Singapore Retail REITs - Maybank Kim Eng 2015-10-09: Stress becoming reality?


Singapore Retail REITs: Stress becoming reality? 

  • DTZ reports that 3Q15 prime retail rents were clobbered 3.7% QoQ. If this is a forewarning, our recent stress test of rents dropping a further 5% from our base assumptions could become reality. 
  • Checks with two real estate consultants reinforce our view of structural headwinds ahead. 
  • Most negative on Retail REITs despite “defensive” tag. FCT and MCT most vulnerable to rising interest cost. Maintain SELLs on FCT, MCT and CT. 

Retail rents collapsing? 

  • Last week in a Business Times news article, DTZ announced that for 3Q15, prime ground floor retail rents fell 3.7% QoQ and 4.5% YoY to SGD30.90psfpm. The fall was led by a 4.5% QoQ drop in the City HallMarina area to SGD22.10psfpm, followed by Orchard falling 3.5% QoQ to SGD38.45psfpm, and Outside Central Region (OCR) falling 3.5% QoQ to SGD32.10psfpm. Extrapolating this rate of decline, we could be looking at YoY declines ranging between 7% and 9% by the fourth quarter.
  • Keeping in mind that this is for contracted prime retail rents only, it still is remarkable when compared to URA data which is currently suggesting 2% and 1% YoY declines by the fourth quarter for Orchard and OCR respectively. As the URA data includes non-prime, which is less resilient than prime, it begs the question of whether our current projections of a 1% drop in market rents for both Orchard and OCR in 2015 and 2016 are still too conservative, despite the fact that we are the most bearish house on the Street regarding retail REITs. Our DPUs and TPs are below consensus by 2.8% and 25% respectively. 
  • On 10 Sep, Maybank Kim Eng Research published a regional stress test report of most companies under our coverage where we applied pressure on our base case assumption of revenue drivers, interest cost, and FX. In the milder scenario, we factored in a further 5% cut in market rents on top of our base case of a 1% drop each year, which brings the total drop to 6% each year, which is not far off DTZ’s findings for the first year at least. As such it would be good to revisit the stress test result regarding impact on DPUs if market rents were to fall a further 5% from our base case.

CT and MCT most vulnerable to drop in market rent. FCT least vulnerable. 

  • A further 5% drop to market rents on top of our base case indicates that CT followed by MCT will suffer the most, with average annual DPU cuts of 1.7-1.9%. Both have lease expiry profiles that are similar. 
  • Starhill suffers less than CT and MCT, averaging 1.2% annual DPU cuts, as its lease expiry in year one is 16% lower than CT and 30% lower than MCT, and its lease expiry in year two although being the highest, is dominated by three master lease renewals which are likely to receive positive 6-7% rent reversions (in comparison, multi-tenanted rent reversions under the stress test scenario are likely to be -3.7%/-4.8% over FY(1-2). 
  • FCT is the least affected as it has the lowest lease expiry among peers over FY(1-2).

Maintain base case assumptions, but stress test not far-fetched. 

  • For now we are maintaining our base case assumptions in our models. But the stress test results beg contemplation if DTZ’s findings are a forewarning of things to come. We would like to remind clients of the considerable headwinds facing retail asset owners; recently we met up with two property consultants separately and both had exactly the same concerns as follows:
    Structural Concerns: 
    1. Labour restrictions have driven up operating cost for retailers and crimped expansion plans. 
    2. Ecommerce - no hard data available but anecdotal evidence abounds. 
    3. Tired product – the retail product is no longer “exciting”. Shopping malls are hosting the same tenants which tend to be global and local chains. Creative content is lacking, which they cite is more interesting in counties like South Korea, Japan, Thailand and Indonesia. With cheap air travel, “global” shopping is more of a reality. Key barrier to shopping mall owners taking more risk with tenant mix is the high cost of land in Singapore which makes operators take tried and tested tenants with a track record of being able to pay. 
    4. Supply competition – 4.7m sf to be delivered over 2015-17 vs. annual demand of 1.04m sf (3.1m sf over 2015-17). Prospective tenants have a lot more choice regarding location. 
    Cyclical Concerns: 
    1. Currency – strong Sing dollar drives away tourists while locals shop abroad.
    2. Economy slowing – slowing employment and income growth. 

