CapitaMall Trust - Retail resiliency

We increase our distributable income forecasts to S$273m in FY09 (+26%) and to S$291m in FY10 (+45%) to reflect: 1) higher occupancy rates of 99% (from 95%) in FY09; 2) a rise in our FY09 retail spot rent assumption from a 20% yoy decline to a 10% decline; and 3) lower interest cost assumptions, as debt is paid down by rights proceeds of S$1.2bn in 2H09. FY09 earnings are essentially a known variable, with only 2% of rents up for renewal. But negative rent reversion could kick in next year when 37% of its rents are due for renewal. Despite this, we expect distributable income to improve 6.6% yoy in FY10 due to interest savings.

Retail rents and occupancy were more resilient than we expected despite a supply pipeline of 2.1m sq ft in 2009 and 2.2m in 2010 vs average new demand of 0.24m sq ft pa in the past decade. CMT maintained its portfolio occupancy rate at a high 99.7% in 2Q09, a testament, in our view, to its superior retail property management skills. Prime Orchard spot rents fell 6% hoh to S$33.90 psf in 1H09, but suburban malls declined only 2.4% hoh to S$28.30 in the same period, boding well for CMT as 51% of its portfolio is suburban malls. Our higher spot rent assumptions are also supported by higher shopper traffic (+1.3% yoy) in 2Q09,14% higher than in 2Q07.

Our DCF-based target of S$1.64 (from S$1.60) reflects: 1) a higher share base arising from its rights issue in February and 2) higher valuation of S$5.2bn (+69%) due to our higher FY09-FY11 earning forecasts. Dividend yields are at a decent 5.9% in FY09F and 6.3% in FY10F.

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CapitaMall Trust - Open to acquisitions if deemed accretive

CMT articulated its criteria for acquisitions as: 1) initial DPU accretion; 2) scope for asset enhancement; and 3) sustainability of market rents. Our checks indicate that Pramerica could sell four malls, which we think provide a strategic fit with CMT’s existing portfolio. The malls could cost around S$1.5bn, and CMT, if it were to buy the assets, may raise equity if it is to maintain its gearing at 30-35%. We have not factored in these potential acquisitions, which we believe will be mildly accretive.

Prime Orchard Road retail rents fell 6% YoY and suburban rents fell 2.4% YoY in H109, less than our forecast of -18% and -8%. Property consultants cite strong demand by new entrants and new concepts as reasons for resilient rents. In the suburbs, rents were supported by limited supply. We revise our 2009 prime rental forecast to -10% YoY and remove our rebate assumption. For the suburbs, we expect rents to stabilise at -2.4% for the full year.

We believe the Q209 result reaffirms CMT’s attributes of having a strong defensive portfolio with stable growth. CMT’s mall occupancy remains at 99.7%. H109 portfolio assets were re-valued down by S$252m to S$6.9bn, largely due to a 10bp expansion in cap rates.

We raise 2009-12 EPU by 3-12% on rental upgrades and AEIs for JEC and Atrium. The rental upgrades account for 18cts, and AEI 8cts change from our previous price target. Our DCF-derived price target uses a 2.6% risk-free rate, 1x beta, and 5% ERP. We raise 2010E EPS from S$0.08 to S$0.09.

CapitaCommercial Trust : 1H09 Slightly Ahead

Maintain EW: Dividend yield of 6.7% for FY09-10e is second to A-reit, our sector top pick’s dividend yield of 7.9-8.1% but we remain concerned about operating weakness from FY10-FY11. Post the recent 1-for-1 rights and repayment of debt, CCT’s gearing falls to 31% - the lower level of CCT’s target 30-45%.

2009 Income Locked in, 2010 & 2011 Challenging: 92% of management’s forecast rentals for 2009 have been locked-in and management is now focusing on 2010 and 2011 renewals. While we applaud management’s efforts to shore up rents, we believe market forces of supply and demand will play the dominant role and expect prime rents to fall to S$8.40 and S$6.50 by end 2009 and 2010 from S$9.50psf pm as at 2Q09, putting pressure on reversion from 2H09 onwards.

Occupancy Could Be Better Than Expected: Portfolio occupancy fell 0.5% to 96.2%, with the main decline contributed by One George Street. We believe occupancy could hold up better than expected as tenants realize it is costly and troublesome to relocate. However, we believe that higher occupancy levels will come at the expense of lower rents to retain tenants.

