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CapitaMall Trust (CMT) is the first real estate investment trust (REIT) listed on Singapore Exchange Securities Trading Limited (SGX-ST) in July 2002. CMT is also the largest REIT by market capitalisation and asset size in Singapore, with a market capitalisation and asset size of approximately S$6.0 billion and S$9.7 billion respectively as at 31 March 2012.

CMT owns and invests in quality income-producing assets that are used, or predominantly used, for retail purposes primarily in Singapore. As at 31 March 2012, CMT’s portfolio comprised a diverse list of close to 2,500 leases with local and international retailers and achieved an average committed occupancy of 96.4%.

CMT’s portfolio comprises 16 quality retail properties which are strategically located in the suburban areas and downtown core of Singapore — Tampines Mall, Junction 8, Funan DigitaLife Mall, IMM Building, Plaza Singapura, Bugis Junction, Sembawang Shopping Centre, JCube, Hougang Plaza, Raffles City Singapore (40.0% interest), Lot One Shoppers’ Mall, Bukit Panjang Plaza (90 out of 91 strata lots), Rivervale Mall, The Atrium@Orchard, Clarke Quay and Bugis+ (formerly known as Iluma).

[Source: CMT website]

INTERVIEW with SIMON HO*, CEO of CapitaMall Trust Management Limited

Congratulations on your recent US$400 million bond issuance. You seem to have gotten very attractive interest rates.

Thanks. Yes, the bond issuance was very well received. It was CMT’s second USD bond issuance under a Euro-Medium Term Note programme¹. CMT is one of the few S-REITs that have the required strong credit ratings to raise financing in this market. To be honest, if we had issued retail bonds instead, the interest rates we could have secured would have been even lower but the debt tenure would have been shorter and wouldn’t be six years. The 3.29% rate we secured for six years is very good. The issue received a very strong response from investors in Asia and Europe. It was tempting to up the offer but we didn’t, as we did not want to build up a big chunk of refinancing in 2018 when the bond matures.

Is it more cost-effective to issue in USD and swap back into SGD rather than directly tapping the SGD bond market?

Not always, but we wanted to diversify our funding sources. The USD bond market is much deeper than the SGD bond market.

I notice that CMT has only around 13,000* unit holders. Given your visible and popular malls and stable yields, I would have thought the number should have been much higher.

For example Keppel Corp has more than 30,000 shareholders.

Our retail base is only 10% to 11% of our total unit holder base (in terms of number of units)

and we are keen to grow it further. We are participating in seminars focused on retail investors to educate investors about our vehicle and create more awareness. And I agree with you that this is one of the best vehicles for retirees to park their savings, particularly if they are risk averse. Why put their money in fixed deposits and earn 0.3% when they can get a regular 5% tax-free dividend from CMT? Every day when they go shopping, they can also see for themselves whether the CMT malls are doing well or not.

Our retail bonds are another product through which we are creating awareness of our malls. We were the first and only S-REIT so far to issue such bonds in 2011. It was a two-year issuance for 2% per annum and they were 1.9 times subscribed. That is a programme we hope to do regularly, not for raising large amounts — perhaps $100 million, $200 million.

Hopefully, retail investors will start to realise that underpinning the bonds is the earnings power of CMT malls such as Plaza Singapura, Tampines Mall, Junction 8 and our other malls. These are malls they are very familiar and comfortable with and can see whether the malls are doing well or not. We hope that over time more and more retail investors will realise the attractiveness of both our REIT units and bonds.

Over the next couple of years quite a few new malls will be coming up especially in suburbs such as Jurong and Punggol. While they will be supported by their own catchments, given Singapore’s small size there will likely be some cannibalisation among malls too. How do you see this impacting CMT malls?

I don’t see an oversupply situation. The planning in Singapore is very long-term and supply is ramped up based on demand. Take Punggol, a new estate with only around 100,000 people now. A new mall, Waterway Point, is being built there but by the time it is completed, the population of Punggol would have grown to around 300,000 people as HDB is ramping up its Build-to-Order (BTO) programme there. The mall will then cater to this catchment. Will this impact say Tampines Mall? Yes, a little bit but I am not unduly worried as our population is also growing and Tampines Mall has enough existing catchment.

Tourism is another big driver; we have a population of 5 million but get another 14 million tourists a year who can contribute a lot to the spending in city malls. Similarly, even Hong Kong would be in a retail oversupply situation if it were not for the hordes of Chinese tourists that go over from China. Another point worth noting is that retail supply is also being taken out, especially from the HDB estates.

Having said that, there will always be competition amongst malls. We just have to continually innovate, get our positioning right and remain relevant with the consumers to remain competitive.

You have the largest mall footprint in Singapore, how are you taking advantage of this scale?

There are three things that give someone a competitive advantage in the mall business. The first is scale, the second is capital management and the third is mall management expertise.

