Overseas retail REITs – No longer in favor
(Downgrade to NEUTRAL)
2QCY13 performance in line. CapitaRetail China Trust (CRCT), Fortune Real Estate Investment Trust (FRT) and Lippo Malls Indonesia Retail Trust (LMIRT) all posted 2QCY13 results that were in line with our expectations. FRT and LMRT clocked double-digit growth in NPI and distributable income. In particular, LMRT’s figures were driven by the acquisition of six properties in 4QCY12. For CRCT, DPU fell 1.2% YoY to 2.38 S cents. However, excluding the 57m units issued through private placement in Oct 2012, 2Q13 DPU would have been 2.58 cents, up 7.1%.
Rental reversions still alright. Occupancies for the three overseas retail REITs have been good. For the past four quarters, CRCT’s portfolio has consistently registered overall occupancies above 97% and positive rental reversions of between 14.9%-23.6% for its multi-tenanted malls. We note that the rental reversion for FRT has slowed down slightly QoQ
from 3QCY12 (20.1%) to 2QCY13 (18.2%).
Financial strength. In the S-REITs space, the average gearing of overseas retail REITs has been relatively low, ranging between 24.3% and 27.5% over the past four quarters. However, we note that the average has climbed in the last quarter due to the addition of MGCCT, which has an average leverage of 41.5%. Average interest coverage of 6.1x remains healthy.
Downgrade to NEUTRAL. The unit prices of the overseas retail REITs have been facing pressure from the general outflow of funds from Asia. In particular, LMRT, as an Indonesian play, has seen its unit price pushed down because of concern over the rupiah and the general sell-down on Indonesian counters. For Fortune REIT, on a more fundamental note, we understand that HK retail market as a whole may see moderated growth going forward because of changes in the consumption patterns of mainland Chinese. Mainland Chinese increasingly prefer to shop in Europe as opposed to in HK and asking rents for prime rent shops have come down YoY and this effect could eventually spread to lower-end retail spaces, or at least cap their rental increases. As we expect continued pressure on the unit prices of overseas retail REITs in the short term, we are downgrading the subsector to NEUTRAL. Our top pick is CapitaRetail China Trust [BUY, FV: S$1.58].
Publish date: 09/09/13