What is the news and what do we think?
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).
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
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.
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