• DPU exceeded prospectus forecast
• Rental reversion remained strong
• Keeping view for steady performance

2QFY14 results within expectations

SPH REIT turned in a sturdy set of 2QFY14 results last evening. NPI came in 8.6% higher than the pro forma figure in previous year at S$38.8m, while distributable income grew 9.4% YoY to S$34.9m. The positive variance was due to higher rental income from both Paragon and Clementi Mall, and lower utilities expenses. As a result, DPU for the quarter rose by a similar 8.6% YoY to 1.39 S cents, ahead of its prospectus forecast of 1.33 S cents by 4.5%. Together with 1Q distribution, 1HFY14 DPU amounted to 3.25 S cents (+5.5% YoY), 3.2% above prospectus forecast. This met 50.8% of our FY14F DPU, which we deem to be consistent with our expectations.

Robust operational performance

SPH REIT’s portfolio continued to exhibit resilience during the quarter. Both retail malls saw improvements in NPI YoY and remained fully leased. For 1HFY14, SPH REIT also achieved positive rental reversion of 10.8% for its portfolio, driven by rental uplift of 13.6% at Paragon and 5.1% at Clementi Mall. In addition, shopper traffic has held steady at Paragon, while that at Clementi Mall increased 2.7% YoY. The only slight disappointments for an otherwise robust performance were the 1) slight decline in recent tenant sales at Paragon in tandem with the softening of the luxury market; and 2) continued tight labour market which may hamper expansion plans by retailers. However, management shared that the situation is still far from worrying and that the strong lease commitment by its tenants is a strong testament to its quality portfolio properties.

Maintain HOLD on valuation grounds

Looking ahead, SPH REIT is keeping its view that it will continue to deliver steady performance. We understand that the development of its ROFR property, The Seletar Mall, is on track for completion in Dec 2014. Its balance sheet remains strong, with gearing at 26.9% and cost of debt at 2.33%. This gives SPH REIT ample debt headroom for growth. We are keeping our forecasts and S$0.99 fair value unchanged, as the results were in line with expectations. Maintain HOLD.

Source: OCBC Research - 9 Apr 2014