The Positives

+ Stable portfolio occupancy and higher tenant retention rate. Stable occupancy across the portfolio. Full occupancy was maintained at Tampines Mall despite the opening of Jewel in April 2019. Tenant retention was also higher at 88.9% (1Q18/4Q18: 82.3%/82.9%).

+ Funan pre-leased at 90% occupancy. Notwithstanding an initial fitting-out period of 3-6 months, Funan is expected to contribute to CMT from 2H19 onwards. The retail and office components of Funan are currently 90% leased (4Q18: 80%). Media reports revealed that various government bodies have leased office space at Funan. The Ascott Ltd’s lyf-branded serviced residence at Funan is also expected to commence operations in 2020.

The Negatives

+ Still-weak rental reversions. Despite an improvement from the average 0.8% rental reversion achieved in FY18, the 1.2% reversion in 1Q19 is lagging behind that of its peers such as Starhill Global REIT and Frasers Centrepoint Trust. Tenant sales also slid 0.5% YoY in 1Q19, dragged down by a wider mix of trade categories than in 1Q18.

Outlook

IMM (second biggest contributor by GRI) had its lease renewed for another 30 years on 23 Jan 2019 (initial 30+30 year lease from 23 Jan 1989). With the Jurong Lake District shaping up under the URA’s Draft Master Plan 2019, we not only expect reversions at this asset (as well as Westgate) to trend up going forward but for a progressive valuation uptick. The re-commencement of operations at Funan is expected to progressively improve portfolio operational metrics.

Maintain NEUTRAL with higher TP of S$2.21 (prev S$2.09).

We adjust our target price to reflect a lower cost of equity. Our target price translates to a 5.4% distribution yield and a P/NAV of 1.06x.