LH Shopping Centers Leasehold REIT

LH Shopping Centers Leasehold REIT

LHSC’s core asset, Terminal 21, is truly one-of-a-kind in a city that seems to have a mall on every street corner. Its unique concept, location and good market positioning made it an instant success – and the economic hiccup did little to thin the crowds. Its steady popularity positions this mall to do well from rising domestic consumption and tourist arrivals. We estimate the fund’s 2015F dividend yield at 7.3% and have derived a DCF based TP of Bt12.0. With a high estimated IRR of 10.3% - the highest of property funds under coverage – LHSC is a good investment. We initiate coverage as a BUY with a potential ETR of 25%.

Unique mall in prime shopping area. LHSC is a leasehold retail REIT that holds a ~26-year leasehold rights to Terminal 21, an 8-storey shopping mall with two basement levels. The mall is located within Bangkok’s prime shopping area at the corner of Asoke and Sukhumvit with access via the BTS and MRT subway interchange - one of the three main interchange stations in Bangkok – making it one of the highest trafficked areas with ~100,000 commuters per day. The easy access was a key factor that made it an instant hit. To a great extent its success also lies in its unique concept, market positioning and tenant mix. Opening in October 2011, the mall’s strong retail sales growth is proved by its high occupancy rate of 98% and the strong rise in rent of 6.6% p.a. over 2012-1H14, higher than the average inflation rate of 1.5% in that period. 

High demand driven by domestic consumption and tourists arrivals. Bangkok has always been famous for its shopping and this is being up-scaled rapidly with the proliferation of higher end malls that also attract Bangkokians, whose disposable income is rising, and tourists, who have been arriving at a growth rate of 10.3% p.a. over 2003-2013 to 26.6mn. Demand has thus kept up with the doubling in total supply of downtown retail space to 1.4mn over 2003-2013, with occupancy rates for Grade A retail space at a high average of 93.4% in the period. According to CBRE, 160K sqm in new retail space, equivalent to 11.3% of existing supply, will be added from 2014; however we do not see this as a material threat as we expect this strong demand trend to continue and even gain strength with the better macroeconomic backdrop and the return of tourists after the restoration of political calm. 

Asset still growing in popularity. Though still relatively new, Terminal 21 was the “in” place to go immediately upon opening, a status that it has kept, and its popularity with both locals and tourists continues to grow. This should keep occupancy rates high at 98.3-99.5% in 2015-2017F, with estimated net investment income growth of 8.3% p.a. Based on an average payout ratio of 95%, we estimate DPU at Bt0.74-0.78/unit in 2015-2017F, implying a yield of 7.3-7.6%. There are few dividend forecasts for leasehold retail property funds, but LHSC’s yield is well within the 12-mth trailing dividend range of 5.9-8.1% for leasehold retail property funds as of Dec 26, 2014. 

2015 TP of Bt12.0, high IRR of 10.3%. We initiate coverage with a BUY and a 2015F TP of Bt12.00 based on DCF assuming cost of equity of 9.05%. Our TP is 18% above its current price, implying total return of 25%. Our estimated IRR for the REIT is also high at 10.3% - the highest of property funds under our coverage: CPNRF’s at 9.5%, TLOGIS’s at 8.3% and TFUND’s at 8.0% (at close on Dec 26, 2014), making LHSC a very attractive investment. Key risks: 1) exposure to economic cycles; 2) politics; 3) single location risk; 4) no political risk insurance; and 5) impact from new property and building tax.