D. Overseas retail REITs – Possible headwinds
3QCY13 performance in line
Overall, the retail REITs subsector showed good YoY growth in NPI (7.8%) and income available for distribution (11.7%), although the YoY increase in DPU came out to only 0.5% due to the effect of placements by CapitaRetail China Trust (CRCT) and Fortune Real Estate Investment Trust (FRT) in Nov 2012 and Aug 2013 respectively.
CRCT, FRT and Lippo Malls Indonesia Retail Trust (LMIRT) all reported 3Q13 results that were in line with ours and the street’s expectations. FRT and LMIRT clocked healthy YoY growth in their NPI and distributable income of between 8.2%-20.7%.
LMIRT’s figures were propelled by the acquisition of six properties in 4QCY12. CRCT’s gross revenue climbed 2.2% YoY to S$39.5m. However, higher property management fees and staff related costs drove NPI down 0.8% to S$25.0m. Excluding CapitaMall Minzhongleyuan, which has been closed for asset enhancement since Jul, CRCT’s 3Q13 gross revenue and NPI grew by 5.3% and 1.7% respectively in RMB terms. Mapletree Greater China Commercial Trust, which listed in Mar, reported 3QCY13 income available for distribution of S$38.8m, 13.2% higher than its management’s IPO forecast, chiefly due to stronger-than-anticipated revenue. However, we judge the results to generally be in line with the street’s expectations.
Healthy gearing; active with fundraising in 3QCY13 and 4QCY13
Among S-REITs, the average gearing of overseas retail REITs has been relatively low, ranging between 24.3% and 28.6% over the past four quarters. However, we note that the average has climbed over the last two quarters to 28.6%. The increase for 2QCY13 was due to the addition of MGCCT (which was relatively more levered at 41.5%). For 3QCY13, LMIRT’s leverage climbed up 4.0 ppt to 28.2% due to the lower valuation of its assets in Singapore dollar terms (versus Singapore dollardenominated debt). Average interest coverage of 5.9x for 3QCY13 remains healthy, although slightly lower than the 6.1x average for 2QCY13.
We note that the overseas retail REITs have been active with fundraising in 3QCY13 and 4QCY13. In 3QCY13, FRT increased its unit base by ~8% through a placement to partially finance the acquisition of Fortune Kingswood. During 4QCY13, CRCT and LMIRT carried out private placements, the former to partially finance the proposed acquisition of Grand Canyon Mall in Beijing and the latter to increase financial flexibility for acquisitions in general.
Greater China retail market remains robust
The overseas retail REITs highlighted here chiefly represent the HK, mainland China and Indonesian retail property markets, although MGCCT also has exposure to the office property sectors in both Beijing and HK. Mainland China’s November retail sales were strong, rising 13.7% YoY, beating expectations for a 13.3% increase. For HK in Oct 2013, the value of total retail sales was up 6.3% YoY at $37.8b. After netting out the effect of price changes over the same period, the volume of total retail sales increased by 5.8% YoY. For 10M13, total retail sales increased by a strong 11.9% in value and 11.3% in volume YoY.
Real retail sales in Indonesian retail growing at a slower clip
The pace of YoY growth in Indonesian retail sales has dropped significantly following Jul-13. According to Bank Indonesia, from Jan-Jul 2013, the YoY growth in real retail sales ranged between 8.0% and 15.2%. However, Aug showed only 2.0% YoY growth and the preliminary YoY growth figure for Sep is 4.5%. The projected YoY growth for Oct is 6.4%. Bank Indonesia highlighted that the inflationary pressures through till March 2014 will remain high due to demand in the run-up to Christmas and New Year festivities, as well as the gearing up to the 2014 General Election. While rental reversions for LMIRT should remain healthy in IDR terms, we are concerned about the continuing depreciation of the IDR against the SGD. Maintain NEUTRAL. The operational performance of the overseas retail REITs should generally remain robust, there are some headwinds with various property consultants reporting that the retailers and MNCs are turning more cautious with regard to leasing retail space in both Tier 1 cities in mainland China and HK. For LMIRT in particular, a further depreciation of the IDR against the SGD is quite possible and could continue to weigh down on LMIRT’s NAV in Singapore dollar terms and its price performance. We are maintaining our NEUTRAL rating on the retail REITs subsector. Our top pick is FRT [BUY, HK$7.01 FV]. FRT’s recent acquisition of the Kingswood property should help boost its distributions starting from 4Q13.