Singapore REITs - UOB Kay Hian 2016-10-24: 3Q16 Results Of CMT And FCT (In Line), Cache (Below Expectations)

Singapore REITs - UOB Kay Hian 2016-10-24: 3Q16 Results Of CMT And FCT (In Line), Cache (Below Expectations) CAPITALAND MALL TRUST C38U.SI FRASERS CENTREPOINT TRUST J69U.SI CACHE LOGISTICS TRUST K2LU.SI

Singapore REITs - 3Q16 Results Of CMT And FCT (In Line), Cache (Below Expectations)

  • CMT’s results were within expectations. Negative rental reversions across more malls were implied in 3Q16. Maintain HOLD on CMT with an unchanged target price of S$2.18. 
  • FCT’s results came in within expectations. Maintain HOLD on FCT with an unchanged target price of S$2.36. 
  • Cache’s results were below expectations on higher property and interest expenses. Maintain BUY on Cache but cut target price of S$1.10 from S$1.12. 
  • Maintain OVERWEIGHT.


  • CapitaLand Mall Trust (CMT), Frasers Centrepoint Trust (FCT) and Cache Logistics Trust (Cache) have reported their quarterly results.

CapitaLand Mall Trust (CT SP/HOLD/S$2.11/Target:S$2.18)

Results in line with expectations; maintain HOLD with a target price of S$2.18. 

  • Our valuation is based on DDM (required return: 6.3% and terminal growth of 1.5%). CMT posted a 6.7% yoy decline in 3Q16 DPU to 2.78 S cents, due to a higher base effect from the distribution of S$8m in retained income during 3Q15. Excluding this, 3Q16 DPU would have grown 3.3% yoy. This came in within our expectations, with 9M16 representing 74% of full-year forecast.
  • 3Q16 gross revenue and net property income saw respective increases of 4.9% yoy and 5.5% yoy, on the back of contributions from recently-acquired Bedok Mall, higher rents at recently renovated IMM building, Tampines Mall and Bukit Panjang Plaza, and higher occupancy at Clarke Quay. 
  • Sale of the strata office units at Westgate were also completed on 20 Oct 16.

Negative rental reversions across more malls implied in 3Q16

  • Negative rental reversions across more malls implied in 3Q16, as 9M16 reversions stood at 1.3% (1H16: 1.7%). We note that management had previously guided for this.

Challenging retail environment. 

  • Management expects the retail environment to remain challenging, due to high labour costs, the ubiquity of online retail platforms and lower tourist expenditure. 
  • We note that the retail sales index (excluding motor vehicle sales) also saw a 6.5% yoy decline in Aug 16.

Funan redevelopment to complete in 4Q19. 

  • 3Q16 saw CMT break ground for the S$560m project (611,000 sf by NLA), which will consist of 53.5% retail space, 33.3% office and 13.1% serviced residences (potential 400 car park lots) in the revitalised civic and cultural district of Singapore. 
  • The expected ROI of 6.5% takes into account stamp duty and expected capex on technological requirements. The redevelopment is expected to be wholly debt-funded, with management pointing to sufficient debt headroom of approximately S$800m assuming comfortable 40% debt limit. 
  • Management remains open to leveraging on the expertise of sister REITs CCT, ART and sponsor CapitaLand in potential tie-ups.

Frasers Centrepoint Trust (FCT SP/HOLD/S$2.13/Target: S$2.36)

Results in line with expectations; maintain HOLD with an unchanged target price of S$2.36, based on a two-stage dividend discount model (required rate of return: 6.3%, terminal growth rate: 1.5%). 

  • 4QFY16 DPU of 2.815 S cents declined 1.5% yoy. 
  • Gross revenue registered a 6% yoy decline mainly due to Northpoint AEI, which was cushioned by a 16.4% decline in property expenses. This led a slower decline in 4QFY16 NPI (-0.9% yoy). 
  • The results were in line with our expectations, with FY16 DPU coming in at 99.7% of full-year forecast

Near-term challenges despite expectations of positive rental reversions. 

  • While management expects to see positive reversions in FY17, it has highlighted existential near-term challenges. Bedok Point, (11.3% of FY17’s expiring leases) could see nonrenewal of up to 20% of FY17’s expiring leases. 
  • Additionally, Northpoint’s occupancy (currently 70.9%) is expected to hit a low of 58% next February. The AEI, which commenced in Mar 16, will also see Northpoint’s NLA decline by 4% due to reconfiguration works. The expected completion of the project is in Sep 17.

Shopper traffic not directly translating to tenant sales. 

  • Shopper traffic was up 0.4% yoy in 4QFY16, while from Jul 16-Sep 16, tenant sales was down 9.5% yoy. Excluding the impact of AEI at Northpoint and tenant changeover at Changi City Point mall, tenant sales was still down 4.2% yoy. 
  • Management noted that the retail sector continues to face headwinds, though they expect portfolio performance to remain resilient, owing to the relatively higher necessity spending (vs discretionary) at suburban malls.

Cache Logistics Trust (Cache SP/BUY/S$0.88/Target: S$1.10)

Results marginally below expectations, maintain BUY with reduced target of S$1.10 (from S$1.12), based on DDM (required rate of return: 6.6%, terminal growth: 1.3%).

  • Cache reported 3Q16 DPU of 1.847 S cents, down 13.7% yoy. Excluding capital gains paid out last year, 3Q16 core DPU declined 5.2% yoy. 3Q16 gross revenue increased 21.2% yoy to S$28.0m, from the Australian acquisitions and DHL Centre (95-96% occupied), while higher property and finance expenses resulted in slower pace of increase in NPI (up 17.5% yoy to S$22.1m).
  • The results came in marginally below our expectations, with 9M16 DPU representing 72% of 2016 estimates. This was due to higher-than-expected property and interest expenses.
  • We reduce our FY16-18 DPU estimates by 1-2%, inputting lowered margins for multitenanted buildings and increasing borrowing cost from interest rate swaps.

Timeline for dispute resolution on Schenker Megahub remains uncertain. 

  • Under the holding rental arrangement in place, Cache currently receives rental income of S$0.77 psf (under protest) as opposed to market rents of about S$1.40-1.50 psf pm. 
  • Legal proceedings are still underway to claim double the amount of the rent payable under the master lease agreement (MLA) or damages arising from Schenker remaining on the property, since C&P failed to deliver vacant possession of the property. The dispute is mainly on disagreement on the rental levels. 
  • Management highlighted that Schenker has full intention to stay in the property, and will draw from the capex invested, client requirements and consolidated operations

Divestment gains likely to be deployed as legal proceedings play out. 

  • Cache sold its Kim Heng warehouse for a gain of S$9.7m in June last year. As we pointed out in our last note, the S$3m in remaining divestment proceeds could be utilised to shore up the shortfall in distributions as legal proceedings continue.

Higher gearing as Schenker Megahub sees lower valuation. 

  • In 3Q16, Schenker Megahub booked a revaluation loss of 31%. This was already alluded to by management when it revealed news of the rental dispute and its impact. Gearing thus hit 41.2% in 3Q16 (2Q16: 39.8%) from the revaluation. 
  • Management is likely to divest lower-yielding assets to pare down debt and manage its gearing level.

Acquisitions likely limited in the interim. 

  • Cache’s relatively high gearing would impede yield accretive acquisitions particularly in target market Australia, especially as cap rates continue to compress. However management still favours Australia, primarily for its freehold land titles (JTC: 30 years), and relatively transparent policies.

Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2016-10-24
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 2.18 Same 2.180
BUY Maintain BUY 1.10 Same 1.12
HOLD Maintain HOLD 2.36 Same 2.36