According to management, CCT is starting to see some tenants move back into the CBD area as office rents continue to moderate, which in our view is positive. Refinancing Risks Removed but De-valuation still a concern: With S$823m proceeds from the rights issue, CCT has paid down S$664m in debt and the nearest debt repayment of S$235m is in 2010. With unsecured assets of S$3bn and S$665m unutilized from the S$1bn multicurrency MTN programme – we see little refinancing risk for CCT. However, de-valuation risksstill loom. Latest valuations assume a cap rate of 4.5% and 4.75% for prime and other office assets – a low cap rate in our opinion. Gearing could rise to 40% if asset values fall by a further 25% (assuming a 6.2% NPI yield).

CMT - Sill enjoying positive rental reversion

CapitaMall Trust (CMT) posted a 2Q09 gross revenue of $138.6m, increasing 10.4% yoy, 3.1% qoq. Net property income grew by 12.2% yoy, 1.5% qoq to $93.8m in the quarter, in-line with expectations. DPU for 2Q09 is 2.13 cents, bringing 1H09 DPU to 4.1 cents. CMT has retained $4.8m for distribution in 2H09, or about 0.15 cents per unit.

To-date, CMT has renewed leases for about 12.1% of the total NLA, enjoying a 1.5% increase in rental rates compared to the preceding rates. Despite having another 302 leases expiring this year, the gross revenue lock-in for FY09 so far already exceeds 98% of FY08’s gross revenue. CMT’s malls are still operating at nearly full-occupancy (99.7%).

As sentiments on the economy improve, CMT has seen shopper traffic in 2Q09 improve by 1.3% yoy, 2.2% qoq on a comparable mall basis. However, actual sales of the tenants have only improved marginally by 0.2% qoq, as consumer spending remained cautious. The management maintains that it will work closely with tenants to improve sales, but also noted that tenants today are more confident of their business outlooks than six months ago.

Following the rights-issue to raise about $1.2b, CMT has pared down about $630m of debt, and intends to repay another $335m in Aug 09. Despite a $250m-decline in the capital values of its investment properties (or 3.5% decline) as a result of higher cap rates used by the valuers, CMT’s gearing remains a low 30.3% when all intended debt repayments are made, well within CMT’s target gearing range of between 30 – 35%. It is also well-positioned to weather further downside on capital values.

CMT’s DPU growth via asset enhancements will take a while to flow through as enhancement works at JEC and the Atrium will begin only in end-09 and end-2010 respectively. We retain our DDM-derived price target of $1.53. Due to the recent improvement in share price, the current yield of 5.5% appears unattractive. We are downgrading CMT to a HOLD.

Capitacommercial Trust - 2Q09 results- Positive reversions held up distribution

Within. 2Q09 core net profit of S$54m was within our expectations but below the Street’s, forming 30% and 24% of the respective full-year forecasts. 1H09 core net profit of S$91m makes up 51% of our full-year number.

Strong contributions from associates and China. 2Q09 revenue rose 34% yoy to S$250m on stronger contributions from development properties in China and improved sales in Singapore. Revenue from property trading increased 39% yoy to S$205m as KepLand sold over 100 units per month in its township projects in the last few months. At the associate level, stronger bookings from MBR and Reflections also boosted net profit.

Set to catch the property wave. At home, KepLand plans to launch The Promont and Madison Residences in 2H09, while releases of Reflections and Marina Bay Suites will be more opportunistic. If launched, we believe the projects will not be priced below market values. We expect margins to be strong given low land costs.

Raising exposure to resurgent China. In China, its 7.3m sf 55:45 JV project with KepCorp to develop township homes in Tianjin is an exciting proposition given the resurgence in the Chinese property market. The first phase will yield 1,760 homes, set for release in 2Q10. Total cost is estimated at over S$400m, possibly funded by proceeds from its rights issue. We estimate China now makes up 18% of its RNAV.

Office pre-leasing still weak. Pre-commitments for MBFC 1 & 2 remain at 60-65%. There have also been some pre-commitments for office space in OFC, but nothing meaningful. However, the pace of rental declines has moderated, suggesting some stabilisation in the office sector.