Scale does bring us a lot of benefits. Most people who do retail in Singapore have at least one shop with us. This gives us a wide retailer network. This network and ongoing relationships with our tenants give us an edge and bargaining power.

Scale is also a major advantage in attracting cross border retailers. Japanese retailers for

example are now very keen on expanding into Singapore. When they arrive in Singapore or even before arriving, they know us because of our wide retail network and scale. If you decide to come out of Japan, you don’t want to open just one shop, you want to tie up with a mall operator that can help you scale up and that’s where we have an advantage with our 15 operational malls in Singapore. As we get some of these new brands to come to our malls, we also become more attractive to our shoppers.

The second thing we get from scale is operational synergy. Take Bugis Junction and Bugis+ [formerly known as Iluma], for example. Now that we own both malls, we can run them with one centre management team instead of two and this immediately saves us the cost of one team.

Another advantage of scale is the ability to attract the best talent in the industry, as we can offer not just a job but a career to people who want to grow in the retail real estate arena.

The mall tenant landscape has been changing over the past decade. Department stores are reducing in size, book and music stores are slowly disappearing, online shopping is increasing. More kids-related activity centres are popping up and so on. How do you see the mall of the future shaping up and how do you position yourself in line with the new retail and demographic trends?

The bulk of the shopping malls we own and operate are basic necessity malls serving a local population which is fairly captive. Such malls play a role in the community that is beyond just being a place for buying and selling of goods and services. It is a place where families bring their kids for entertainment and leisure, do their grocery shopping, go for a haircut, foot massage, watch a show or catch a meal with friends and so on. Shopping centres, especially suburban malls, have evolved into “town squares” where people gather. Hence, we feel that online shopping, no matter how big it becomes, will never fully replace malls. Of course, tenancy mix will change over time, as our kids will shop differently from us. We therefore watch trends closely and we keep adapting to stay relevant. In terms of demographics, as the Singapore population slowly ages, our malls will also start adapting to the new buying trends of the silver-haired generation.

We also have a small team that is monitoring the trend of online shopping closely. Some products such as books and music will increasingly move towards online channels so we will gradually reduce such trades in our malls. We will also focus on strengthening things that can’t be replicated online, for example, food & beverage trades and services such as hairdressing, entertainment, etc that requires a visit to the mall.

The bottom line is that we think online shopping will grow but this does not mean shopping malls will go the way of the dinosaurs. They will still remain relevant because shopping is a way of life, especially in Singapore, and not just about buying goods and services per se.

How do you stay on top of new shopper buying patterns? Is it based on feedback from your various mall-leasing teams?

To stay relevant, we gather feedback from all channels — from internal as well as external sources. In addition, every 12 to 18 months, we commission an independent survey of shoppers. Through the interviews, the shoppers tell us what they want to see in our malls;

what they like and don’t like. This helps us in the positioning of our malls.

Beyond this, we have a programme called CAPITASTAR which is a rewards programme to build shopper loyalty. More importantly, it gives us direct feedback on what shoppers are really buying. This programme gives us insights that can help us react faster to changing trends.

I suppose shopping patterns will always evolve; the important thing is to keep track of all these trends and adapt to them. Take the case of department stores. Department store operators know that, unlike in the past, it will be difficult for mall operators like us to set aside big spaces of 150,000 to 200,000 sq ft for them in our malls given the rising cost of real estate in Singapore. So do they really need all this space? If they want to stay relevant to us, they also have to go back and do an analysis of the product segments that are top sellers, prune those that lose money and streamline their space requirements accordingly. If you look at Robinsons in Raffles City, you will note their space is quite compact at around 100,000 sq ft. Yet the space is very productive. So, it is increasingly about raising the productivity of space; smart operators — both mall operators and retailers — will have to face reality and start to adapt their operations accordingly to stay relevant.

What about libraries and book shops, do you see a place for them in your malls?

The book industry is going through a state of change and flux due to severe online competition. You will need a niche to survive. One example is Popular which focuses on children’s assessment books. Their stores are located in most of our heartland malls as they cater to a niche which is more sustainable.

Libraries are part of what is called C&CI (Civic & Community Institution use) space.

This is a government initiative to integrate community facilities in private commercial developments for greater convenience. We have a library in our Lot One Shoppers’ Mall and they are not counted as part of our GFA (gross floor area) space. We love to have libraries in our malls as they serve the local community and are strong traffic generators.

Let us now move on to the topic of acquisitions. Something which you have done quite a lot of. Can you take us through how CMT makes a decision on acquiring a property. What factors do you consider?

We have a few broad guiding principles when making acquisitions. Firstly, where possible, we prefer it to be yield-accretive upfront. By yield-accretive, I mean that the acquisition has to be done at a yield greater than the implied property yield (Net Property Income divided by the enterprise value of the REIT) of the portfolio. Our second criterion is the quality of cash flow. Is it inflated or buffed up to facilitate a sale? We want to make sure the cash flow is sustainable. The third thing we ask ourselves is whether there is any asset enhancement opportunity, as that is one of our core strengths. If we find a lot of asset enhancement potential, such as in the case of Bugis+, we may lower our yield expectations upfront, because we are confident we can increase the yields in the near future through asset enhancement works. This evaluation process keeps us very disciplined; we need to tick these boxes before making any acquisitions.

