2Q09 NPI slightly below estimates: Net property income was S$19.4m, S$1.4m or 6.7% below our estimates, due to higher-than-expected property expenses. The distribution income was ahead of our estimates as interest expense was S$3.3m lower, due to interest savings from the cross-currency interest rate swap in respect of its S$88m 2-year term loan facility.
Leasing conditions challenging, rent reversions flat: Portfolio occupancy dipped 1.0ppt QoQ to 95.7%. Challenging leasing conditions in Beijing led to lower occupancy at Xizhimen Mall (-0.3ppt to 95.4%) and Wangjing Mall (-1ppt to 98.8%). Saihan Mall’s occupancy (-10.5% ppt QoQ to 86.2%) was impacted by extensive asset enhancement activity, which would be completed by end 2009. In balancing rentals and maintaining occupancy, rent reversions were flat at -0.3% over preceding rentals. Xizhimen Mall registered negative reversions of 6.5% but this was mitigated by Xinwu Mall’s strongly positive 38.9% reversions.
Mild decline in property valuations, gearing stable: The mid-year portfolio revaluation saw a 4.6% (or S$57m) decline in property values from the December 2008 valuation of S$1.25bn. In Rmb terms, the valuation was marginally lower by 0.9%. Gearing was stable at 33.6% with a healthy interest cover of 7.3x and an average cost of debt of 2.3%.
Acquisitions now possible but still challenging: Share price action over the past 3 months lowered CRCT’s trading yield from more than 10% to 7%, making accretive acquisitions a possibility. However, the lack of third-party assets at reasonable prices could mean CRCT might have to wait on potential dispositions from CapitaLand’s private equity funds, which may not happen in the near term, as most of the malls are greenfield and require time to stabilise. Earnings and target price revision
We raise our DPU forecast for FY09 by 6% and for FY10 by 8%, factoring in interest savings from the cross-currency interest rate swap in respect of its S$88m 2-year term loan facility. We thus lift our target price slightly to S$0.48 from S$0.45.
12-month price target: S$0.48 based on a DCF methodology. Maintain Underperform. We prefer SREITs with higher yields, such as AREIT (9.0% yield; AREIT SP, S$1.68, OP, TP: S$1.85, upside: 10%) and CapitaCommercial Trust (7.9% yield; CCT SP, S$0.89, OP, TP: S$1.08, upside: 21%).
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