• 2QFY15 DPU up 0.7% YoY
• Portfolio rental reversion of 11.0%
• Challenging environment

2QFY15 results within our expectations

SPH REIT reported a stable set of 2QFY15 results, with gross revenue and DPU increasing by 2.8% and 0.7% YoY to S$52.5m and 1.40 S cents, respectively. This came in within our expectations. Growth was driven by higher rental income achieved at both Paragon (revenue +3.1%; NPI +4.1%) and The Clementi Mall (revenue +1.3%; NPI +1.9%). For 1HFY15, gross revenue rose 2.3% to S$103.1m, forming 50.1% of our FY15 forecast; while DPU of 2.73 S cents represented a slight growth of 1.5% and constituted 50.8% of our full-year projection.

Tenancy fine-tuning affected rental reversions at Clementi Mall

During 1HFY15, SPH REIT achieved positive rental reversions of 11.6% at Paragon, which we believe reflects the scarcity premium of prime retail space despite industry headwinds. On the other hand, negative rental reversions of 8.8% were registered for The Clementi Mall’s rental renewals/new leases. Notwithstanding the disappointing headline figure, this was contributed by only six leases which formed 2% of The Clementi Mall’s NLA. Management further explained that out of these six leases, five had actually achieved positive rental reversions. The only negative reversion was due to a strategic move to offer a popular F&B outlet competitive rental rates, which SPH REIT believes will be mitigated by its appeal to a wider base of shoppers. Overall rental reversions of 11.0% were recorded for SPH REIT’s combined portfolio.

Muted outlook; valuations unappealing

Looking ahead, Singapore’s retail operating environment remains challenging, but this is buffered by SPH REIT’s healthy gearing ratio of 26.0%. 54.7% of its total debt is on a fixed rate basis. Management is cognisant of the recent spike in the SOR and SIBOR, and highlighted that it will continue to monitor the situation before deciding on whether to increase its hedges. Its average cost of debt stands at 2.5%, versus 2.35% as at 1QFY15. We maintain our forecasts, HOLD rating and S$0.99 fair value estimate on SPH REIT. The stock is trading at FY15F P/B ratio of 1.14x and distribution yield of 5.0%, which does not appear attractive, in our view.

Source: OCBC Research - 14 Apr 2015