Maintain Outperform. We raise our FY09-11 core EPS estimates by 8-17% to reflect potential accretion from the Tianjin project and higher ASPs. Our end-CY10 RNAV has been raised by 6% as a result of this as well as higher marked-to-market valuations for KREIT. Our target price, still pegged at a 20% discount to RNAV, accordingly rises from S$2.77 to S$2.95. Weakness in the office sector remains a key risk but we believe stock valuations fully reflect this. We believe our capitalvalue assumptions for its Grade A office assets are conservative at S$1,300- 1,450psf, based on 6% cap rates. A quality residential inventory in Singapore and its China exposure are likely to be positives right now. Maintain Outperform.

CapitaMall Trust (S$1.58) - 2Q09 results - Meeting expectations

DPU in line despite S$1.5m retained. 2Q09 results were in line with Street and our expectations. Total income available for distribution was S$67.1m (+17% yoy). However, actual distributed amount was S$67.9m, including S$1.5m of distributable income retained from 2Q09 in view of economic uncertainties; and S$2.3m of net capital distribution income and net tax-exempt income from CRCT retained in 1Q09. Including the S$3.3m retained in 1Q09, management has retained S$4.8m of distributable income for 1H09. It is committed to distributing 100% of its distributable income for the full year. Hence, the S$4.8m retained will represent an additional 0.15cts for distribution in 2H09.

2Q09 DPU of 2.13 cts fell 40% yoy due to an increase in the unit base, forming 25% of our forecast for FY09. 1H09 DPU of 4.25cts, including retained income, represents 49% of our full-year forecast. Net property income of S$93.8m was up 12% yoy on new contributions from Atrium@Orchard and the completion of asset enhancement work in various malls. Qoq, the income was up 1.5% as positive rental reversions were diluted by higher property tax, marketing and maintenance expenses.

Occupancy stable at 99.7%; reversion rates flat. Portfolio occupancy stayed at 99.7%, the same as 1Q09. Average rentals grew 1.5% over preceding rates (typically committed three years ago), representing annual growth of 0.5%. Although shopper traffic was 2.2% higher than in 2Q08, gross turnover sales of tenants was only 0.2% higher, indicating more care in consumer spending.

New-to-market brands in Orchard could be prospective tenants. Management says competition in Orchard Road could be viewed positively as new-to-market brands who would first establish themselves in the prime shopping belt could also be persuaded to take root in suburban malls.

Maintain Underperform and DDM-based target price of S$1.30. For the rest of 2009, we expect CMT’s portfolio occupancy to be nearly full, anchored by its well-located suburban malls. However, reversions may turn negative as improvements in retail sales still lag behind. Maintain target price S$1.30, still based on DDM valuation (discount rate 9.5%).

CapitaMall Trust - Not quite a safe haven

We maintain our (Underperform) rating for CMT, and believe there is still a high degree of uncertainty over how the trend for retail sales (down 11.7% YoY for April) will play out over the remainder of the year (we are not so sure that the worst is over), or how the rollout of new retail supply would affect the operations or pricing power of existing malls.

We see CMT’s two major earnings-related risks as: 1) falling market rents and the start of a negative rental-reversion phase, and 2) the implementation of concessionary rent cuts to keep retailers afloat under a prolonged retail-sales slump.

Suburban malls make up the core of CMT’s portfolio, but it also owns The Atrium (an office property on Orchard Road acquired at the peak of the market and with considerable asset-value downside, in our view), a 40% stake in Raffles City, and Plaza Singapura. Even though Plaza Singapura is not high-end, we see a considerable amount of new retail space on Orchard Road catering to a similar (youth and lifestyle) market, especially at Orchard Central.

We maintain our six-month target price, based on our RNG-valuation method, of S$1.32, obtained from capitalising the estimated FY09 core operating distribution at an effective cap-rate assumption of 7.0%. CMT’s target price to latest (March 2009) book, adjusted for the rights issue, of S$1.66, is 0.80x.

CMT - Signs of improvement

Operating environment improving. According to mgmt, retail sales and visitor traffic have picked up in April & May, with 1Q09 the worst quarter in their view, partly due to the timing of CNY. Although sales and visitor traffic will likely show a YoY dip, this is still an improvement over 2007. The per-formance of the suburban malls remains resilient, although growth for the portfolio is likely to be muted over the next year. The impact of increasing competition from upcoming supply has been manageable.

