• 3QFY15 DPU flat YoY at 1.35 S cents
• Portfolio rental reversion of 9.2%
• Valuations appear fair

3QFY15 DPU unchanged YoY

SPH REIT recently reported a flattish set of 3QFY15 results, with DPU coming in unchanged on a YoY basis at 1.35 S cents, despite a mild 1.6% growth in gross revenue to S$51.2m. Paragon and The Clementi Mall both saw a stronger percentage increase in NPI than in gross revenue, underpinned by lower maintenance expenses and savings in utilities. For 9MFY15, SPH REIT’s revenue came in at S$154.3m (+2.1%), while DPU of 4.08 S cents represented an increase of 1%. The former and latter constituted 75% and 75.9% of our FY15 projections, respectively, and was within our expectations. YTD, management has retained S$2.1m of taxable income available for distribution. This would be distributed to unitholders in the future.

Negative rental reversions at The Clementi Mall

Overall portfolio occupancy remained healthy at 99.8%, as at 31 May 2015, despite an unexpected lease termination of an office unit in Paragon. Paragon has subsequently become fully-committed again. Rental reversions at Paragon continued to stay positive at 9.8% for 9MFY15, but this was lower than the 11.8% achieved in 1HFY15, which implies a moderation in rental renewal growth rates in 3QFY15. This is unsurprising given the soft retail sentiment. The Clementi Mall’s rental reversion came in at -11.4% for 9MFY15, a deterioration from the -8.8% recorded in 1HFY15. We understand that this was partly due to management’s efforts to retain an existing tenant by offering more competitive rental rates. Overall portfolio rental reversion for SPH REIT was 9.2% for 9MFY15.

Maintain HOLD

SPH REIT’s gearing remained stable at 26.0%. Management also increased its interest rate hedge ratio from 55% to 85%. This resulted in a higher cost of debt of 2.55% (1HFY15: 2.5%), while finance expenses also rose 15.7% QoQ to S$5.8m due to costs associated with the interest rate swaps. We retain our forecasts, HOLD rating and S$0.99 fair value estimate on SPH REIT. The stock is trading at FY15F P/B ratio of 1.1x and distribution yield of 5.2%, which are largely in-line with its historical averages since its IPO.

Source: OCBC Research - 14 Jul 2015