What would you say have been your best and worst acquisitions?

We made a lot of good acquisitions in the early years. They have all worked out very well.

There was a period around six to seven years ago when we bought smaller size malls such as Jurong Entertainment Centre (JEC) from Shaw, and Hougang Plaza. For JEC, we were able to increase the plot ratio from 1.8 to 3.0. The revamped JEC, now called JCube, will be opening soon² with Singapore’s only Olympic-size ice-skating rink which will help draw a lot of traffic. The expected ROI on this asset enhancement initiative will be 9.7%. So, this is definitely one of our hits.

Hougang Plaza has been more of a struggle. Despite getting permission to increase the plot ratio, there were restrictions on the net lettable area for the retail component. So yes, we are still exploring options on this asset³. The acquisition misses are generally smallish malls which are not located near an MRT station or bus interchange.

Have you thought about divesting some of the underperforming malls or ones where there is limited upside?

Yes, we like our properties but we don’t have to love them forever. If the right offer comes along, we are open to divesting any of our assets.

It is hard to get bargain retail assets in Singapore today. Is that why you have ventured into greenfield development?

Yes, rather than compete with everybody for a limited pool of assets available for acquisition and pay ridiculous prices, why not go into greenfield when we have the financial capacity and operational capability? In fact, we sometimes find it technically easier to work on a greenfield development when compared to doing asset enhancement works for a “live” mall which is still in operation.

On costs, given the clear trend in Singapore of rising wages and other expenses, how are you planning to combat this? What impact will this have on your operating margins?

Our current portfolio is a bit varied in terms of operating margins. The large suburban malls such as Tampines Mall have operating margins of above 70% but we see lower margins from Clarke Quay which is a low-rise property and spread out over a large site area and also from smaller malls such as Sembawang Shopping Centre. So, overall operating margins for the whole portfolio is about 68%. Not too bad, but it still can be improved.

On future cost pressures, we are well aware that this is not temporary and it is not going to go away. We are focusing on the key costs that can move the needle such as wage cost, maintenance cost and utilities cost. But this is not purely about cost cutting but more about increasing productivity and we take a holistic view of the issues. For example, reducing cleaning costs is not just about getting the cheapest bids from cleaning companies but about aggregating our contracts and making the process of cleaning more efficient right from the design stage.

Our scale will also help us better utilise our management staff. For example, we have some cost savings by having one management team for both Bugis+ and Bugis Junction, Plaza Singapura and The Atrium@Orchard and IMM and JCube as the malls are in close proximity.

In summary, we are taking a hard look at our entire operations with the aim of containing costs by increasing productivity and using more mechanisation and technology.

In terms of REIT governance, do you see compensation based on DPU growth as better aligning the interests of the REIT managers and investors?

In my view, no matter what system you have, each will have its strengths and weaknesses. For instance, compensation based on Distribution Per Unit growth, whilst it may sound theoretically attractive, may lead to short-term behaviour by REIT managers that may damage the REIT in the longer term.

For example, we just issued six-year bonds at a rate of 3.29% per annum. If we were thinking of shorter-term DPU growth, it would have been cheaper to issue debt of shorter tenure, say, two-year retail bonds at below 2% per annum. However, one must question whether this will be good for the long-term well-being of CMT.

Our management philosophy is clear: we are focused on doing the right things to grow the business for the long term. We grew from 3 malls at IPO stage to 16 malls today. And contrary to popular perception, only three of these acquisitions were from our sponsor and they have been hugely accretive. We bought Plaza Singapura for about S$700 million in 2004, it is now valued at about S$1 billion. Clarke Quay was acquired in 2010 and in just a year, its valuation has gone up from S$268 million to about S$300 million. Raffles City’s valuation has gone up from S$2.1 billion at acquisition in 2006 to about S$2.8 billion. These are also clear win-win transactions.

We constantly remind ourselves that we are stewards of our investors’ money and we are clear that, ultimately, investors are free to vote with their feet. There are now more than 20 S-REITs listed on the Singapore Exchange and investors have lots of choices. Hence, we must consistently do what is right and necessary to win the continued trust of our investors.

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* Mr Ho stepped down as CEO on 1 July, 2012 and assumed the position of Deputy CEO of CapitaMalls Asia Limited.

1 CMT was the first S-REIT to set up a US$2.0 billion unsecured Euro-Medium Term Note programme in March 2010 and issue US$500 million five-year bonds in April 2010.

* The actual number of shareholders as per their 2011 Annual Report is 13,196.

* The actual number of shareholders as per their 2011 Annual Report is 13,196.