+ Stripping out impact from acquisition (Xinnan) and divestment (Anzhen), NPI grew 6.1% YoY in RMB terms. Multi-tenanted (non-Master lease) malls grew NPI by 4.9%, excluding new acquisition Xinnan. This is driven by stable portfolio occupancy (3Q17: 95.6% vs 2Q17: 96.2%) and positive rental reversions of 7.5% for the 20,283 sqm of leases renewed in the quarter.
+ Stable average cost of debt at 2.42%: This compares with 2.44% as at 2Q17. The stable cost of debt is achieved despite the re-financing of a S$300mn 1-year bridging term loan secured in FY16 for the financing of Xinnan’s acquisition into longer term debt. The new loan now expires >2021. Gearing remains stable at 35.4%.
+ Gradual shifting away from underperforming department stores into higher yielding trade sectors: Percentage of total rental income as at Sept17 (disclosed in results slides) from department stores saw a significant drop YoY to 6.5% (FY16: 16.8%). The shift is towards higher yielding trade sectors such as fashion and F&B.
– Tenant sales slowing, 3Q17 down 2.0% YoY (2Q up 1.9% YoY): YTD tenant sales is up 0.8%. Weaker trade sectors include leisure (cinema) and supermarkets, while stronger sectors include fashion and F&B.
We expect flat DPU YoY for FY17e and a 5.1% increase for FY18e. Tenant sales should stabilise after falling the past 2 years as CRCT’s malls mature. Mall rejuvenations at CapitaMall Wangjing, Xinnan and Minzhongleyuan are expected to drive FY18 tenant sales and rental reversions.
Maintain NEUTRAL with unchanged target price of S$1.64.
This translates to a FY18e yield of 6.4% and P/NAV of 1.0. At a current yield of 6.0%, CRCT is trading at -1s.d. for post-GFC yields (Figure 2), which we deem fair given that tenant sales and rental reversions are stabilising around mid-single digits as malls mature. We also prefer to see a more sustainable pick-up in rental reversions or more accretive acquisitions before relooking at our recommendation.
Figure 1: CRCT portfolio statistics – Rental reversions stabilizing in mid-single digits
Figure 2: CRCT trades at close to -1S.D. average yields (post GFC) and above average P/NAV
Figure 3: Peer Comparison Table