CapitaLand Commercial Trust (C38U) Earnings Call Transcript & Summary

Dear unitholders, in late January this year, we proposed merger of CMT and CCT. We shared our rationale that this strategic merger of equals is a proactive response to the evolving developments in the retail and office sectors and also the overarching trend towards decentralization, mixed-use precincts and integrated developments in Singapore, as envisioned by URA in its 2019 master plan. The unprecedented and unexpected impact of COVID-19 extended our timetable as we had to focus on managing our businesses, and supporting our tenants. While COVID-19 has impacted economies and businesses globally, including ours, it has also cost a light on trends such as the shift towards more flexible work arrangements, and work, live, play arrangements that were already in play pre-COVID. These trends are expected to accelerate the development of more mixed-use precincts and integrated developments in Singapore, making the rationale for the merger even more valid. As our economy returns to more normalized state and with CMT and CCT 2Q 2020 operational and financial results now available, investors have more insights to the impact of COVID and are more informed. We are now seeking your support to create a stronger, more resilient platform that will be uniquely positioned to capitalize on evolving trends, leverage on synergies and pursue large-scale redevelopments and acquisition opportunities that will propel us to the next phase of growth. The merger will be affected by way of a trust scheme of arrangement whereby CMT will acquire all issued and paid-up CCT units. The scheme of consideration per unit of CCT has been fixed at 0.72 new CMT units and $0.259 in cash. It is a market to market arrangement, structured to achieve the most optimal outcome for both CMT and CCT unitholders and emerge entity going forward. Recognizing the unprecedented impact of COVID-19, the CMT manager has volunteered a one-off 100% waiver of its acquisition fee to reinforce his commitment to the transaction. CMT and CCT unitholders will continue to receive permitted distributions until the effective date of the merger. As shared before, the merged entity will be named CapitaLand Integrated Commercial Trust or CICT in short. CICT will be one of the largest REITs in Asia Pacific and the largest proxy for Singapore commercial real estate. CICT will be predominantly Singapore focus with an initial portfolio of 24 strategically located prime properties, well balanced across office, retail and integrated assets of which 96% will -- buy portfolio value will be in Singapore and 4% in Germany. Underpinned by leadership, resilience and growth CICT will leverage on synergies and the growth potential of the combined platform to drive value creation for our unitholders. To put things in perspective, we would like to share our assessment of COVID-19's impact on Singapore's retail and office landscape. We firmly believe that Singapore retail and office remain relevant and essential. Amidst evolving customer preferences, shopping mall culture is deeply entrenched and a key threat in the fabric of Singapore life. We are seeing positive signs of normalization in our shopping malls as COVID-19 situation in Singapore stabilizes. This reinforces our belief that shopping malls will continue to thrive as a push towards decentralization, promote a more work, live and play lifestyle. The office is here to stay. As companies thrive to promote collaboration and networking amount their staff to drive productivity, innovation and culture, workspace solutions will evolve. And companies may adopt a hybrid of core and flex, hub and spoke, work near home or work from home arrangements. Stronger landlords will be more equipped to differentiate themselves by providing better amenities like access to retail and technology enhancements. And the Singapore CBD will continue to play a central role in the future office, given its dominance over quality of the stock and the established business ecosystem. Singapore retail is showing signs -- positive signs of recovery. As many of us can attest, restaurant reservations on Fridays and weekends are a must and popular malls are bustling on weekends. Shopper traffic at CMT malls as at the end of August has recovered to about 57% of pre-COVID levels with some malls like IMM and Plaza Singapore are recovering 70% to 80% of traffic. CCT's office portfolio has also seen a gradual return of its office communities. With about 25% of our office population returning as at the last week of August. This is even while the government continues to encourage companies to make telecommuting the default mode of work for most. Many tenants and colleagues that I've spoken to, look forward to coming back to work. They lament the blurring of lines between work and home life and miss the comradery and comfort of the office environment. We believe that a proposed merger will be transformative and beneficial to unitholders. The merged entity will be bigger, better and stronger to meet the challenges of a changing real estate landscape. It will be underpinned by key pillars of leadership, resilience, and growth, and the transaction will be DPU accretive for CCT and CMT unitholders. CICT will have a strong and leading platform. Individually, CMT and CCT are leaders in their respective sectors and have the best-in-class retail and office portfolios, with proven track records of portfolio performance and value creation. CMT has a balanced portfolio of very well located and connected downtown and suburban malls. CCT, on the other hand, has a widest footprint and the largest portfolio of Grade A assets in Singapore. The combination of 2 strong platforms with a long history of partnership will create an even more robust and efficient platform that will be