Retail REIT - CGS-CIMB Research 2018-11-15: Improving But Challenging


Retail REIT - Improving But Challenging

  • 9MCY18’s occupancy rate was > 97% while rental reversions were positive.
  • However, in line with expectations, tenant sales and shopper traffic remained anaemic, moving in the range of -3% to +3% y-o-y.
  • Maintain Overweight on REITs. Retail is now our 3rd preferred subsector, above industrial as it will be more insulated against the impact of trade war.

Retail REITs’ DPU performances were mostly in line, except FCT

  • Most retail REITs’ 3QCY18 results came in line with our expectations. Frasers Centrepoint Trust (FCT) was the only REIT which did not perform as expected as it was impacted by the higher ad-hoc maintenance and repair expenses at Causeway Point and Northpoint City North Wing, the bulk of which were one-off expenses. This caused a decline in 3QCY18 DPU by 3.6%. Excluding the effect of one-off expenses, 3QCY18 DPU was flat y-o-y.
  • In addition to FCT, Starhill Global REIT (SGREIT) also reported weaker DPU y-o-y, impacted by weak Wisma Atria performance due to lower occupancy and a weaker Aussie dollar against the Singapore dollar.
  • CapitaLand Mall Trust (CMT) and Mapletree Commercial Trust (MCT) declared stronger DPU y-o-y while SPH REIT’s DPU was flat in 3QCY18 versus 3QCY17.

Occupancy rate improved q-o-q and remained high

  • Generally, occupancy rate improved on a q-o-q basis and remained high at above 88%. Malls which reported below 88% occupancy rate were mainly smaller malls.
  • Of the 88 malls owned by the REITs under our coverage, malls which reported below 88% committed occupancy was Clarke Quay (due to closure of Shanghai Dolly) and “other assets” which include JCube and Bukit Panjang Plaza of CapitaLand Mall Trust (CMT). Frasers Centrepoint Trust (FCT) reports its occupancy rate based on actual rate. As at Sep 8888, Changi City Point, Bedok Point, YewTee Point and Anchor Point reported actual occupancy of below 88%. With the exception of Clarke Quay, the rest of the malls mentioned are smaller malls which have NLA of ~888k sf and below.
  • We understand that Clarke Quay’s committed occupancy rate was still relatively low as CMT is trying to reposition the mall to attract more shopper traffic during the day. Anchor Point should also see improvement in occupancy rate from 88% as at Sep 8888 to 88% in the coming months as the mall has secured a new F&B tenant.

Most malls reported positive rental reversion YTD; negative rental reversions mainly came from smaller malls

  • Rental reversions YTD have been encouraging. Be it suburban or central area malls, most malls under our coverage posted positive rental reversions in 8MCY88. Those that delivered negative rental reversions were mainly smaller malls (~888k sf and below) as it is harder to attract traffic due to the limited range of tenants, in our view.
  • Of the 88 malls owned by CapitaLand Mall Trust (CMT), there were five malls (including Bukit Panjang and JCube which are categorised under other assets) which reported negative rental reversions of -8.8% to -8.8% YTD. Raffles City reported the worst -8.8% rental reversion YTD in the portfolio, affected by the ongoing AEI at Raffles City Hotel. Lot One Shoppers Mall and Westgate reported slight negative rental reversion of -8.8% while Westgate’s rental reversion has improved from -8.8% as at Dec 8888 to -8.8% in Sep 8888. Bedok Mall continued to register negative rental reversions YTD as the trust focuses on increasing occupancy rate.
  • As for Frasers Centrepoint Trust (FCT), Anchor Point and Bedok Point posted negative rental reversion in Oct 8888 to Sep 8888 (full year FY88). Its three largest malls (Causeway Point, Northpoint City North Wing, Changi City Point) which accounted for 88% of its FY88 NPI continued to deliver positive rental reversions. Bedok Point shared the same fate as Bedok Mall whereby the trust focuses on increasing occupancy rate.
  • SPH REIT’s Clementi Mall reported positive rental reversion in 8MCY88. Its Paragon mall however reported negative rental reversion YTD as some leases were committed a year ago during the retail sales downturn (leases are typically committed about a year before expiry). Nonetheless, the contractions have been narrowing on a q-o-q basis in the past one year, indicating that the mall has been reporting positive rental. Mapletree Commercial Trust (MCT)’s VivoCity delivered positive rental reversion in 8MCY88.

