CapitaLand Retail China Trust - Positives priced in
- CapitaMall Xinnan and revived CapitaMall Minzhongleyuan drove earnings growth. Overall results were within our expectations.
- 1Q17 3.6% rental reversion, within our expectations for full year single digit reversion.
- Expect further rising interest costs q-o-q towards 4Q17 as majority of expiring debt gets refinanced.
- Maintain NEUTRAL with unchanged DDM-derived target price of S$1.44.
What is the news and what do we think?
Executed well on CapitaMall Xinnan as promised.
- CapitaMall Xinnan achieved a 13.7% y-o-y rental reversion. Recall that the mall had a 5.4% yield on cost at acquisition (vs FY15 portfolio NPI yield of 5.8%). Management then expressed optimism at pushing this up to > 6% over the next three years through topline growth and improving operating efficiency. We will continue to monitor the remaining leases expiring (13.9% of NLA) for further progress of rejuvenation at the mall.
- CapitaMall Minzhongleyuan benefitted from the re-opening of Zhongshan Avenue and new Metro line. The mall recorded > 90% and > 60% y-o-y increases in shopper traffic and tenant sales.This drove rental reversions of 35% at the mall.
- As for rest of portfolio, NPI from 3 main multi-tenanted malls in Beijing remain stable (+0.4% y-o-y).
Slow tenant sales and high occupancy cost an overhang.
- We think slowing tenant sales will continue to impede management’s ability to extract strong rental reversions given that occupancy costs are already in the low 20%.
- We continue to expect single digit full year portfolio rental reversion on back of high occupancy costs and slowing tenant sales. This represents a significant slowdown from the double digit reversions from 2011-2014.
Expect further rising interest costs q-o-q towards 3Q17 as majority of expiring debt gets refinanced.
- Recall that CapitaMall Xinnan was acquired with 90% debt. That brought debt levels up c.40% from $700.7mn in 2Q16 to current S$989.4mn. A one year S$300mn bridging loan was taken up to finance the acquisition and that debt is due to expire in 3Q17. We expect further rising interest expense q-o-q when this short-term debt gets refinanced towards 3Q17 into longer term debt with more spread out maturity.
- We have assumed an average cost of debt of 3% for FY17 versus 2.81% in FY16.
Maintain NEUTRAL with unchanged target price of S$1.44.
- We maintain our NEUTRAL with an unchanged DDM-derived target price of S$1.44, at an implied FY17e dividend yield of 7.0%. This compares with CRCT’s average yield of 6.6% since 2010 (post GFC).
- On the back of slowing fundamentals and rising interest rates posing more headwinds, we deem the higher yield justifiable in current economic climate.