• DPU above prospectus forecast
• Rental reversion at 8.4%
• Keeping view for steady performance

3QFY14 results within view

SPH REIT reported its 3QFY14 results last Fri, with NPI up 2.4% YoY to S$37.7m. The better performance was driven by a 2.1% growth in gross revenue at Paragon, and lower utilities and marketing expenses within the portfolio. Distributable income also rose by 2.4% to S$33.9m. As a result, DPU registered 1.35 S cents for the quarter (+2.7%). Coupled with 1H distribution, 9MFY14 DPU totaled 4.60 S cents. This exceeded its prospectus forecast of 4.46 S cents by 3.1%, but came in largely within our expectations (forming 76.0% of our full-year DPU projection).

Portfolio sturdy as ever

We understand that both Paragon and The Clementi Mall remained fully leased. For the 365,913 sqft NLA (40.6% of portfolio NLA) of leases expiring in the 9M period, an average positive rental reversion of 8.4% was achieved (Paragon: 11.5%; Clementi Mall: 5.1%). This was a tad lower than the 10.8% rental uplift saw in 1H, but still very healthy in our view. Management disclosed that shopper traffic has held steady YoY, and that Clementi Mall has added several new tenants including Coffee Kaki, Rubi Shoes and Ogawa. Going forward, however, SPH REIT reiterated that the continuing manpower crunch is expected to weigh on the growth in some labour-intensive sectors and take a toll on expansion plans of retailers. Nevertheless, it expects its portfolio to continue to turn in steady performance, as it continually optimizes the tenant mix of its malls.

Retain HOLD on valuation grounds

Management also shared that it has identified three asset enhancement initiatives at Paragon, which is expected to generate an estimated NLA of 10,000 sqft (to be phased in from FY16) and improve the operational efficiency of the mall. We note that SPH REIT’s sponsor pipeline property, The Seletar Mall, is slated for completion in Dec 2014. SPH REIT currently has a strong balance sheet, with gearing and cost of debt unchanged QoQ at 26.9% and 2.33% respectively. We make only minor adjustments to our forecasts as the quarterly showing is consistent with our expectations. Retain HOLD with unchanged fair value of S$0.99.

Source: OCBC Research - 14 Jul 2014