Letter to Unitholders (English)
The global economy started year 2011 in recovery mode and on a promising note. However, as the year progressed, hopes for a strong recovery dimmed, with a long shadow cast by heightened sovereign debt risks in the Eurozone and anaemic economic growth in the United States. The Singapore economy slowed down in tandem with the rest of the world, recording a GDP growth of 4.9%1 in 2011, markedly down from the sterling 14.8% growth in 2010.
Safety Amidst Increased Market Volatility
Despite choppy financial market conditions in the second half of the year, CapitaMall Trust's (CMT) tenant sales grew by 6.3% year-on-year in 2011, supported by Singapore's low unemployment rate, healthy domestic consumption and record-breaking visitor arrivals of 13.2 million2 in 2011.
For the financial year ended 31 December 2011, CMT achieved net property income (NPI) of S$418.2 million. This was 4.8% higher than the NPI for 2010. Distribution per unit (DPU) for 2011 was 9.37 cents, higher than the DPU of 9.24 cents in 2010. This translates to a distribution yield of 5.5% based on CMT's closing price of S$1.70 per unit on 30 December 2011. The improved operational performance was mainly due to contributions from Clarke Quay and Iluma which were acquired in July 2010 and April 2011 respectively, as well as positive reversions from new leases and renewals of existing leases.
CMT's steady performance and consistent returns are underpinned by the inherent strengths and resilience of its portfolio and the proactive management of the vehicle's capital structure. This has helped CMT to grow its distribution income annually for the past nine years.
During the year, we also successfully completed the acquisition of Iluma, commenced a series of asset enhancements in The Atrium@Orchard, Iluma and Junction 8 and entered into a joint venture to develop Westgate, a greenfield project. These initiatives are expected to come to fruition and boost CMT's rental income within this year and also over the next three years.
Steady Income Stream, Defensive Asset Class
CMT's steady income stream is sustained by our cluster of well-located necessity shopping malls which have their own captive population catchments. These malls contributed to 73.1% of CMT's gross revenue in 20113. CMT's other properties located in the city centre such as Raffles City Singapore, Clarke Quay and Funan DigitaLife Mall have also benefited from a 13.1%2 year-on-year increase in visitor arrivals to Singapore in 2011. In view of this, we achieved strong rental reversions for CMT's overall portfolio in 2011, with rental rates for renewals and new leases increasing by 6.4% over preceding rental rates.
All our malls have enjoyed consistently high occupancy rates for the past nine years, testifying to the resilience of CMT's portfolio. Although the portfolio occupancy rate decreased to 94.8% as at 31 December 2011 from 99.3% a year ago, the increase in vacancy rate is temporary in nature as it was due to the ongoing asset enhancement works at Iluma and The Atrium@Orchard.
CMT's high occupancy rates can also be attributed to our strong tenant relationships and intimate understanding of their business needs. Our tenants are integral to the success of our malls and we regularly engage them through a host of seminars, workshops and networking activities.
In 2011, our property management team organised four Biz+ Series events for our tenants. These Biz+ Series events included talks on how to raise levels of customer service standards, how to attract more customers with effective visual merchandising and how to raise productivity levels in the retail sector.
Income Uplift from Asset Enhancements
While our active lease management efforts continue to sustain organic growth for the portfolio, asset enhancements remain one of our key growth drivers. Ongoing asset enhancement projects at JCube, The Atrium@Orchard and Iluma are progressing well.
As at December 2011, over 90.0% of the net lettable area at JCube has been committed and we are targeting to open the mall in April 2012. On stabilisation, JCube is expected to produce NPI of more than S$20.0 million per annum. This includes an incremental NPI of S$16.1 million per annum which translates to an attractive return on investment (ROI) of approximately 9.7% for the project.
We commenced asset enhancement works at The Atrium@Orchard in January 2011 and the project is on track to be completed by end-2012. We expect this asset to contribute additional NPI of approximately S$15.6 million per annum on a stabilised basis.
Asset enhancement works for Iluma commenced in November 2011 and are slated to be completed in the second quarter of 2012. Upon completion of the works, the net lettable area of the property will increase by approximately 9,000 square feet (sq ft) to 194,306 sq ft. Changes are also being made to the layout to improve traffic circulation within the mall. A vibrant combination of trendy fashion stores and wide variety of dining and entertainment options is expected to improve the trade mix at Iluma and reinforce its positioning as a prime entertainment-focused mall in downtown Singapore. The projected capital expenditure for this asset enhancement is S$38.0 million. Incremental NPI is expected to be approximately S$8.5 million per annum, translating to a ROI of 22.4%.
