The Positives

+ Better rental reversions albeit weaker occupancy. Rental reversions for 2Q19 were +1.8% over the initial signing rents (1Q19 +1.2%). Positive reversions were observed for all malls except Raffles City Singapore (RCS). The highest reversions came from Lot One (+5.6%), Westgate (+4.3%) and IMM Building (+4.2%). However, portfolio occupancy fell by 50bps QoQ from 99.8% in 1Q19 to 98.3% in 2Q19, contributed by CQ (-400 bps), Bedok Mall (-110bps), and IMM (-90bps).

+ Funan did not cannibalize RCS. Due to the different concept and tenant mix at Funan, the opening of Funan did not cannibalise RCS. Contrary, it increased the footfall at RCS.

The Negatives

– Weaker retail sales. Despite an improvement in shopper traffic, tenant sales for 1H19 fell by 0.9% YoY, slightly worse off than 1Q19’s -0.5%. Eight out of 14 trade sectors recorded negative growth with Home Furnishing (-22.4%), and IT & Telecommunications (-12.9%) and Electrical & Electronics (-9.8%) recording the worst contraction in sales. The weakness in these trade sectors was due to the softer property market and lengthening of the mobile device replacement cycle. We were comforted that tenant sales psf/month improved 1.2% YoY, and the top five trade categories that contributed >70% of gross turnover (GTO) income were the ones that registered growth in tenant sales. These were the Sporting Goods (+8.5%), Jewellery & Watches (+3.8%), F&B (+3.5%), Fashion (+1.6) and Shoes & Bags (+1.3%).

– Tampines and Bedok Mall cannibalized by Jewel; weaker tenant sales recorded. Since opening in April 2019, Jewel (owned by Sponsor, CapitaLand) has drawn crowds from the Tampines and Bedok Mall. As of 2Q19 (3 months after the opening), tenant sales for Tampines and Bedok Mall have settled at the c.-5% and c.-2%.

Outlook

Funan opened ahead of schedule, on 28 July 2019, with the occupancy of the retail mall in the 80%. Targeting at millennials, 30% of the tenants are new-to-market. More risk-sharing is expected as these new-to-market brands will negotiate for a higher portion (percentage) of variable GTO rent and lower base rent. Revenues will pick up in September 2019, where the majority of the office tenants are scheduled to move in.

7% of the leases by GRI are up for renewal in 2019, which highest lease renewals coming from RCS (17.1%), Tampines Mall (10%) and IMM Building (9.7%).

AEI and tenant rejuvenations are being carried out at J Cube and Lot One. It will commence in 3Q19. Estimate cost of AEI is c.$20mn and will increase the space taken by the library and reconfigure the cinema layouts to increase the number of screens.  

Maintain NEUTRAL with higher TP of S$2.68 (prev. S$2.36).

We adjust our forecast to incorporate the revenues from Funan as well as reduced the risk-free rate owing to the lower interest rate environment – and in doing so, our cost of equity is reduced from 6.90% to 6.55%.  Our target price translates to a 5.4% distribution yield and a P/NAV of 1.09x.

Source: Phillip Capital Research - 25 Jul 2019