Letter to Unitholders (English)
The gradual recovery we saw in the world economy towards the end of 2009 continued to gather momentum in 2010. The resultant pick-up in confidence among financial markets, businesses and consumers helped Singapore's economy to recover strongly in 2010. Singapore recorded a GDP growth of 14.5%1, making it one of the fastest-growing economies in the world in 2010. This was a sharp rebound from the contraction of 0.8% recorded in 2009 due to the global economic crisis.
Consistent Performance
On the back of the improved economic conditions, increased visitor arrivals and healthy consumer spending, we saw more optimism among our retailers in 2010. This contributed to strong occupancy and higher rental rates at CapitaMall Trust's (CMT) properties in 2010.
For the financial year ended 31 December 2010, CMT achieved a distribution per unit (DPU) of 9.24 cents, which was 4.6% higher than the DPU of 8.85 cents in 2009. The better performance was mainly due to the half-year contribution from Clarke Quay which was acquired in July 2010, as well as positive reversions from new leases and renewal of existing leases.
As at 31 December 2010, CMT's unit price closed at S$1.95, representing a gain of 8.3% from S$1.80 as at 31 December 2009. Based on the closing price, CMT's DPU of 9.24 cents for 2010 translates to a distribution yield of 4.7%, which was approximately 200 basis points higher than the 10-year Singapore Government bond yield. Unitholders who have held CMT units for the full year 2010 would have enjoyed a one-year total return of 13.5%.
Despite the economic vagaries over the past eight years since its IPO, CMT has stood the test of time and delivered consistent and sustained performance across business cycles since its inception in July 2002. Its total return to Unitholders registered 177.3% for the period 17 July 2002 to 31 December 2010. Distributable income grew at a compounded annual growth rate of 24.1% from S$64.9 million in 2003 to S$294.8 million in 2010. CMT has also maintained its track record of delivering positive rental reversions every year, even during 2009 when the global and domestic economies were in the doldrums.
Sustainable Growth
CMT is the first and largest REIT by market capitalisation and asset size in Singapore. CMT's scale and leading position in the retail industry are competitive advantages that create opportunities for sustainable growth over the long-term. These competitive advantages enable us to build and maintain strong partnerships with tenants and suppliers and reach out to a wide range of shoppers in Singapore. Our scale also makes it easier for us to attract and retain the best talent in the industry.
In addition, the actions we had taken in 2009 to strengthen CMT's balance sheet, optimise asset performance and maintain operational discipline during a difficult year, have fortified our portfolio and positioned us well to capitalise on growth opportunities in 2010 and beyond.
Active Leasing
We have seen strong rental reversions for CMT's overall portfolio in 2010 as the leasing market for retail space showed emerging signs of strength. Rental renewal rates for CMT's portfolio increased by 6.5% over preceding rental rates, compared to the 2.3% growth attained in 2009.
Shopper traffic at CMT's properties increased by 3.8% in 2010, compared to 2009 while the gross turnover of our tenants gained 6.4%. CMT also maintained its robust track record of maintaining almost full portfolio occupancy over the last eight years. The portfolio occupancy was 99.3% as at 31 December 2010.
Tenant engagement and regular communication continued to be a key pillar of our business strategy. In 2010, our property management team organised four Biz+ Series events, including a Lunar New Year gathering for tenants to network with one another and with us. The informal gathering was well-attended by more than 400 of our tenants. Our three other Biz+ Series events included talks on how to raise levels of customer service standards, how to tap on the huge wave of Chinese consumers expected to enter Singapore and honing the art of visual merchandising among our tenants.
Value-Adding Asset Enhancements
Asset enhancements remain a key growth engine for CMT. In October 2010, we completed our asset enhancement works at Raffles City Singapore. The enhancement works involved the re-configuration of the mall's Basement One space and construction of a new Basement Two link between the City Hall mass rapid transit (MRT) station and Esplanade MRT station. The incremental net property income (NPI) for Raffles City Singapore will be S$3.1 million2 per annum from 2011 onwards, higher than the original budgeted S$2.7 million. This translates to an ungeared return on investment (ROI) of about 9.0%, up from the budgeted 8.0%.
At JCube (formerly known as Jurong Entertainment Centre), asset enhancement works are in full swing. Groundbreaking for the new larger mall took place in May 2010 and the project is on track to be completed by end 2011. Revised capital expenditure for the asset enhancement is now projected to be approximately S$165.0 million; S$35.3 million lower than the original budget due to lower construction costs. This is expected to improve the ungeared ROI for the project to 9.7%, significantly higher than the initial budget of 8.0%.
