CapitaLand Integrated Commercial Trust (C38U) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Thank you for joining us this morning. I'm Mun Wah from CMT Investor Relations. The manager of CMT and CCT have released the announcements on the date of the respective unitholders' meetings and electronic dispatch of the CMT circular and CCT scheme document this morning before market opened. For those of you who have joined us on the live webcast, good morning and a warm welcome. We will kick off this morning's briefing with a joint presentation by the CEOs, Mr. Tony Tan of CMT and Mr. Kevin Chee of CCT, on the proposed merger of CMT and CCT. We will end this morning's session with a Q&A. Without further ado, may I invite Mr. Tan to kick off the presentation. Mr. Tan, please?

Thank you, Mun Wah. Greetings, and good morning, everyone. The proposed merger is a proactive response to the changing Singapore real estate landscape. We first announced the proposed merger in January this year. Today, the merger rationale remains valid. It has been reinforced by the impact of COVID-19. Prior to the global pandemic, the overarching trends towards decentralization, mixed-use precincts and integrated developments had already been set in motion by the URA Master Plan 2019. This trend is expected to accelerate now as people demand a shift towards more flexible work arrangements, place high emphasis on health and well-being. So by coming together to form a larger and more diversified REIT, we are confident the merged entity will be in a better position to capitalize on evolving trends in the post-COVID world and to withstand challenges. CCT unitholders will receive 0.72 CMT units, plus $0.259 in cash for each CCT unit. Recognizing the unprecedented circumstances presented by COVID-19, CMT manager has voluntarily waived, on a onetime basis, 100% of the acquisition fee amounting to approximately $111.2 million to reinforce its commitment to the merger. And as before, both sets of unitholders will continue to receive permitted distribution until the effective date of the merger. The merged entity will be named CapitaLand Integrated Commercial Trust or in short, CICT. CICT will be one of the largest REITs in Asia Pacific and the largest proxy for Singapore's commercial real estate market, underpinned by leadership, resilience and growth. We will be in a strong position to drive value creation for our unitholders. The merged entity will have a greater capacity to unlock synergies and emerge stronger to capitalize on post-COVID-19 recovery growth. And CICT's portfolio will also be more balanced across integrated developments, retail and office asset class, offering a greater stability through cycles. We would like to take this opportunity to provide an assessment of the impact of COVID-19 on the Singapore office and retail landscape. We believe that Singapore office and retail real estate are still relevant and essential. Unique to Singapore, shopping malls remain a key thread in the fabric of society and are well integrated into the daily activities of population. The shopping mall culture is expected to be an integral part of everyday life and remain deeply entrenched in Singapore. Further, the overarching decentralization team, which was already in play before COVID '19, will be even more relevant now so as to promote work-live-play lifestyle in identified growth clusters, whilst the urban malls have gradually caught up with the reopening in Phase 2 as more workers return to office and more shoppers visit downtown malls over the weekend. So while we recognize the office sector is evolving, Singapore office is here to stay. Being one of the key economic hubs in Asia, the CBD will be at the heart of future of office given the central concentration of quality of its stock and a well-established business ecosystem. The purpose of work space to meet organizational goals such as productivity, collaboration, culture has not changed. So why is it evolving our work space solution? And this solution may include hub-and-spoke, core effects, work-from-home or work-near-home arrangements. They are driven by a conscious need for social distancing, health and safety and wellness. The need to accommodate all this consideration in a controlled environment will ensure the relevance of the office work space. So in order to stay competitive in the light of the evolving Singapore office landscape, proactive management is critical to provide differentiation in services, amenities, technologies, offerings to create a positive impact on the lifestyle occupiers beyond the workplace environment and in a more sustainable, vibrant and lively community. So economic activities in Singapore are showing signs of gradual resumption. Although COVID-19 has disrupted our lifestyles, the underlying consumer needs and wants are the same. People still desire to socialize, dine out and collaborate in a controlled and safe environment. There have been positive signs of recovery in shopper traffic. So for instance, larger and dominant malls such as IMM Building, Plaza Singapura or The Atrium@Orchard have led the recovery in shopper traffic with 82% and 73%, respectively, compared to pre-COVID-19 level. Overall, shopper traffic has improved significantly post circuit breaker, recovering to about 58% of pre-COVID-19 levels. For office, it's important to note that telecommuting remains default mode of work for companies under Phase 2, as advised by the Singapore government. Nonetheless, since the beginning of phased reopening, there's an increasing trend of returning employees. So what benefit does this merger brings to our unitholders? We firmly believe that the proposed merger will be beneficial to unitholders, the need for a transformative merger. Forming a larger, more diversified REIT, has become more compelling in today's changing real estate landscape. The merged entity will be underpinned by 3 key attributes, namely leadership, resilience and growth, and will be in a better position to drive long-term value creation. The merger is also deeply accretive on a pro forma basis. Here, let me pass on to Kevin for illustrate -- or elaborate on some of the points that I mentioned earlier in my presentation. Kevin, shall I pass to you?

