CapitaLand Mall (CMT) and Commercial (CCT) Trust – A Merger of Two Giants

cct cmt merger reits stocks Sep 21, 2020

by: Tam Ging Wien

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CapitaLand Mall Trust (CMT) and CapitaLand Commercial Trust (CCT) will be hosting their Extra-Ordinary General Meeting (EOGM) on 29-Sept-2020 (Tue) to obtain unitholder consent to the merger of the two giants into form the largest Singapore listed REIT by market cap – CapitaLand Integrated Commercial Trust (CICT).

This announcement was made earlier in January 2020 just before the massive worldwide outbreak of the COVID-19 pandemic which has resulted in the delay in this EOGM. To proceed with the EOGM amidst the pandemic, the format of the meeting come 29-Sept-2020 (Tue) has been modified to a live audio-visual webcast or a live audio-only stream instead of a physical meeting.

Are the rationale and benefits of the merger still valid in view of the current COVID-19 pandemic? How should unitholders vote come end-September? We approach this deal with a renewed lens taking into account what we know about the impact from the pandemic.

Formation of a New Giant

CMT and CCT’s merge to form CICT will result in Asia Pacific’s second largest REIT by market cap, second only to Link REIT which is listed in Hong Kong. CICT will also overtake Ascendas REIT to become Singapore’s largest listed REIT.

When it comes to REITs, we are on the view that scale really does matter. Larger REITs come with the advantage of:

  • Larger REITs tend to attract more analyst coverage both domestically and internationally therefore attracting more institutional and high net worth investor demand boosting trading liquidity
  • Larger market cap REITs with branded sponsors backing are generally larger free market float and more liquid allowing more institutional support
  • Larger REITs are better able to utilize debt funding more effectively compared to smaller REITs potentially lowering dilutive effects on unitholders
  • Larger debt profile and are therefore able to negotiate better interest rates with lenders resulting in lower interest cost
  • Consolidating operations to achieve economies of scale which lowers the overall expenses of the REIT

In this sense, we think that regardless of the COVID-19 pandemic, the size will be beneficial to unitholder holders in the long term.

Source: CMT and CCT Merger Proposal

Difficulty in Assessing Office Demand in Singapore

The merge will result in the loss of two pure play retail and commercial REIT. As their asset size is roughly equal, both retail and commercial components are equally important to the growth of the REIT. If one component does not perform well, it will drag the performance of the entire portfolio.

In a report published by Cushman & Wakefield, “leasing activity (in Q2-2020) remained muted with risk of long-term structural shift”, “leasing activity remained muted during the second quarter as brokers were unable to close deals during the circuit breaker period. With remote working continuing as the default mode, and corporate occupiers putting the brakes on expansion plans to focus on operational issues arising from the pandemic, future leasing demand in the short term is likely to remain weak. Due to the limited leasing activity during the second quarter, a larger moderation in rents is expected in the third quarter as landlords compete to attract and retain key tenants”.

While it is expected that the short-term impact on the office sector is likely to remain weak throughout 2020 due to the work from home push by the Singapore government to curb the spread of the pandemic, the longer term trends of office demand from 2021 remains unknown. Will employers revert to normal behaviour come 2021 onwards? Or will they take the opportunity to cut floor space and shift a good amount of their workforce to a permanent work from home?

While supply side is likely to increase given some employers cutting floor space, it could be offset by increase floor space per employee needed to adhere to social distancing requirements.

On top of that, large scale China based tech companies are also taking up office spaces in Singapore as a result of their global expansion efforts. Restrictions of Tik Tok and Tencent in US and also undesirable situation now in Hong Kong seems to have indirectly benefitted Singapore both in terms of employment opportunities and office space demands by these Chinese tech giants.

One example would be Bytedance the parent company of social media app TikTok/Douyin signing a fresh lease of 20,00sqft at One Raffles Quay South Tower at Marina Bay. In an earlier transaction, Alibaba is also entering into a joint venture with a Perennial led consortium to redevelop AXA Tower. This initiative is likely to lead to a displacement of tenants currently occupying AXA Tower with over 700,000sqft of space. Another Chinese tech giant Tencent has also picked Singapore to be its regional HQ.