Even eight years after the acquisition of Junction 8 and Tampines Mall (these two malls were part of the seed assets for CMT's listing in 2002), we continued to extract more value from these existing assets in 2010. In October 2010, at Tampines Mall, we reconfigured some retail units and relocated an existing taxi stand to create a new shop unit spanning approximately 1,800 square feet (sq ft). We also completed the construction of a new two-storey food and beverage annex block in Junction 8 in November 2010, with net lettable area (NLA) of approximately 3,500 sq ft. These two asset enhancement works contributed an additional NPI of about S$1.1 million per annum, translating to an ungeared ROI of approximately 15.5%, based on capital expenditure of S$6.8 million.
We have commenced asset enhancement works for The Atrium@Orchard in January 2011. The estimated project costing S$150.0 million will take an estimated 21 months to complete. It involves the decanting of office space to create three new levels of retail space of about 127,000 sq ft. The new retail space will be linked and integrated with Plaza Singapura to create a seamless shopping experience in an enlarged retail mall with NLA of approximately 625,000 sq ft.
Yield-Accretive Acquisition
On 1 July 2010, we completed CMT's acquisition of Clarke Quay for S$268.0 million which was financed wholly by debt. With this yield-accretive deal, CMT now has 15 properties with an asset size of approximately S$8.1 billion as at 31 December 2010 – up from 14 properties with an asset size of approximately S$7.4 billion a year ago.
The acquisition has provided CMT with an additional platform to leverage on the influx of visitor arrivals to Singapore in 2010, as more than 40.0% of the visitors to Clarke Quay are tourists. Visitor arrivals to Singapore have grown strongly by 20.2% in 2010, compared to that in 2009, mainly due to the improving economy and the opening of two integrated resorts. Shopper traffic for Clarke Quay has also correspondingly grown by 5.8% year-on-year in 2010. The acquisition has allowed CMT to enjoy good rental upside as 14 expiring leases at Clarke Quay were renewed or replaced in 2010 with a 10.0% increase over preceding rental rates.
In February 2011, CMT announced the acquisition of Iluma, a shopping mall located at Victoria Street opposite Bugis Junction, for S$295.0 million. The combined offerings of the two malls will further strengthen its overall attractiveness to shoppers.
Proactive Capital Management
Sound capital management provides the stable foundation for CMT's sustainable growth. To create an even stronger capital structure that supports CMT's continued growth momentum, we have diversified our sources of funding, actively sought out longer debt tenures and unencumbered more assets in 2010.
During the year, we capitalised on the robust debt market and low interest rate environment to raise approximately S$1.2 billion with five medium term notes (MTN) issuances in 2010 with longer 4, 5, and 7-year tenures. This included the successful issuance of US$500.0 million (S$699.5 million) five-year medium term notes under a US$2.0 billion unsecured Euro-Medium Term Note programme, the first by a Singapore Real Estate Investment Trust (S-REIT). The funds raised enabled us to refinance the S$440.0 million borrowings due in 2010 and fund the acquisition of Clarke Quay.
In line with our proactive capital management strategy, we have also repurchased S$100.0 million of convertible bonds in October 2010, reducing CMT's outstanding amount of convertible bonds to S$550.0 million.
CMT's debt profile remains healthy with gearing of 35.9% and average borrowing costs of 3.7% as at 31 December 2010. Currently, six out of CMT's 15 properties are unencumbered, providing us with greater financial flexibility.
In February 2011, CMT established a S$2.5 billion Retail Bond Programme and issued S$300.0 million of bonds to public and institutional investors in its maiden retail bond issuance. The 2-year bonds pay an interest of 2.00% per annum.
Outlook
Singapore's economy grew by 14.5% in 2010. This high
growth rate was, however, measured against a lower base in 2009 and is unlikely to be repeated in 2011. Singapore's Ministry of Trade and Industry expects the economy to grow by a more modest 4.0% to 6.0% in 2011 although it highlighted that the global economy remains vulnerable to a few downside risks including weaknesses in the economies of the United States and some European countries.
Against this backdrop, the outlook for Singapore's retail sector remains generally positive in 2011. A low unemployment rate, rising disposable income and strong tourism arrivals are expected to benefit CMT's properties.
As we enter 2011, we will seek to ensure that enhancement works for JCube and The Atrium@Orchard proceed smoothly. We will also continue to extract organic growth from active management of lease renewals, focus on possible acquisition opportunities and pursue selective greenfield development projects that have the ability to create value in the long term.
Acknowledgements
We welcome our new Directors, Mr Richard R. Magnus and Mr Tan Kian Chew who joined the Board in May 2010. Their significant experience and expertise will be invaluable to the Board.
We would also like to take this opportunity to extend our sincere appreciation to our Board of Directors for their wise counsel and to our Unitholders, business partners, tenants, shoppers and staff for their unwavering support. With their valued support, we were able to deliver consistent performance and sustained growth in 2010 and over the past eight years.
James Koh Cher Siang
Chairman
Simon Ho Chee Hwee
Chief Executive Officer
2 March 2011
- Source: Ministry of Trade and Industry.
- Based on 100.00% interest.