In-line Results, Maintain HOLD

• CapitaLand Mall Trust (CMT) reported a stable 2Q18, with rental reversion at +0.8%, further moderating from the weaker or negative reversions in earlier quarters in spite of a slight dip in occupancies. Its balance sheet, firmed up by SGD243m in divestment proceeds, has lifted acquisition growth prospects.
• We continue to see an unexciting rental outlook for retail, and against recovering macros, an earlier improvement in prime Orchard Road rents may possibly benefit SPH REIT (Rating: HOLD, Target Price SGD1.00). We keep forecasts and DDM-based SGD2.15 Target Price (WACC: 7.1%, LTG: 1.5%) intact following its in-line results.
• We prefer Frasers Centrepoint Trust (Rating: BUY, Target Price SGD2.55) for its dominant suburban mall footprint and visible 4.6% DPU CAGR profile.

2Q18 Metrics Tracking 1Q Performance

Revenues rose 1.6% y-o-y while NPI was up 2.7% y-o-y in 2Q18 as stronger rental income from Plaza Singapura, Bedok Mall, Bugis Junction and Tampines Mall partially offset lower occupancies and renewals at JCube and Bukit Panjang Plaza. 

Portfolio occupancy dipped slightly q-o-q and y-o-y to 98.0% while shopper traffic and tenant sales (measured on psfpm) fell 2.4% y-o-y and 0.2% y-o-y, tracking performance metrics in 1Q18. This was attributed to Tampines Mall (closure of adjacent Century Square for refurbishment), Raffles City (Swissotel upgrading in progress), and Clarke Quay (exit of tenant Shanghai Dolly).

Rental reversion stayed at +0.8%, with stronger performance at Plaza Sing (+4.0%) and Clarke Quay (+3.5%) mitigating weakness at Westgate (-2.1%) and Bedok Mall (-1.5%). We believe rents have likely bottomed out given a moderation in the weaker or negative reversions in earlier quarters (-1.7% in 4Q17 and +0.8% in 1Q18).

Other Portfolio Updates

CMT has commenced a SGD10m AEI at Westgate to erect air-conditioned enclosures at existing outdoor F&B space and improve mall circulation (with a new Level1 entrance and escalators connecting to Level2).

The Funan Mall is tracking ahead of schedule and could open before its end- 2019 target date. Pre-leasing efforts aim to raise commitment - from 50% currently for retail and 20% for office space, to 80% by end-2018.

Firmer Balance Sheet, Higher Deal Prospects?

AUM has risen by 0.8% HoH with cap rate assumptions lowered by 10- 15bp across its portfolio. The divestment of Sembawang Shopping Centre for SGD243m has lowered leverage to 31.5% with SGD1.6b in debt headroom.

Management is seeing a strong deal pipeline both local and overseas; Westgate (remaining 70%) now stabilized could be frontrunner.

Swing Factors 

Upside 

• Earlier-than-expected pick-up in leasing demand for retail space driving improvement in occupancy. 
• Better-than-anticipated rental reversions. 
• Accretive acquisitions or redevelopment projects. 

Downside 

• Prolonged slowdown in economic activity could reduce demand for retail space, resulting in lower occupancy and rental rates. 
• Termination of long-term leases contributing to weaker portfolio tenant retention rate. 
• Sharper-than-expected rise in interest rates could increase cost of debt and negatively impact earnings, with higher cost of capital lowering valuations. 

Source: Maybank Kim Eng Research - 20 Jul 2018