Thank you, Tony. So we're looking to create a bigger, better, stronger platform that's more efficient and more resilient for the future. So on leadership, CICT will have a strong and leading platform. Individually, CMT, CCT are leaders in their respective sectors. They 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 suburb malls. CCT has a widest footprint and a largest portfolio of Grade A assets in the Singapore CBD. The combination of 2 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 evolving trends and opportunities. CCT will be a dominant REIT. It will be the second-largest REIT in APAC and the largest REIT in Singapore. Its scale will attract greater visibility and increase the potential for higher trading liquidity, positive re-rating and a more competitive cost of capital. This will allow CICT to be more competitive in Singapore and developed markets overseas to drive new opportunities for growth. CICT will have scale to tap on synergies. COVID-19 has highlighted the symbiotic relationship between office and retail assets, especially in our integrated developments, where the interdependence of office and retail components has been even more evident. The merged entity will capitalize on cross-selling opportunities, enhancing our digital platforms to deliver to and extract value from our enlarged customer base, optimizing costs through economies of scale and eliminating fictional costs that exist between separate platforms. CICT will have a more resilient platform, the importance of which has been emphasized by COVID-19. 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 tenants -- the top 10 tenants of the merged entity will account for 20.6% of monthly gross rental income compared to 38% for CCT and 22% for CMT. The reduced asset concentration risks 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 that of CMT and CCT. For CMT, it reduces from 50% to 43%. And for CCT, it reduces from 82% to 43%. Resilience increases the merged entity's flexibility to undertake redevelopment and asset enhancements because the financial impact of embarking on such projects is reduced. This will reduce -- 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 of urban planners on rejuvenation and intensification of land use are driving the market towards 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 our combined domain expertise. CMT and CCT, each have proven track records of pushing boundaries, repositioning our portfolios and staying abreast of evolving real estate 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 merged platform will have an extensive island wide footprint of strategically located assets in the identified growth classes in Singapore. This presents opportunities to extract value from assets located in these classes. Growth can be derived from the 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 good 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 and with up to 20% in developed markets. So with enlarged SGD 23 billion investment portfolio, that is only 4% invested overseas, we have the capacity to hunt for accretive acquisitions across developed markets. So aside from leadership, resilience and growth, the transaction is also DPU accretive on a pro forma basis. Including first half 2020 that was impacted by COVID-19, the pro forma DPU accretion for the last 12 months to June 2020 is 4.1% for CMT unitholders and 7.6% for CCT unitholders. So 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. We will focus on retail, office and integrated commercial developments. We will create value through organic growth, AEIs and redevelopments, proactive acquisitions and portfolio reconstitution and of course prudent cost and capital management. These will be anchored by continued strong ESG commitment that both CMT and CCT exemplify. So I'll hand this presentation over to Tony, who will take us through some further details about the merger.

Thank you, Kevin. So before we end this presentation, let me highlight some key dates to note. All unitholders' meeting will be helped by way of electronic means on the 29th September. CMT will hold its EGM at 10:30 a.m., while CCT will hold its EGM and Trust Scheme Meeting from 2:00 p.m. The last date to lodge your proxy forms for both meetings is 27th September. And the expected effective date is 21st October, and we expect to complete the merger by 30th November, if we get a vote from our unitholders. So there'll be 3 resolutions to be put forth to CMT unitholders for voting. For CCT unitholders, approval is sought for 2 resolutions. Please give your voting instructions via the respective proxy forms, which has been dispatched to unitholder this morning. You may also obtain a copy of the forms via the SGX website and respective entity's website. So we have come to the end of our presentation. Thank you for your attention. Kevin and I are open for questions. Thank you.

