announcement, its pro forma earnings per share would increase to 24.3 cents, from 21.9 cents as at end-December. Net tangible assets would rise to $4.41 from $4.39 as at end-December. The divestment of Westgate has allowed CapitaLand to recycle the monies into a new integrated development, through a 50:50 joint venture with City Developments, in the fast-growing Sengkang sub-market.
As far as CMT is concerned, it gets increased exposure to the Jurong Lake District, Singapore’s second CBD. The long-term plan is for the Jurong Lake District to eventually be able to accommodate 100,000 jobs and 20,000 homes. The population catchment could be increased further through the development of Tengah, the new HDB township that is expected to have 42,000 homes when completed and will be connected to Jurong East via the Jurong Regional Line.
In a way, an extra property derisks the portfolio. After CMT has acquired all of Westgate, none of the 16 properties in its portfolio will contribute more than 11.1% to total revenue. Revenue from necessity shopping will rise to 80.3% of the portfolio, up from 79.1% as at Dec 31, 2017.
For 1HFY2018, CMT reported a 2% rise in DPU to 5.59 cents, on a 3.7% rise in net property income to $246.4 million, a marginal rise in NPI from joint ventures, and a 2.5% rise in distributable income to $199 million. In addition, CMT has retained $13.7 million of its taxable income and $1 million of tax-exempt income from CapitaLand Retail China Trust during the period.
“Westgate’s [NPI] came down over the years. [NPI] was at $56 million, and I don’t see why it can’t go back to that level, given the potential of the location,” Tan says. In FY2015, Westgate’s NPI was $56.3 million (see chart). If Westgate’s NPI rebounds back to this level, it should help lift DPU.
