Retail REITs – OCBC

Common themes of 3QCY10 results; NEUTRAL

Common themes. At 3QCY10 results, we found a few common themes in the guidance given by the Retail REIT managers: strengthening rents, increased DPUs and asset enhancement/acquisitions. The unifying message was to capitalise on the recovery-cycle that will both strengthen the REITs and also grow distributable income.

Retail rents strengthening. According to CBRE, Prime-Orchard rents remained stable in 3Q10, after seven quarters of contraction, averaging $31.10psf/month. Suburban malls continued to strengthen, underpinned by strong catchment demand, rising 1.8% QoQ to $29.00psf/month. The supply pressure along Orchard/Scotts Roads is also expected to ease as the increase in retail space from 2009/10 is eventually absorbed. With limited supply expected in 2011 and 2012, retail rents there should increase gradually next year, particularly if the nascent recovery in retail sales, which grew 2.3% MoM in July, continues.

Increased DPU. Most Retail REITs reported higher DPU for 3QCY10. We see an average increase of 3.6% QoQ but a decline of -1.7% YoY. The YoY growth was pulled down mostly by Suntec REIT (more issued units) and LMIRT (forex losses and rental guarantees expiry). The remaining Retail REITs, however, were able to ride on the recovery cycle.

Asset-enhancements/Acquisitions. On the organic-growth front, most REITs stepped up or continued their asset enhancement plans. CMT will complete its asset enhancements for Raffles City by Nov while works for JCube and The Atrium are on track to finish in 1Q2012 and 3Q2012 respectively. FCT has completed 3.4% of its refurbishment for Causeway Point. The $72m facelift, announced in July, for the 12-year-old mall will be carried out over a 30-month period. StarHill Global is also looking at enhancements for Wisma Atria, which will add about 40,000sf in 2011. On the acquisition side, Suntec REIT has announced the proposed acquisition of a one-third interest in Marina Bay Link Mall, with approx. 94,464 sq ft of NLA.

Valuations. Retail REITs are trading at an average price-to-book of 0.96x, similar to the broader S-REIT sector. Barring any unforeseen external shocks, prospects for the retail property market are expected to remain positive in the last two months of 2010, leading up to the year-end festivities and school holidays, which traditionally is a peak season for the retail sector. Nonetheless, in view of slower economic growth and weaker demand from the west, we expect retailers to remain cost-sensitive. Any potential quarterly upside in retail rents in 2011-2012 is forecasted to be kept within 3%-5%. We thus have a NEUTRAL rating on the Retail REITs subsector. Top of our pick is StarHill Global with a fair value estimate of S$0.66.