Thank you, Tony and Kevin, for the joint presentation. My name is Mei Peng from CCT Investor Relations and your moderator for today's question-and-answer session. We also have with us here in this room, Ms. Cindy Sze, CFO of CMT; and Ms. Anne Chua, CFO of CCT for the Q&A session. [Operator Instructions] Now we do have some questions via the webcast, and a few of them is about the timing of this merger. Let me try and ask the questions altogether. Why did you previously halt the transaction? And why are you proceeding with the merger now? Tony, would you like to address the question first, followed by Kevin?

Okay. Thanks, Mei Peng. I think, first of all, I think we need to clarify. At no point in time that we actually halted the EGM. As you probably know, COVID-19 is an unprecedented event and hit us hard. And following with the circuit breaker, both CMT and CCT at that point in time thought that we want to focus our immediate resource to support our tenants during that period of time operating under difficult circumstances. We also want to take the opportunity to allow a period of time so that we can present the potential financial impact, which was announced in our second quarter result to unitholder so that unitholder can make a better informed decision in the respective unitholder meetings. So it's under this context that we decided to delay the EGM. And bear in mind, we actually announced in January that we had earlier anticipated EGM to be held in May. But given the circumstances, it was not possible to do it in May. Yes.

Kevin, would you like to...

So no, this -- in relation to the timing of this transaction, first of all, we've always established that this is a strategic merger of equals and the whole idea is to create a bigger, better, stronger, more efficient platform, right? As far as the scheme consideration is concerned, we -- it reflects a market-to-market transaction. And this has taken consideration various things, including the prevailing and historical price of CMT and CCT and also balancing the interest of CMT and CCT unitholders and also the merged entity going forward. So taking all this in consideration, we tracked the trading of CMT and CCT units, and they've been trading in tandem. This -- the merger is DPU accretive. So in light of all this, we believe that the transaction is fair. And as such, it's a good time to embark and announce our EGM on the 29th of September.

Thank you, Tony and Kevin. We also have a couple of questions from the media. So I'll start off with a question from Natasha from Channel News Asia. Her question is, how has COVID affected the outlook for the REIT sector? And how is the business looking to pivot? Maybe we can start with Tony first, followed by Kevin.

Sure. So COVID-19, like what we had presented, it certainly has created fairly across the sector in the retail space to a different degree of impact. Specific for retail, it's probably -- you'll probably observe CMT, we have been actually been very proactively managing our business even pre-COVID-19 days, whether the overall trend of centralization or recentralization of retail space, the rapid development of the infrastructure in Singapore, which actually has an impact on how consumers shop because their travel pattern may change. So all this actually has been something of a norm, I mean, I'll say for the retail space, and we have been evolving along the way. So with COVID-19 coming, obviously, we would have to take that impact potential, impact to the business, and slowly shift some of the assets potentially like what we elaborated. The whole idea of the merger is to get a more diversified base potentially moving to integrated development. At the same time, the retail business is also pivoting towards a little bit more into the digital space, where in June this year with CapitaLand to new digital platform. It came right in the, I can say, the whole landscape where it becomes quite complementary now. The whole omnichannel distribution model for retail business has become even more relevant. So that's an area that we are moving into, yes, from a retail perspective. Maybe I'll pass on to Kevin.

I think what has happened, as you've seen over the years, is that the landscape for real estate has been evolving. And this merger of CMT and CCT is really a proactive response to that. And as Tony talked about evolution of changes in the retail space, the office space has also been evolving. And of course, of late, people have been talking about more flexible demand for office space. I think what COVID-19 has done is actually not change these evolving trends. In fact, we believe that it has likely accelerated the strength. So as such, I think what we are proposing today was valid pre-COVID and is still valid today. Now what we talk about is creating a bigger, better, stronger, more efficient and more resilient platform, embodying attributes of leadership, resilience and having the ability to capture and capitalize on growth. I think this is what we're striving for. We are trying to create a platform that can address uncertainties that we are facing today. The COVID-19 situation is fluid. We don't know when this or when we'll get totally ahead of it and when the situation will totally subside, but we are certainly making sure that we have a platform that's ready to address the uncertainties and also capitalize on opportunities that may present themselves in the future.

