Orchard Road Star. We reiterate our preference for retail REITs in the current uncertain yield environment, especially as SGREIT’s key assets are in the coveted Orchard Road area, where tight supply and the entry of new international retailers give it greater bargaining power in terms of leasing its space. Looking ahead, the new rental rate from master tenant Toshin at Ngee Ann City (NAC) Retail, continued repositioning of Wisma Atria and rental uplift from Malaysia portfolio master leases will drive SGREIT’s income in 2H13 and keep the stock supported for now. At 5.7% FY13F yield and 330bps yield-spread, we reiterate BUY with a DDM-derived TP of SGD0.95.

Within expectations. 2Q13/1H13 DPU at 1.19 SG-cts (-13% QoQ; +10% YoY)/ 2.56 SG-cts (+19% YoY) was 27%/52% of ours and consensus estimates (in-line). This was attributable to the strong contribution from the Singapore portfolio and full-quarter contributions from the recently-acquired Plaza Arcade. Stripping out the Toshin payout of 0.19 SG-cts from rental arrears in 1Q13, 2Q13 was up 1% QoQ and 1H13 DPU was up 10% YoY. Income to be distributed to CPU holder(s) declined 88.2% YoY to SGD0.3m following the CPU conversion into 210.2 million units by the YTL Group on 5 July 2013, which increases its stake to 36% from 29%. We expect YTL to convert the remaining 20.3m CPUs into 28m units by FY13. Aggregate leverage inched down to 30.3% from 30.5% last quarter. Net financing costs for 2Q13 averaged 3.03% (1Q: 3.08%) with an average term of debt of 1.2 yrs (1Q: 1.4 yrs).

Singapore aided by positive rental reversions, AEI completion. In 2Q13, Toshin’s base rent at NAC was increased by 6.7% for the renewal of its master lease over the next 12 years. This was effective from 8 June 2013 and incorporates a rent review every 3 years. The Toshin base rent was previously uplifted 10% from Jun 2011 to Jun 2013, following the completed rent review in 1Q13. Toshin constitutes 85.3% of NAC retail gross rent as at 31 Dec and is SGREIT’s largest tenant (21.1% of portfolio gross rent in 2Q13). We estimate NAC retail average passing rentals (incl. other income components) to be ~SGD16 psf/mth moving forward. Wisma Atria retail achieved a positive rental reversion of 15.1% based on leases committed between July 2012 and June 2013, driven by rental contributions from new tenants, following the completion of its AEI. The SG office portfolio also achieved a positive reversion of 15.6% based on leases committed between July 2012 and June 2013.

Yearning for growth but nothing on the cards for now. SGREIT’s future growth drivers include the potential asset redevelopment of David Jones Building and Plaza Arcade in heart of Perth CBD. SGREIT’s Australia portfolio made up 10% of gross revenue and NPI in 2Q13. Management is looking at conducting a feasibility study and possible renovation works in 2014. In addition, there will be a upward-only lease review for David Jones Building in Aug 2014, which SGREIT guided a possible 6% positive rental reversion. Nonetheless, we think that inorganic acquisitions stand a higher chance of ‘moving the needle’, and management stated that their targeted markets include Singapore, Malaysia and Australia. At 30.3% gearing, SGREIT has debt headroom of ~SGD460m before hitting the 40% level.

Japan and China drag. The Japan portfolio suffered a 8.9% QoQ drop in revenue, following a dip in occupancy (91.6% from 94.3%) and the weakening of the Yen against SGD, which has depreciated ~4% last quarter. Despite 100% occupancy, Renhe Spring Zongbei's 2Q13 revenue was down 10% QoQ and 5% YoY, as the high-end and luxury retail segments continue to contract, impacted by a continued easing in China’s growth, weaker consumer sentiments and the country’s ongoing austerity drive. The coming supply of retail space has also placed pressure on the city’s retail landscape.

Source: Maybank Kim Eng Research - 25 Jul 2013