Tuesday, September 10, 2013

Local retail REITs – Still heavy on asset enhancements (OCBC)

Local retail REITs – Still heavy on asset enhancements
Robust 2Q13 performance as expected
Local retail landlords ended 2Q13 on a positive note, with the majority benefitting from higher secured rents and improved occupancy rates following the completion of AEIs at several of their portfolio assets. Mapletree Commercial Trust (MCT) and Starhill Global REIT (SGREIT) posted higher-than-average growth in DPU for the quarter, boosted by contributions from newly acquired Mapletree Anson and Plaza Arcade respectively. 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 stronger-than-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. Only SGREIT saw a marginal 0.1% dip in portfolio occupancy rate to 99.6% due to a decline in its Japan properties’ occupancy rate (contributes less than 3% of SGREIT’s revenue). 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 also been very active, possibly in anticipation of potential rise in interest rates in the near-to-medium term. During the quarter, MCT issued a S$70m 3.2% fixed rate notes due 2021 under its S$1b multicurrency Medium Term Note (MTN) programme. SGREIT, on the other hand, entered into a 3-year and 5-year unsecured facility agreement with eight banks to refinance ~S$508m in borrowings ahead of its maturity in Sep. This is consistent with our view in our May sector report that S-REITs are likely to seek longer term and unsecured debts to reduce their interest rate exposure and improve their unencumbered asset ratios. On 2 Jul, we also saw CMT redeem its convertible bonds due 2013, resulting in all the properties held directly by CMT to be unencumbered. Hence, we expect the local retail subsector to post significant improvement in its debt maturity profile and statistics in the coming quarter

Healthy gearing and limited interest rate risks a plus
As of 30 Jun, the financial positions of local retail REITs have remained strong. Aggregate leverage improved sequentially across the board, with CMT showing the biggest drop amid a S$104.0m positive asset revaluation. Cost of debt was also maintained at 2.8% in 2Q13. 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 financial performance of the local retail REITs. While acquisition activity is likely to remain muted in the near term, we note that the REITs are still expected to gain from their AEI efforts 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, the overall retail market occupancy rate and rents have held firm in 2Q13, while the capital values have edged upwards across all sub-markets despite weaker growth observed in retail sales and visitor arrivals. For 2013, JLL expects the growth in rents island-wide to range between 0% and 0.2%, while capital values grow by 2.7%- 3.8%. 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. SGREIT remains as our preferred pick, due to its apparent growth drivers, higher-than-average yield of 6.6% and compelling valuation (0.89x P/B).

Source/Extract/Excerpts/来源/转贴/摘录: OCBC-Research,
Publish date: 09/09/13

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