A 100bps/200bps increase in borrowing costs will shave 2%/2.5% off DPU.

A 10% drop in all SGREIT’s forex exposure will see DPU slide by no more than 5%.

Higher occupancy costs for SGREIT tenants are offset by their higher sales efficiency.

Key takeaways

Looking positive. We hosted SGREIT for a non-deal roadshow (NDR) in Singapore and Malaysia recently. We came away feeling more positive about its asset quality, defensive lease structures and financial standing. Management said a 100bps/200bps rise in borrowing costs will shave 2%/2.5% off its DPU; a 10% drop in forex exposure (JPY, AUD, CNY, MYR) will see a dip by no more than 5%.

Occupancy cost ratio. On the use of the industry’s de facto standard, occupancy cost ratio (OCR), to gauge mall performance, management cautioned that luxury goods tenants in its prime Orchard Road malls differ from suburban mall tenants in sales efficiency. The higher occupancy costs incurred by the former are offset by higher sales efficiency.

Traffic count. Management also took pains to explain that shopper traffic in prime Orchard Road and suburban malls differ because of the clientele. The shoppers at SGREIT’s malls are mainly tourists whereas suburban malls cater to residents in their vicinity. It added that the lower shopper traffic at Orchard Road malls vs suburban malls do not necessarily translate to lower sales as the former malls have much higher sales efficiency than the latter.

Upcoming lease renewals. In Malaysia, management is eyeing ~6.8% increase in rent when the master tenancy with Katagreen Development for Starhill Gallery and Lot 10 is up for review in 2016. For Australia, it expects rent for the David Jones Building to go up by 6% in Aug 2014.

Maintain HOLD. For now, we maintain our HOLD call with an unchanged DDM-derived TP of SGD0.84 (discount rate of 7.3%, terminal growth rate of 2%).  

Source: Maybank Kim Eng Research - 10 Mar 2014