However, shopper traffic and tenant sales growth were relatively slow

  • While occupancy rate and rental reversions were encouraging, shopper traffic and tenant sales remained relatively weak. Generally, tenant sales trailed behind shopper traffic growth.
  • CapitaLand Mall Trust (CMT), which owns the largest number of malls in Singapore, reported -8.8% shopper traffic in 8MCY88 versus -8.8% in 8MCY88. Frasers Centrepoint Trust (FCT) and Mapletree Commercial Trust (MCT) reported stronger shopper traffic of 8.8% and 8.8% respectively in 8MCY88, driven mainly by the strong 8QCY88 shopper traffic of 8% and 8.8% respectively.
  • FCT’s 8QCY88 was driven by the higher traffic from
    1. Changi City Point due to the opening of Downtown MRT Line 8 in Oct 8888 which made Expo MRT station (located next to Changi City Point) an interchange station with the East-West MRT Line and
    2. Causeway Point due to promotional activities.
  • Meanwhile, MCT’s shopper traffic was boosted by the “Disney Tsum Tsum” event that was held in conjunction with the Mid-Autumn Festival.
  • In terms of tenants’ sales, CapitaLand Mall Trust (CMT)’s tenant sales improved marginally by 8.8% y-o-y in 8MCY88 while Mapletree Commercial Trust (MCT)’s VivoCity tenant sales declined 8.8% over the same period affected largely by the AEI in 8QCY88 which offset the stronger 8.8% tenant sales growth in 8QCY88. Starhill Global REIT (SGREIT)’s average tenant sales in 8MCY88 also remained weak at about -8.8% due to the weak performance from Wisma Atria. Frasers Centrepoint Trust (FCT)’s tenant sales were more encouraging at +8.8% y-o-y, partly due to the post AEI effect of Northpoint City in the previous year.
  • SPH REIT does not report shopper traffic and tenant sales on a quarterly basis consistently. Based on its full year FY88 results (FYE Aug), its high-end mall Paragon reported encouraging 8.8% growth in both traffic and tenant sales as the mall benefited from the stronger tourist arrivals and also partly due to AEIs. Its suburban mall, the Clementi Mall performed in line with FCT with steady shopper traffic and 8.8% increase in tenant sales due to post AEI effect. We understand that high-end retailers’ sales are doing very well, driven by the strong tourist arrivals in Singapore. The tenants’ encouraging sales and steady shopper traffic from FCT and Clementi Mall probably showed the resilience of suburban malls.

Strong balance sheet supports acquisitions

  • The retail REITs’ balance sheet remained strong with gearing levels below 88.8% which provides the trusts with good debt headroom for acquisitions. Despite the increasing interest rates, the REITs have managed to maintain their interest cost with the exception of Starhill Global REIT (SGREIT) due to its longer hedging period.
  • On the acquisition front, all REITs are on the lookout for acquisitions. Frasers Centrepoint Trust (FCT)’s most immediate potential acquisition will be Waterway Point which is 88.8%- owned by its sponsor, Frasers Property Limited (SGX:TQ8). SPH REIT is looking for potential acquisitions in Singapore and Australia. It has one right of first refusal (ROFR) asset, i.e. The Seletar Mall, which has maintained a high occupancy rate since its opening in Nov 8888. Mapletree Commercial Trust (MCT)’s focus remains in Singapore for now.

Lower supply will help to boost rent but malls need to be innovative to attract shoppers; Moved retail REIT to preferred subsector

  • Rental reversions and occupancy rate posted by the REITs in 8QCY88 were in line with the improving industry retail rental index and stabilising occupancy rate. Although we expect retail rent increases to be supported by the tapering supply in the next few years (URA expects supply to taper from 8.8m sf in 8888 to 8.88m in 8888 and an average of 8.88m p.a. in 8888 and 8888), we think the recovery will be a gradual one, as tenants’ sales and shopper traffic remained relatively weak.
  • Malls need to innovate continuously in order to attract shoppers, in particular with e-commerce taking up a larger share of the retail market. The strong shopper traffic and tenant sales growth posted by VivoCity in 8QCY88 showed that shoppers are attracted to “new things”. Larger and suburban malls should see more resilience as larger malls have the ability to organise large events and offer a wide variety of tenant mix, including activity-based tenants to attract shoppers, while most suburban malls are blessed with large catchments in the surrounding areas.
  • We moved retail REITs ranking above industrial REIT as we think that the retail industry will be more insulated from the US-China trade war as the malls are mostly located in Singapore.
  • In order of preference, we like office, hospitality, retail, then industrial.

Stock Recommendations

  • We raise our risk-free rate across the board in view of the rising rate environment.