Debt expiry schedules our primary concern

Interest cost to wipe out NPI growth for FCT and MCT. 

  • Even if market rents do not fall more than our base case, higher interest cost is not in question, as SIBOR has nearly doubled since the beginning of the year. In our sector report on 8 Sep, we highlighted that NPI growth is not large enough to offset rising interest cost comfortably for both FCT and MCT. 
  • Due to our base case expectations of market rents dropping 1% annually over the next two FYs, our rent reversion expectations are between 0- 1.4%, which flattens NPI growth. At the same time FCT and MCT have 61% and 55% of their debt due for refinancing. We assume refinancing cost will rise 25bp/50bp/50bp from 2015-17, applied to debt to be refinanced and variable interest cost not hedged into fixed. 
  • All in all, the absolute rise in interest cost eats away whatever mild NPI growth there was for both REITs. Thus MCT DPUs are flat while in FCT’s case DPU might fall.

Reiterate SELLs on FCT, MCT, and CT 

  • From our Yield Targeting Framework established 8 Sep 2015, we continue to believe that REITs globally are in a de-rating phase, SREITs included. We expect CT, FCT, MCT, and Starhill to de-rate to 6.75%/7%/7.25%/7.5% respectively, and reiterate SELL on FCT, MCT, and CT, with a HOLD on Starhill.

CapitaLand Malls Trust – 

  • Operating metrics are mixed with shopper traffic and tenant sales up 3.4% and 2.8% respectively but rent reversions weakening from c.6.1% to c.3.1% (1Q, 2Q15) and occupancy falling 98.8% to 96.4% (1Q, 2Q15). The occupancy fall was broad based across malls: Funan, IMM, Bukit Panjang, Atrium, Clarke Quay, JCube, Bugis+ and Westgate due to AEIs and tenant repositioning in response to stiffening competition. DPU growth is accounted for by recent Bedok Mall acquisition, but dragged by our weak rent reversion expectations. Applying our 6.75% yield target to FY16 DPU, TP SGD1.66, maintain SELL. 

Fraser Centrepoint Trust – 

  • Resilient portfolio with little direct competition, but NPI growth will still be dragged by a weak retail environment. On the other hand interest cost will rise faster as 61% of total debt is due to be refinanced at higher rates. DPUs may decline. Applying our 7% yield target to FY9/16 DPU, TP SGD1.61, maintain SELL. 

Mapletree Commercial Trust – 

  • Shopper traffic has declined last 4 quarters -1.5%/-0.7%/-7.7%/-6.5% YoY while tenant sales has declined last 3 quarters -2.8%/-0.2%/-1.7% YoY. FY1Q3/16’s revenue underperformed (-1.8% QoQ, +1.6% YoY, 23.4% of FY3/16f). Vivocity is being buffeted by weak retail environment and poor tourist arrivals. Office assets also face supply glut threat in 2016 (3.6m sf vs 1.2m sf historical annual demand). Applying our 7.25% yield target to FY3/17 DPU, TP SGD 1.10, maintain SELL. 

Starhill Global REIT – 

  • FY16 DPU growth from 1) Myer Centre Adelaide, 2) Ngee Ann City’s master lease renewal, and 3) Lot 10 and Starhill Gallery’s master lease renewal. FX risks from 31% NPI denominated in AUD and MYR. Applying our 7.5% yield target to FY16 DPU, TP SGD0.71, maintain HOLD.

Joshua Tan Maybank Kim Eng | Derrick HengCFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2015-10-09
Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 1.66 Same 1.66
SELL Maintain SELL 1.10 Same 1.10
SELL Maintain SELL 1.61 Same 1.61
HOLD Maintain HOLD 0.71 Same 0.71