Initial signs of recovery in CMBS market. Credit markets remains tight, but there appears to be initial signs of improving appetite for bond issues and convertible securities, albeit at a high cost. Refinancing requirements this year have been addressed with proceeds from the rights issue, and CMT aims to extend and stagger the duration of borrowings in the longer term. Balance sheet has been strengthened to 29.2% post rights.

Asset enhancement and acquisition updates. Mgmt is reviewing Jurong Entertainment Centre's AEI plans to optimize the use of space (they have permission to double the plot ratio to 3x). Further savings in construction costs is likely. The mall has been closed since end 08, and mgmt earlier indicated plans to commence the redevelopment by year end. Other planned AEIs have been deferred, with AEI for The Atrium likely to start only by end next year. Mgmt views ION as an attractive acquisition (CMT has a ROFR) as they believe there is upside in rents as the asset matures. That said, an acquisition is unlikely until stabilization in the trading performance, which is likely to take 6-12 months.

CapitaMall Trust - Positive retail sales data eases concerns

Retail sales of small-ticket items picking up. While sales of big-ticket items such as motor vehicle remained weak, sales of small-ticket items have been picking up since March. According to the latest data from Singstat, the seasonally-adjusted retail sales excluding motor vehicles rose by 1.1% MoM in April. This was the second consecutive month of rising retail sales, following the 3.3% MoM increase in March.

More positive data from GSS. According to data from MasterCard, spending by local MasterCard holders during the first weekend (May 29 to 31) of the Great Singapore Sale (GSS) had increased by 7% YoY to US$26.3m. Including spending by tourists, sales increased by a smaller 1% YoY to US$37.5m and this was due to lower tourist arrivals. Nevertheless, spending by locals still represents a higher proportion of the retail spending and the improvement in spending sends a positive signal that consumer sentiment continues to improve after hitting a low in February.

Easing pressure on retailers and landlords. Even though the economic outlook remains uncertain, we believe that the initial stage of fear among consumers has now passed and small-ticket item spending by local consumers is now picking up, as seen in the recent retail sales data. This momentum has continued into May as supported by data from MasterCard. This bodes well for retailers that had been facing pressures from declining sales and rising operating costs since 2H08. To retail landlords such as CapitaMall Trust (CMT), concerns on tenant eviction and rising tenant turnover would also ease.

No catalyst in sight yet; maintain HOLD. While we believe that the worst could be over for the retail industry, we expect the recovery in consumer spending to be gradual as consumers are likely to stay cautious in light of the uncertain economic outlook. As such, we maintain our forecast of a 10% decline in rent for FY09 and a 5% decline in rent for FY10. Our RNAV estimate remains at S$1.36 per unit. We also expect mid-year revaluation of the retail malls to remain stable. After the Rights issue, its gearing level will decline to 29.1% after the repayment of borrowings and we estimate that CMT's asset portfolio can tolerate up to an 18% decline in valuation before it reaches the upper bound of its comfortable leverage target of 30%-35%. Our fair value of CMT remains at S$1.21 and we maintain our HOLD rating.

CapitaMall Trust (CMT) - Defensive portfolio

Strong balance sheet: Post the rights issue, we believe investors’ concerns regarding the equity overhang and debt refinancing will be alleviated. CMT's total debt has been reduced to S$2.2bn and gearing to 28% from 42%.

Retail more resilient: We believe retail rents are likely to hold up better relative to other property sub-segments. Retail asset values have not shown the same appreciation as in the office sub-segment and we expect downward revaluation of CMT’s portfolio to be less aggressive.

Defensive portfolio; mostly suburban malls: The majority of CMT’s portfolio is exposed to the suburban mall segment which is not in direct competition with the incoming supply in the central region. Retail rents for the suburban malls have proven to be relatively resilient in past downturns.

DPU and NAV dilution: Given the nine for 10 rights issue, our FY09-11E DPU will be diluted by an average of 37% while NAV is reduced to S$1.68/share (-31%).

Lower-than-expected rental renewals: Weakness in the general economy could lead to lower-than-forecast rentals and occupancy.