• CapitaMall Xinnan and revived CapitaMall Minzhongleyuan drove earnings growth. Overall results were within our expectations.
• 1Q17 3.6% rental reversion, within our expectations for full year single digit reversion.
• Expect further rising interest costs q-o-q towards 4Q17 as majority of expiring debt gets refinanced.
• Maintain NEUTRAL with unchanged DDM-derived target price of S$1.44.

What is the news and what do we think?

• Executed well on CapitaMall Xinnan as promised.

CapitaMall Xinnan achieved a 13.7% y-o-y rental reversion. Recall that the mall had a 5.4% yield on cost at acquisition (vs FY15 portfolio NPI yield of 5.8%). Management then expressed optimism at pushing this up to >6% over the next three years through topline growth and improving operating efficiency. We will continue to monitor the remaining leases expiring (13.9% of NLA) for further progress of rejuvenation at the mall. CapitaMall Minzhongleyuan benefitted from the re-opening of Zhongshan Avenue and new Metro line. The mall recorded >90% and >60% y-o-y increases in shopper traffic and tenant sales. This drove rental reversions of 35% at the mall. As for rest of portfolio, NPI from 3 main multi-tenanted malls in Beijing remain stable (+0.4% y-o-y).

• Slow tenant sales and high occupancy cost an overhang.

We think slowing tenant sales will continue to impede management’s ability to extract strong rental reversions given that occupancy costs are already in the low 20%. We continue to expect single digit full year portfolio rental reversion on back of high occupancy costs and slowing tenant sales. This represents a significant slowdown from the double digit reversions from 2011-2014.

Figure 1: Slowing tenant sales and rental reversions

• Expect further rising interest costs q-o-q towards 3Q17 as majority of expiring debt gets refinanced.

Recall that CapitaMall Xinnan was acquired with 90% debt. That brought debt levels up c.40% from $700.7mn in 2Q16 to current S$989.4mn. A one year S$300mn bridging loan was taken up to finance the acquisition and that debt is due to expire in 3Q17. We expect further rising interest expense q-o-q when this short-term debt gets refinanced towards 3Q17 into longer term debt with more spread out maturity. We have assumed an average cost of debt of 3% for FY17 versus 2.81% in FY16.

Investment Action

Maintain NEUTRAL with unchanged target price of S$1.44.

We maintain our NEUTRAL with an unchanged DDM-derived target price of S$1.44, at an implied FY17e dividend yield of 7.0%. This compares with CRCT’s average yield of 6.6% since 2010 (post GFC). On the back of slowing fundamentals and rising interest rates posing more headwinds, we deem the higher yield justifiable in current economic climate.

Figure 2: CRCT trades at close to 7 year average (post GFC) yields, but below average P/NAV

Figure 3: Peer Comparison Table