Thursday, December 19, 2013

Local retail S-REITs – Maintaining strong growth momentum (OCBC)

C. Local retail REITs – Maintaining strong growth momentum
Reaping respectable returns from past investments
Domestic retail landlords saw a robust DPU growth of 9.8% on average in 3Q13, as they continue to reap returns from their asset enhancement initiatives (AEIs) and newly acquired properties. The distribution of income retained over 1H13 also contributed to the boost in DPU for some of the local retail REITs. Mapletree Commercial Trust (MCT) again outperformed the pack with a strong 16.5% YoY increase in DPU, thanks to new income stream from its newly acquired Mapletree Anson, and a robust rental uplift and improved occupancy at existing portfolio assets.

Continued strong leasing interest
For the quarter, all the local retail REITs witnessed sustained leasing demand for their retail spaces. The subsector occupancy as at 30 Sep stood at 99.1%. This represents at least the fifth straight quarter of sequential growth in the overall occupancy rate. A number of retail REITs have also disclosed a rise in tenant sales in some of their malls, while positive rental reversions of 6.3%-37.1% were clocked. The weighted average lease to expiry (WALE), on the other hand, held steady at 3.1 years compared to 3.2 years in the previous quarter. We view these datapoints as positive indicators for the expected resilience in performance for the local retail REITs going forward.

Financial position remain robust, with potential upside ahead
On the capital management front, local retail REITs have been very prudent, as evidenced by the several debt refinancing activities and sturdy financial positions over the quarter. There were three noteworthy developments during this period:
1) Starhill Global REIT (SGREIT) has completed the drawdown of its new unsecured loan facilities to refinance its debts due in 2013, leaving it with no refinancing needs until Jun 2015. ~94% of its borrowings are now fixed or hedged, while its  unencumbered asset ratio improved from 42.0% to 79.0%.

2) Both MCT and SGREIT saw their corporate credit rating/outlook upgraded by rating agencies during the quarter. Following the assessment, MCT now has a Baa2 credit rating with positive outlook by Moody’s, while SGREIT has a BBB+ credit rating with stable outlook by S&P. Reasons for the upgrade were enhanced asset quality and improved operating performance for MCT and improved cash flow coverage and expected lower leverage for SGREIT.

3) Frasers Centrepoint Trust (FCT) registered a significant S$195.7m revaluation gain in its portfolio properties. This has led to a 2.8ppt QoQ drop in its gearing level to 27.6%. As CapitaMall Trust (CMT) and SGREIT close their financial years in Dec 2013, we may potentially see revaluation gains in their portfolio assets as well.

Improvement in debt profile as expected
As a result of the above-mentioned activities, the subsector aggregate leverage improved from 34.1% in 2Q13 to 33.5%, whereas the weighted average debt term to maturity was extended to 3.2 years from 2.8 years in the prior quarter. At least 74.5% of the local retail REITs’ borrowings are now hedged into fixed rates, which is likely to mitigate any negative impact from a rise in interest rates. This is in line with our view mentioned in our Sep sector report that the local retail subsector would post significant improvement in its debt maturity profile and statistics in 3Q13.

Still heavy on AEI/development projects; reversions to persist
Looking into 2014, we are keeping our optimistic view on the local retail REIT subsector. We note that domestic retail REITs are still expected to gain from their AEI/development projects and better rental rates for the leases due for renewal. For example, CMT is expected to see higher secured rentals at Bugis Junction post its rejuvenation works (new retail space at Phase 1 AEI already saw strong pre-commitment of over 95%). In Dec, CMT’s 30%-owned Westgate mall opened its doors for operations after almost two years of construction, and will contribute positively to CMT’s income. Come 1Q14, CMT will also be embarking on another new AEI at Tampines Mall, which is projected to yield an ROI of 8.0% post completion. All these efforts are expected to optimize CMT’s yield, in our view.

Potential acquisitions in 2014 to provide kicker
FCT, on the other hand, has 75.5% of its leases (by gross rent) at its crown jewels Causeway Point and Northpoint due for renewal in FY14, and positive rental reversions are still expected. We also understand that the strata title division of One@Changi City is progressing well, and the potential acquisition of Changi City Point in 2014 is likely to provide FCT with another level of growth. For MCT and SGREIT, both are still anticipated to benefit from higher secured rentals and contribution from their recent acquisitions. We also do not rule out acquisitions in 2014, as at least one of them has communicated that it is actively sourcing for good acquisition targets. As such, we believe local retail REITs will still be able to sustain their growth momentum going forward.

Outlook remains buoyant
In our opinion, the local retail landscape is expected to remain sanguine, bolstered by growing retail sales, an expanding population and comfortable supply of retail space. Retail sales growth in Singapore, we note, has historically been fairly strong barring downturns caused by external shocks including the 9/11 terrorist attacks in 2001, the Severe Acute Respiratory Syndrome (SARS) epidemic in 2003 and the Global Financial Crisis (GFC) in 2008 and 2009. In Sep 2013, the retail sales
excluding motor vehicles saw a marginal drop of 0.3% YoY, following a 1.6% YoY growth in Aug. However, retailers of recreational goods, food and beverages, recreational goods, medical goods & toiletries and optical goods and books all saw strong sales growth of 2.6%-5.4% YoY. According to Urbis, retail sales growth is likely to remain strong, growing at an average of 5.0% p.a. from 2013 to 2018, driven by expanding private consumption expenditure and growth in the tourism retail spending market.

Future retail supply likely manageable
We also deem the upcoming supply in retail space to be comfortable. In 3Q13, the total island-wide private retail stock tallied 25.63m sqft, representing a sequential increase of 0.2%. For the rest of 2013, there are only two key developments in the suburban market – Westgate (416,000 sqft) and Bedok Mall (220,000 sqft), both of which have reported high pre-commitment levels. This reflects the healthy leasing interest and confidence from retailers in our view. Between 2014 and 2016, CBRE projects ~4.39m sqft of new supply in domestic retail market. While this constitutes a material 17.1% of current retail stock, we note that the new supply will be distributed well across the Orchard Road, Downtown Core, Fringe Area and Outside Central Area submarkets. Hence, we feel that the expected supply is still comfortable, and should not pose any intense competition among the malls.

Retail leasing market to stay healthy
Apart from some challenges arising from shortage of labour, retail leasing market over the past few months has also been generally healthy. According to URA REALIS, the private retail market registered a net absorption of 97,000 sqft in 3Q13. This exceeded the net completion of 43,100 sqft over the same period. As a result, the overall private retail occupancy rate grew by 20bps QoQ to reach 93.1%. In addition, all three submarkets – Central Area, Fringe Area and All Areas – saw QoQ increases in rental rates, based on URA rental indices. Looking ahead, CBRE expects the retail rental growth to stay stable with a possible uplift of 3%-5% over the next 6-12 months horizon. As all the datapoints seem to reaffirm our take that the local retail REITs will continue to deliver in 2014, we are keeping our OVERWEIGHT rating on the local retail REIT subsector. SGREIT [BUY, S$0.95 FV] remains as our preferred pick, due to its apparent growth drivers, higher-than-average forward yield of 6.6% and compelling valuation (0.88x P/B). We also like FCT [BUY, S$2.02 FV] for its pure suburban exposure, low gearing of 27.6% and growth potential.

Source/Extract/Excerpts/来源/转贴/摘录: OCBC-Research,
Publish date:13/12/13

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