very well positioned to meet evolving challenges and capitalize on emerging trends and opportunities. CICT will be a dominant REIT. It will be the largest Singapore REIT and the second largest in Asia Pac. Its scale will attract greater visibility and increase the potential for higher trading liquidity, positive rerating and a more competitive cost of capital. This will allow CICT to be more competitive in Singapore and developed markets overseas to drive growth and opportunities for growth. CICT will have scale to tap on synergies. COVID has highlighted the symbiotic relationship between office and retail assets, especially in our integrated developments where the interdependence of office and retail components have been more evident. The merge entity will capitalize on cross-selling opportunities, enhancing our digital platforms to deliver and extract value from our enlarged customer base, optimizing costs through economies of scale and eliminating frictional costs that exists between separate platforms. CICT will have a more resilient platform, the importance of which has been emphasized by COVID. The combined size, balance and diversification by value and NPI across office, retail and integrated commercial assets will result in a more stable and resilient platform that provides a hedge against market volatility. This improves the ability of the merged entity to compete through cycles. CICT's tenant mix will be well diversified across trade sectors. The top 10 tenants of the merged entity will account for 20% of the monthly gross rental income compared to 38% for CCT currently. The reduced asset concentration risk will also reduce earnings vulnerability and make the platform more resilient. Comparing the NPI contribution from the top 5 assets of the merged entity versus debt of CCT and CMT. For CCT, it reduces from 82% to 43% and for CMT, it reduces from 50% to 43%. Resilience increases the merge entities flexibility to undertake redevelopments or asset enhancements because the financial impact of embarking on such projects is reduced. This will translate to stronger value creation in the longer-term while supporting stable distributions in the near term. CICT will be well positioned to capitalize on future real estate trends to drive growth. Shifting occupier and shopper preferences and a growing focus on urban planners on rejuvenation and intensification of land use is driving the market towards more integrated retail and office offerings. This reinforces the rationale for CMT and CCT to converge, capitalize on these trends and future-proof our assets. Growth will come from capitalizing on the combined domain expertise. CMT and CCT, each have proven track records of pushing boundaries, repositioning our portfolios and staying abreast of evolving relative trends. Projects such as Funan and CapitaSpring exemplify this. We will continue to leverage on this expertise to drive office and retail investments and increasingly integrated commercial developments. The merge platform will have an extensive island-wide footprint of strategically located assets and identified growth clusters in Singapore. This presents opportunities to extract values from assets located in these clusters. Growth can be derived from optionality and flexibility to undertake larger developments within the portfolio to drive future income streams. Both CMT and CCT have enjoyed uplifts in income when new developments come on stream. CapitaGreen is a prime example. The merged entity will have a significant development headroom advantage of SGD 5.8 billion, unmatched by any Singapore REIT. Growth will also come from having more options to invest. The merged entity will be predominantly Singapore focused with up to 20% in developed markets overseas. With a large SGD 23 billion investment portfolio that is only 4% invested overseas, we have plenty of headroom to hand for accretive acquisitions across developed markets overseas. Aside from leadership, resilience and growth, the transaction is also expected to be DPU accretive. Factoring first half 2020 that was impacted by COVID-19, the pro forma DPU accretion for the last 12 months to June 2020 is 7.6% for CCT unitholders. In summary, we are looking to build a stronger and more efficient platform for the future. We will be predominantly Singapore-focused, with up to 20% in developed countries overseas. We will focus on retail, office and integrated commercial developments. We will create value through organic growth, developments, proactive acquisitions and portfolio reconstitution and prudent capital management. These will be anchored by continued strong ESG commitment that both CMT and CCT exemplify. We received regulatory approvals for the merger on the 20th of August 2020, and are targeting to convene our EGM and scheme meeting on 29th of September 2020. With your support, and if all goes well, we expect the following schedule of events. The last day of trading of CCT will be the 16th of October. Our effective date of the merger on the 21st of October. The payment of cash consideration and consideration units on the 20th of October and our delisting on the 3rd of November. Some important details of our EGM and Trust Scheme Meeting on the 29th of September. The meeting will be held by way of electronic means, meaning there will not be a physical meeting. Voting will be via proxy and unitholders have been sent printed copies of the proxy form. We will seek to pass 2 resolutions. The first resolution is to amend the trust deed to facilitate the implementation of the trust scheme, and the second resolution is to prove this trust scheme and thus agreeing to CMT's offer to acquire all issued and paid-up CCT units and agree trust scheme consideration. With this, I thank you for your attention. Now look forward to seeing you on the 29th. Thank you.