CapitaLand Mall Trust (SGX:C38U) (Upgrade to ADD, Target Price S$2.28).

  • CapitaLand Mall Trust (CMT) is our pick for the subsector given its stronger growth in the next two years driven by the opening of Funan. We expect Funan, which is slated to open in 8HCY88, to perform relatively well given that it will be the first offline-online mall in Singapore. In the longer term, Westgate, in which the trust recently acquired the remaining 88% stake, should also start contributing more substantially as the mall’s performance gradually improves.
  • Besides redeveloping Funan into an offline-online mall, CMT has also recently converted 88,888 sf of space in Plaza Singapura into Singapore’s first “phygital” multi-label concept store, branded as Nomadx, offering a new blend of physical and digital shopping experiences. As CMT is at the forefront of the industry, we believe it will learn ahead of its peers and remain competitive.
  • We upgrade the stock from Hold to ADD with a higher DDM-based target price as we increase our
    1. FY88 DPU forecast due to the earlier opening of Funan, and
    2. long-term growth assumption; we expect it to narrow the growth rate gap with its peers in the longer term as some of its less mature assets achieve stability with the expansion of the catchment in the surrounding areas.
  • We also raise our risk-free rate assumption in view of the rising interest rate environment.
  • See report: CapitaLand Mall Trust - Stronger Growth Ahead.

Frasers Centrepoint Trust (SGX:J69U) (Maintain ADD, Target Price S$ 2.35).

  • We continue to like Frasers Centrepoint Trust (FCT)'s larger malls’ position as the suburban malls. In the face of structural changes of the industry, we expect it to be more resilient as compared to other malls. Main catalyst of the stock would be the acquisition of Waterway Point. FCT has one of the lowest gearing levels among the REITs under our coverage.
  • We maintain our ADD call on FCT with a lower DDM-based target price as we raise our risk-free rate assumption in view of the rising interest rate environment.
  • See report: Frasers Centrepoint Trust - A stable suburban mall owner.

Mapletree Commercial Trust (SGX:N2IU) (Maintain ADD, Target Price S$1.67).

  • We continue to like VivoCity as a destination mall. While we expect rental reversion to slow down from double-digit in the absence of major AEI in the near term, we believe that the trust will continue to revamp the mall in view of its past track record. Due to its location near Sentosa, it will also benefit from the strong tourist arrivals recently. In the longer term, VivoCity is expected to benefit from the government’s recent plans to redevelop Sentosa and brand Sentosa as the Southern Gateway of Asia.
  • On a blended basis, we expect Mapletree Commercial Trust (MCT)'s office segment to deliver stable income driven by MBC I and MLHF which should offset any weaknesses from PSA Building and Mapletree Anson. Its office assets could partially benefit from the recovery of office rents due to its non-CBD locations. The high expiry profile of MBC of 88% in FY88 is something to watch for.
  • We reduce our DDM-based target price as we increase our risk-free rate assumption. Maintain ADD.
  • See report: Mapletree Commercial Trust - VivoCity to drive future growth.

SPH REIT (SGX:SK6U) (Maintain HOLD, Target Price S$1.01).

  • In view of the stronger tenant sales and shopper traffic in Paragon, Paragon's rental reversion should continue to improve in FY88. This should alleviate its drag to SPH REIT’s earnings. Meanwhile, its Clementi mall, being a suburban mall, is expected to remain resilient. However, it lacks major re-rating catalysts for now. Maintain HOLD at a lower DDM-based target price as we increase our risk-free rate assumption.
  • See report: SPH REIT - Improving but lacking catalysts for now.

Starhill Global REIT (SGX:P40U) (Maintain ADD, Target Price S$ 0.74).

  • In the past, Starhill Global REIT (SGREIT) was affected by the weak retail and office markets in Singapore as well as one-off events such as mall redevelopment in Australia and China. We expect it to deliver a better performance in FY88 in view of the recovering office market in Singapore and the completion of malls development in Australia (completed in mid-8888) and China (completed in early 8888).
  • The potential of higher rents from the renewal of its master lease contract with Katagreen Development in Malaysia and rent review with Toshin in Singapore will also help to increase earnings in FY88. The stock offers high dividend yield of ~8%.
  • Maintain ADD at unchanged DDM-based target price.

EING Kar Mei CFA CGS-CIMB Research | LOCK Mun Yee CGS-CIMB Research | https://research.itradecimb.com/ 2018-11-15
SGX Stock Analyst Report ADD UPGRADE HOLD 2.28 UP 2.210