Source: Cushman & Wakefield 

Based on Cushman & Wakefield’s 12-month forecast for Singapore grade A office space, the real estate consulting firm expects a decline of average rentals to decline to S$10.37sf/mo, a contraction of -2.3% rental and an increase in the average vacancy rates to 2.9%.

As of the month of August 2020, CCT’s office portfolio has seen approximately 24% of its office community return to work.

Increasing supply from employers cutting space may be offset by increasing demand from requirements from social distancing and entrants of the Chinese tech giants into Singapore. Will demand accelerate faster than supply? Or will demand be inadequate to meet the rapid supply increase?

In our view, there is a good chance that office space demand will likely not plunge significantly and any notions about “blocks and blocks of vacant office spaces” are likely to be a little extreme. On the other hand, we think investors shouldn’t be overly rosy about office space demand from the entry of the Chinese tech giants either. The likely scenario is likely somewhere in between.

Source: CMT and CCT Merger Proposal

CCT’s Occupancy Rates Stays Above Average

Specifically for CCT, its Q2-2020 results show above average occupancy rates and also a fairly strong tenant retention and rental reversions despite the circuit breaker period. CCT occupancy rate clocked 95.2%, above the Singapore CBD average of 94.4%. Also, by June-2020 CCT had also renewed its roughly two thirds (2/3) of its expiring leases for 2020. Of the rentals that expired, a good number of them were renewed at a higher rate as well which appears to support its leasing momentum. Portfolio WALE remains at a steady 3.6 years.

This indicates that CCT likely has fairly loyal and stable tenants who continue to retain their office spaces despite the pandemic.

Source: CCT Q2-2020 Results Presentation

Source: CCT Q2-2020 Results Presentation

Source: CCT Q2-2020 Results Presentation

CMT’s Sees Early Signs of Recovery in Shopper Traffic Trends

Weekly shopper traffic trends since January 2020 has been falling throughout the first half of 2020 with the lowest figures clocked during the circuit breaker months of April, May and June. Post circuit breaker trends show a quick and strong recovery in July 2020 with shopper traffic recovering to 53% of the pre-pandemic levels of January 2020. For the month of August 2020, shopper traffic recovered to 58% of the pre-pandemic levels.

A good proxy to compare CMT’s foot traffic would be too look at its smaller peer, Frasers Centrepoint Trust (FCT). With foot traffic recovering to 61.5% and tenant sales recovering to 97% in July and likely higher in August, we think that CMT would likely bring in similar numbers for the rest of Q3-2020.

Source: CMT and CCT Merger Proposal

Source: CMT Q2-2020 Results Presentation

Source: Frasers Centrepoint Trust Proposal

Source: Frasers Centrepoint Trust Proposal

Deal Sweetener – Acquisition Fee Waiver

Under the revised terms of the merger deal, CMT will accept a one-time waiver of the acquisitions fees for the manager in recognition of the unprecedented circumstances brought about by the COVID-19 pandemic.

As a result of this waiver, the cost saved from the acquisition fee waive amounted to S$111.2mil and is  to 1% of the property valuation of the CCT portfolio.

Thanks in part to this one-time waiver of the acquisition fees, CMT unitholders will enjoy an increased DPU accretion. On a pro forma basis, H1-2020 DPU is expected to increase 4.1% while the NAV per Unit is expected to increase 2.2%.

Source: CMT and CCT Merger Proposal

Gearing Increase? What About Valuation Decrease?

Interestingly, the merger while being DPU accretive would result in leverage increasing for CICT to 38.3% adjusted for the draw-down of S$1.02bil by CMT to fund the cash consideration and transaction costs. This is an increase from 36.4% for CCT and 34.4% for CMT (as of 30-Jun-2020). As this pro forma gearing was based on the original January 2020 announcement, it is expected to be lower now given that the acquisition fee to CMT’s manager was waived. However, this could be offset by decreases in the valuations of both CMT’s and CCT’s portfolio value.

Both REITs has already performed a revaluation of their assets, as of 30-Jun-2020 which would provide some transparency to the impact of COVID-19 on the asset valuations.

The aggregate value of all CMT’s properties was S$13,405.0mil as at 30-Jun-2020. This represents a downward revaluation of S$193.6mil or approximately 2.78% from the aggregate value of S$13,788.0mil as at 31-Dec-2019.

