MCT – CIMB

Strong rental reversions

MCT kicked off FY13 with strong rental reversions for both VivoCity and its office portfolio. This bodes well for 2H when the effects will flow through DPU as more leases are expected to lapse then. With healthy operating metrics, MCT’s organic growth outlook remains strong.

1Q13 DPU was slightly above street and our forecasts, at 25% of our FY13 forecast on stronger reversions. We expect a backend-loaded FY13 as committed rental reversions kick in towards 2H. We up DPU and DDM target price (8.1% disc. rate) for stronger reversions. Maintain Outperform.

Backend-loaded year

We expect positive rental reversions to flow through in 2H when more leases expire. 1Q13 NPI was up 14% yoy from 1Q12 (restated to one quarter), reflecting positive rental reversions and slight margin upticks. Management has finalised close to 50% of lease renewals even though the majority expires towards 2H.

Vivo still the key driver

Positives came from stronger rental reversions of 37.4% at VivoCity, albeit not entirely comparable with FY12’s 24.9% as 1QFY13’s rental reversions are pegged to fixed rents rather than gross rent in FY12. The strong reversions reflect partly 2009’s low base. We understand that reversion trends would have been fairly similar to last year’s if we were to compare expected gross rents pegged to new tenants’ projected sales. Retention fell to 75% vs. 92% last quarter, mainly due to tenant management. Tenant demand remains strong, with some open to renewals and negotiations ahead of expiries. Shopper traffic growth of 6.5% is higher than other retail REITs while tenant sales growth of 2% (affected by fit-outs) is healthy.

Some progress at ARC; strong office reversions

Committed and physical occupancy at ARC crept up to 63% and 59% from 50% and 57% in 4QFY12, respectively. PSA Building saw higher committed occupancy of 97.9% while positive rental reversions jumped to 39.5% due to lower expiring rent of ~S$5 psf vs. signing rents of S$6-7 psf and improved connectivity of property. Effects should flow through in later quarters when more leases lapse.