In January 2012, we announced plans to optimise CMT's rental upside from upcoming renewal of leases at Block C of Clarke Quay through an asset enhancement project. This exercise will also allow us to introduce new concepts to refresh the tenant mix in the property. The capital expenditure for this initiative is S$15.6 million. The expected ROI is 13.0%, based on projected incremental NPI of approximately S$2.0 million per annum. We will commence the works in the second quarter of 2012 and target to complete it in the third quarter.
Collectively, the asset enhancement projects at JCube, The Atrium@Orchard, Iluma and Clarke Quay will contribute projected NPI of approximately S$46.0 million per annum upon stabilisation. The various projects will come to fruition over 2012 and 2013.
We also recognise that we have to regularly refresh CMT's properties to stay at the forefront of the retail landscape. At Junction 8, the first phase of asset enhancement works to refresh and rejuvenate the mall started in the third quarter of 2011 and was completed in January 2012. The facelift involved an upgrading of the mall's facade, the installation of a glass canopy to create a seamless connection to the Mass Rapid Transit (MRT) station adjacent to the mall and the installation of a LED screen at the entrance of the mall.
Acquisition Milestone
We completed the acquisition of Iluma for S$295.0 million on 1 April 2011. This acquisition, financed wholly by debt, increased the number of shopping malls in CMT's portfolio to 16. This further strengthened our market leadership and reinforced CMT's position as Singapore's largest real estate investment trust.
The acquisition of Iluma was exciting as we saw a lot of opportunities to integrate it with our Bugis Junction. The two malls are already connected by an overhead link-bridge. Bugis Junction, with its direct connectivity to the Bugis MRT Station and central location, already attracts strong shopper traffic of more than 3.2 million per month. The integration of Iluma with Bugis Junction will create a combined shopping destination with net lettable area of more than 606,000 sq ft.
Maiden Greenfield Development
We made our inaugural foray into greenfield developments in May 2011 when CMT, in partnership with CapitaMalls Asia Limited and CapitaLand Limited, successfully won an Urban Redevelopment Authority tender to develop a prime site at Jurong Gateway. The site has a prime location next to both Jurong East MRT Station and Jurong East Bus Interchange as well as neighbouring amenities such as the upcoming Ng Teng Fong General Hospital. Jurong Lake District is also set to become the largest regional centre (Jurong Regional Centre) in Singapore for commercial developments outside the city centre in the near future.
The new retail-cum-office development, to be called Westgate, will complement CMT's other malls in the area, namely IMM Building and JCube. Shoppers can look forward to the equivalent of a three-in-one mall in the heart of the Jurong Regional Centre by end-2013. Each mall will offer something different to meet every shopper's needs: Westgate will be a lifestyle mall, IMM Building will become a value-focused mall with more outlet shopping while JCube is positioned as a youth and entertainment hotspot with its IMAX theatre and Singapore's only Olympic-size ice rink. We will leverage on our extensive tenant network of close to 2,500 leases in Singapore and CapitaMalls Asia's networks in China, Malaysia, Japan and India, to attract both local and international retailers for Westgate.
Ground-breaking for the site took place on 12 January 2012, seven months after the award of the site. We are targeting to open Westgate's mall by end-2013 and the office tower, to be called Westgate Tower, is expected to be ready by end-2014.
CMT holds a 30.00% stake in the joint venture developing the site and its proportionate share of the total development cost of the project would be approximately S$469.5 million.
Stronger Balance Sheet
CMT's debt profile remains healthy with gearing of 38.4% and average borrowing costs of 3.5% as at 31 December 2011. Currently, seven out of CMT's 16 properties are unencumbered. CMT's currency and interest rate risks are minimal as our borrowings have been swapped into Singapore Dollar fixed rates.
We continued to diversify our sources of funding with the issue of S$300.0 million of two-year retail bonds to public and institutional investors under a S$2.5 billion Retail Bond Programme in February 2011. We were very encouraged by the strong response to our first retail bond offer which enjoyed a subscription rate of about 1.9 times.
In March 2011, CMT issued S$350.0 million in principal amount of three-year convertible bonds which will mature in 2014. In addition, in April and July 2011, we repurchased S$206.0 million in principal amount of CMT's convertible bonds due in 2013 while S$87.8 million was redeemed upon the exercise of a put option by bondholders in July 2011, reducing the outstanding amount of the convertible bonds due in 2013 to S$256.3 million.