The aggregate value of all CCT’s properties was S$10,929.7mil as at 30-Jun-2020. This represents a downward revaluation of S$193.6mil or approximately 1.74% from the aggregate value of S$11,123.3mil as at 31-Dec-2019.

All in all, there is no information on what the merged CICT entity’s final gearing will be, but there is a possibility it would remain elevated as the valuation of the assets have fallen as at 30-Jun-2020.


Concluding Remarks

The COVID-19 pandemic has taken the world by surprise and each passing day, we are learning more and more about the virus itself and also the impact on businesses and the toll is brings on individuals.

Trying to understand the impact on both CMT and CCT and on the merger into CICT is also a tricky one. There is a lot we do not understand about the pandemic and there is a lot about the impact on the economy that is still unravelling.

Given the data points available as of the time of writing, we would think that the worse is likely over for CMT’s retail assets. The foot traffic seems to be picking up and the tenant sales figures are likely to also be showing early signs of recovery.

However, the impact on CCT’s portfolio is a bit trickier to deduce. As of Aug-2020, only 24% of the portfolio office community has returned to work while telecommuting remains the default mode of work under Phase 2 as advised by the Government of Singapore. There is a good chance that some of the tenants will likely take the opportunity to reduce cost by reducing their office space footprint by making a larger part of their workforce work from home. This might be offset by the need to increase floor space per employee as also increased demand from expanding businesses especially from the Chinese tech giants.

As both the impact on CMT and CCT is almost equally weighted, it makes it difficult for investors to manage their portfolio sector exposure due to the integrated nature that CICT will bring.

As unitholders of CMT, we are writing off the 2020 as a bad year and instead focus on looking forward to a better year in 2021 and 2022. Taking a long-term view, we are still holding on to our positions in CMT and welcome CCT’s assets into our portfolio when the merger is complete.

Positioning to Ride the Recovery

Opportunities and Risk Post-COVID-19 Pandemic in the various S-REIT Sectors

The COVID-19 crisis has brought about an unprecedented economic shock to many sectors, and yet it has also generated opportunities in others.

The tech sector has been a major beneficiary and along with that, S-REITs exposed to the Data Centre sector such as Keppel DC REIT and Mapletree Industrial Trust gained phenomenally.

But are the investment opportunities in REITs now gone? Personally, we do not think so. There are still many REITs below their pre-COVID-19 levels poise to recover strongly in the coming quarters – and now it is the best time to prepare to capture the post-COVID recovery.

Join us as we discuss the opportunities and risk in the S-REIT space sector-by-sector as we try to uncover recovery opportunities for FY2021 and beyond. Real estate sectors that we will be covering include the Retail, Hospitality, Offices, Healthcare, Industrial and Data Centres.

Our speaker Tam Ging Wien will be sharing his knowledge and experience including:

  • Part 1: A Survey of the REITs Landscape Around The World
  • Part 2: Key Metrics in Identifying Strong REITs
  • Part 3: Real Estate Sector Review Amidst the COVID Crisis
  • Part 4: Screening for Opportunities
  • Part 5: Q&A

Some key highlights that will be covered includes:

  • Real estate sector-by-sector review on COVID-19 impact and recovery opportunities. Sectors covered include the Retail, Hospitality, Offices, Healthcare, Industrial and Data Centres.
  • Opinion on which sector will continue to stay resilient and which are poised to recover quickly post-pandemic
  • The right metric to use when screening for high quality REITs
  • Case studies of REITs which are considered high quality
  • Step-by-step demo of how to screen for high quality REITs on your own

During the sharing session, various Singapore-listed REIT examples will be used.

There will also be a Q&A so that members of the investing community may engage in open dialog and discussions in order to deepen their understanding of REITs. Do prepare your writing materials for note taking.

Please note that the duration of the on-site seminar is 7pm to 9:45pm Singapore Time (GMT +8).

The details of the event are as follows:

  • Seminar: Positioning To Ride The Recovery
  • Date: 5th May 2021 (Wed)
  • Time: 7:00pm to 9:45pm
  • Venue: RNN Conference Centre - Kyoto Training Room (Level 4), 137 Cecil Street, Cecil Building #04-01, Singapore 069537
  • Fees: S$10.00
  • Sign-up Link:

To learn more about REITs, we recommend the article: What are REITs?


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