.• 2Q13 results in line with expectations
• Active capital management to limit risks
• Starhill Global REIT remains our top pick
Robust 2Q13 performance as expected
Local retail landlords ended 2Q13 on a positive note, with the majority benefitting from higher secured rents and occupancy rates following the completion of asset enhancement initiatives (AEIs) at several of their portfolio assets. On the whole, the subsector turned in a 14.6% YoY growth in aggregate NPI and 9.6% YoY growth in DPU. The results were mostly in line with our expectations, except for CapitaMall Trust (CMT) which exceeded our forecasts on strongerthan- expected rental reversions.
Positive operational performance
As we have previously expected, the subsector average occupancy rate improved QoQ in 2Q13 on the back of active leasing efforts by the REIT managers. As of 30 Jun, the subsector average lease to expiry stood at 3.2 years, unchanged from that seen a quarter ago. In addition, positive rental reversions ranging from 6.4% to as high as 42.8% were achieved across the local retail REITs upon renewal – a reflection of continued strong demand in our view.
Likely improvement in debt profile
On the capital management front, we note that the REITs have been very active, possibly in anticipation of potential rise in interest rates in the near-to-medium term. As such, we expect the local retail subsector to post significant improvement in its debt maturity profile and statistics in the coming quarter. Aggregate leverage has also improved sequentially across the board. More notably, a significant portion (74.5%-94.0%) of the REITs’ existing borrowings are either based on fixed rates or hedged via interest rate swaps. This will likely limit the impact of rising interest rates on the REITs’ DPUs and yields, in our opinion.
Outlook remains sanguine
Looking ahead, we are maintaining our positive view on the local retail REITs due to AEI activities and better rental rates for the leases due for renewal. In addition, the local retail landscape has remained largely stable. According to Jones Lang LaSalle (JLL) 2Q13 Singapore property market review report, JLL expects the growth in rents islandwide to range between 0% and 0.2%, while capital values grow by 2.7%-3.8% in 2013. This reaffirms our take that local retail REITs will continue to perform for the rest of 2013. We are keeping our OVERWEIGHT rating on the local retail REIT subsector. With the recent sell-down in the S-REITs sector, we note that the local retail REITs are now trading at undemanding 1.04x P/B and 6.3% forward yield. We retain Starhill Global REIT as our preferred pick, due to its apparent growth drivers, higher-than-average yield of 6.8% and compelling valuation (0.88x P/B).
Publish date: 29/08/13