Okay. There is another question from Therese of Bloomberg. The question is more specifically on the retail market. I think just given that the pandemic has affected the retail badly, I mean, are we looking to change the content of the malls? If so, how? And I mean, here, she also gave the example of who we will be covering space to other users. So Tony, you may want to address this.

Sure. So thanks for the question. It's very interesting. Because just like what I mentioned, retail landscape has always been evolving pre or post. Post-COVID, obviously, there will be a little bit more certain kind of dynamic. But even pre-COVID, I think we have already been facing the kind of landscape, ever evolution -- ever-changing evolution in the retail space. So let me just put forward, this is actually not a new phenomenon that retail real estate is facing. So we have been going through that kind of evolution. With COVID-19 coming in, obviously, there's still a little bit of dynamic. Like Kevin mentioned, how that will eventually pan out is an open question. We, in the meantime, are trying to get more our retailer onto the platform so that it opens up opportunity for tenant to capture new business area. As you probably know, one of the key digital platform, CapitaStar program, is one of the leading digital platform in the retail market with more than 1 million members. So this more than 1 million members present an immediate potential business for our retailer in the mall. So we are moving towards that. Hopefully, over time, we look at it holistically as a business, whether it's the virtual space or the physical space. But we are able to present a more complete offering to our unit -- our retailers. So I think that's probably one of the potential outcome we will end up with. The other thing we talk about from a real estate use perspective, and we mentioned, even pre-COVID, there's already a very visible trend moving towards a mixed-use precinct or integrated development. So we're trying to seize that opportunity as it comes along. As it's laid out in also URA Master Plan, they are already identifying growth cluster within which our combined basis 24 property, we are in a good position to look at opportunity that come along the way.

Okay. Thank you, Tony. I think along the same line about the retail and office sector, the next question is from Joy of HSBC. Could you give us a quick update on the recovery of tenant sales for CMT and also on the percentage of workforce that has returned to the office so far? Maybe we start with the office now, Kevin?

So I think all -- many of us are dying to come back to the office to work, I am, certainly myself. And when I speak to my friends and my colleagues, most of them are looking forward to come back to work because it's a more comfortable environment. It's a place where they can have camaraderie of their teammates and clearly have a more pleasant environment to work in. In Singapore, at least for our CCT portfolio, we've seen about 24% of our office community come back to work. But I think this needs to be taken in the context of the fact that, by and large, the Singapore government is still guiding companies to make telecommuting the default mode of work, meaning to say, not all people can come back to work even though they may want to. We are certainly looking forward to the situation to improve and restrictions to ease so that more of our office community can come back to our offices.

So for retail, I think we are quite -- we are seeing quite encouraging sign of shopper coming back, confidence coming back and visiting shopping malls. And probably all you out there may have experienced in your own way. So there's a need for human to socialize, to interact, to dine. So you look at shopper traffic I presented, the trend looks very encouraging. Some of the malls are already -- we're covering up to 70%, 80% of our shopper traffic compared to pre-COVID, albeit downtown malls slightly less. But gradually, like Kevin's saying, more and more people started to come back to the office and more and more people started to visit downtown malls over the weekend. We are seeing very encouraging signs as well. And the gap is really narrowing between what you see in suburban and downtown. Taken as a whole that we presented, it's about 80% -- 58%, with the better ones that are 70%, 80%. So even downtown, we see Plaza Singapura, Atrium are having a very strong recovery from a shopper traffic perspective. And putting in context, this is in an environment where our border is still somewhat closed, right, although there are signs that, gradually, there seems to be -- the country seems to be opening up. So while we think that, eventually, the cross-border travel will resume, I think downtown mall will definitely benefit when this happens, yes. So overall, it's been very encouraging, yes.

Yes. Thank you, Tony and Kevin, for giving us a perspective of what's current. The next question we have is from DBS, Derek. His question is more about valuation. I think given that, in the first half 2020, I think for both REITs, they've seen a drop in the valuation of about 1.5% to about close to 3%. So what is management view about valuations in the medium term post COVID? And potentially, yes, how long will valuations rise back to pre-COVID level? Maybe you can start with office first, followed by retail. Yes.