In June 2011, Silver Oak Ltd. which is a special purpose company incorporated to provide credit facilities to RCS Trust, issued US$645.0 million five-year secured floating rate notes (which were swapped into S$800.0 million) and drew down the full S$200.0 million from a five-year term loan facility. These were on-lent to RCS Trust, in which CMT has a 40.00% interest, to refinance its existing debt of S$964.0 million ahead of the expected maturity date in September 2011. The issue by Silver Oak Ltd. attracted good demand, with about half of the notes placed with Asian institutional investors and the other half with European investors. This landmark transaction was conferred the IFR Global Asia Pacific Securitisation Deal of the Year 2011 award, IFR Asia Securitisation Deal of the Year 2011 award and Best Cross Border Securitisation 2011 award by The Asset Triple A.
On 30 November 2011, the Infinity Mall Trust and Infinity Office Trust which are special purpose trusts established to hold the Westgate project, drew down S$650.0 million from S$820.0 million secured banking facilities. CMT's 30.00% share of this five-year loan amounted to S$195.0 million.
To improve CMT's financial capacity and flexibility, we also raised gross proceeds of approximately S$250.0 million through a private placement in November 2011. This improved CMT's financial capacity for ongoing and future asset enhancement initiatives and reduced our gearing to the current 38.4%. The private placement of 139.7 million new units to raise approximately S$250.0 million further diversified CMT's unitholder base.
CMT currently does not have any debt maturing until 31 October 2012. Our proactive capital management initiatives over the last two years have fortified CMT's balance sheet and the vehicle is well-positioned to ride out any economic uncertainty or volatility in the financial markets in the coming year.
Transparency and Corporate Governance
CMT was recognised for its commitment towards good investor relations and strong corporate governance in 2011 when it garnered an award for the Most Transparent Company Award (Runner-up in 2011, REITs category) at the Securities Investors Association (Singapore) Investors' Choice Awards for the eighth consecutive year.
CMT was also recognised for its high standards by the Asia Pacific Real Estate Association (APREA) at the APREA Best Practices Awards 2011 when we were declared the overall winner in the Mature Markets category. CMT also clinched a Certificate of Excellence in Investor Relations at the IR Magazine South East Asia Awards 2011.
We appreciate the trust and strong support from all our investors, analysts, media and the investment community and will continue with our efforts to improve corporate governance and transparency levels in CMT.
Green Accolades
We see it as our responsibility to manage our malls in an environmentally-sustainable and energy-efficient manner and we are heartened that our green efforts have been recognised in 2011. JCube was conferred the prestigious BCA Green Mark Platinum Award by the Building and Construction Authority (BCA), the highest accolade for green building certification in Singapore, in recognition of its green features, design and engineering safety and construction excellence. The Atrium@Orchard, Bugis Junction and Raffles City Singapore were also honoured with BCA Green Mark Gold Awards in 2011. Including these four awards, CMT has been conferred a total of eight green awards to date.
Looking Forward
Singapore's Ministry of Trade and Industry expects global economic conditions to remain subdued and has forecast the domestic economy to grow at a slower rate of between 1.0% and 3.0% in 2012.
Although the outlook for the global economy in 2012 is less certain and may affect consumer sentiment, CMT is well-positioned to ride out any downturn with our portfolio of well-located necessity shopping malls whose businesses have proven their resilience over time and economic cycles. In addition, leases due for renewal in 2012 were executed in 2009 in the throes of the global financial crisis at a relatively low rental reversion of 2.3%.
When our ongoing asset enhancements such as those for JCube, Iluma, The Atrium@Orchard and Clarke Quay are completed this year, we can look forward to increased NPI contributions from these assets over 2012 and 2013. Westgate's mall, when completed in end-2013, will start to contribute NPI in 2014. Westgate Tower, when completed in end-2014, will start to contribute NPI in 2015.
We are confident that CMT's scale, strong retailer network and knowledge of tenant sales will stand us in good stead in times of economic uncertainties. In the past two years, we have seen more new-to-market international retailers establishing a presence in Singapore, along with the rejuvenation of Orchard Road and the opening of the two integrated resorts. These new entrants have infused a lot more colour and vibrancy into the local retail scene and will provide us with more choices and variety for our malls.
For the S$783.0 million commercial mortgage backed securities maturing in October 2012, we are proactively exploring refinancing options and plan to finalise the refinancing in advance of the debt maturity.
Acknowledgements
Finally, our sincere gratitude goes to our Board of Directors for their wise counsel and commitment to their roles and also to our Unitholders, staff, business partners, tenants and shoppers for their continued support.
James Koh Cher Siang
Chairman
Simon Ho Chee Hwee
Chief Executive Officer
1 March 2012
- Source: Ministry of Trade and Industry.
- Source: Singapore Tourism Board.
- Excludes The Atrium@Orchard which consists of primarily office space.