CapitaMall Trust: Higher than expected debt cost (DMG)

Neutral (TP: S$1.94)

2Q11 DPU below expectation by ~6%. CapitaMall Trust (CMT) reported 2Q11 DPU of 2.36S¢ (+3.1% QoQ; +3.1% YoY), equivalent to 23% of our FY11 DPU estimate. Main reason for below expectation DPU was attributable to higher than expected interest expense and debt-related transaction cost which amounted to S$34.6m in 2Q11 (+6.6% QoQ, +5.4% YoY) vs our FY11 interest expense estimate of S$95m. On the other hand, net property income rose 7.7% YoY to S$106m (+0.7% QoQ) mainly due to new contributions from Clarke Quay (acquired in Jul 2010) and Illuma (acquired in Apr 2011), and higher rental rates achieved from new and renewed leases. Following our interest expense revision upwards by ~21%, our FY11-12 DPU are reduced by 7.6-4.7% respectively. Consequently, our TP is lowered to S$1.94, derived based on DDM (COE: 8.0%, terminal growth: 2.0%). Maintain NEUTRAL.

Positive rental reversion continues. CMT continues to enjoy positive rental reversion at 7.8% in 2Q11 (vs 7.5% in 1Q11). Given that ~8.2% of portfolio NLA will be up for renewal in 2H11 (~402k sqft), we believe CMT will be able to reap further benefit from positive rental reversion. However, due to abundant supply coming on stream outside central region estimated at ~3.6m sqft during 2H11-2015, we expect the rate of growth of spot rents to decline gradually for certain suburban areas. Nonetheless, we expect CMT to benefit from further positive rental reversion on the back of expiring leases in FY12-13 at 33.1-32.8% of total gross rental income for Mar 2011 respectively.

Leasing commitment hit ~80% for JCube; more AEI in the pipeline. Asset enhancement work for JCube is scheduled to be completed by 1Q12. With ~nine months to go, we view the pre-commitment lease of 80% as encouraging. Our current forecast has factored in contribution of JCube in FY12. Once operational, JCube will add another 204k sqft of NLA to CMT’s portfolio (~4.0% of current portfolio). Separately, CMT intends to undertake asset enhancement works on Illuma which will cost ~S$30m. More details on the Illuma AEI work will be revealed later on.