Yes. Derek, thank you for the question. We will not comment on projections because that's really the job of the -- our independent valuers to assess down the road what the value is. We did our valuation at the 30th of June, as you pointed out. This was in light of this merger, and we wanted to provide some flavor to our unitholders and investors on the impact of COVID on our portfolio. We will -- we're doing valuation at the end of the year. I think, overall, if you talk about valuations, the factors and considerations that we have seen in the office sector that we saw in our 30th of June valuation, that was largely impacted by assumptions of rental growth -- changes in rental growth assumptions and market rents. We did not see any change in our cap rates. And if you were to look at where office investments have been reported at, I think we are hopeful that this can -- the cap rates of our investment properties will hold.

Quite similar in line with what Kevin mentioned that the value, obviously, we'll take into consideration when we do the valuation in December at that prevailing market condition. So we -- I don't think it's not for us to comment how that will look like. But more importantly, I think the -- it's about value creation going forward. And what we put forth to our unitholder is that, on a combined basis, I think we are in a better shape. And another thing point to note is that and one of the strong proposition for the unitholder is this Singapore core team. And Singapore real estate generally is doing very well, in demand across the world. So we think that, in the long run, the value would -- we will be able to create more value for the unitholders. With a bigger platform, there'll be more resilience, there'll be more opportunity to look at growth. And also, at the same time, we will be the largest REIT. And in today's market, liquidity begets liquidity, and we think that we will be in a better cost of capital situation, yes.

Okay. Thank you. The next question we have is regarding -- about the retained distribution. So there are a couple of questions. But I think largely, they're asking about that -- I think there was retained distribution in the first half. So will the rest of this -- will this retained distribution be released before the completion of the merger or by 30th November? Tony, would you like to...

So I think like in the CMT's results announcement, I did mention that we are releasing 1/3 of our retained distribution. Bear in mind that we have actually came up from circuit breaker. We will continue to assess the situation. But the underlying principle is that we will not want to hold any unnecessary retained earning, if possible. So we are continuing to assess in the months ahead the situation -- operational situation on the ground. In the case of CCT, as you know, the amount of distribution that we retained in the first quarter was distributed in the second quarter. I think unitholders of both CMT and CCT can bear in mind that, at the end of the day, all permitted distributions will be -- there will be a cleanup as part of this merger and appropriate distributions accruing to each would be distributed accordingly.

Okay. Thank you. There is a specific question from a CCT unitholder. I think it's more about the -- I think given the distribution from the retail side is a bit more unreliable, so will CCT unitholders be affected after merger?

When we presented early on, we shared that this transaction will be DPU accretive. In the case of CCT unitholders, we're looking at the 7.6% accretion. I think it's important for unitholders on either side, CMT and CCT, to look at the entirety of this deal and the merits and the benefits that this deal will bring. We are ultimately looking to create a stronger platform that has got leadership, resilience and the opportunity to drive growth, right? At the end of the day, with a stronger platform, I think we'll be in a much better position to create and deliver value for both CMT and CCT unitholders today. So for CCT unitholders, my point to us is all -- we're all -- well, I'm also clearly a CCT unitholder. I certainly look at this deal as a positive transaction. It's something that will create value for myself and for all of us going forward.

Thank you. This next question is also a combination of a few questions. It's more regarding about the opportunities, I think, that the merged entity will likely look at. So maybe I will try to put it together. I think one of it is asking from [ Macian ] that do we foresee that some of our existing properties will be converted to integrated development. I think this is again about the plans. And another question from Therese is about how will we shape the -- how does -- what's happening now to the retail and office shape our consideration when it comes to future acquisition of such assets? And then there was another question about the strategy of the merged entity. So I think I'm just putting this all together. So Tony, perhaps you'd like to start and then Kevin can also add.

Sure. So I'll answer on it holistically, right? I think at the end, if you look at the -- if the merger were to proceed and you get your vote from unitholders, we really, on day 1, will have exposure to 3 different asset classes as presented earlier. So we have that flexibility to look at opportunity, and you obviously know real estate move in different cycles. So we will assess the situation according to the market cycle and opportunity that surface to us. Because of that ability to look at the 3 different sector real estate space, we definitely have more ability to look at opportunity. Yes.