• 1QFY16 DPU flat YoY at 1.33 S cents
• Portfolio rental reversion of 3.2%
• Near-full portfolio occupancy

1QFY16 results within our expectations

SPH REIT reported a steady set of 1QFY16 results which met our expectations. Gross revenue rose 2.9% YoY to S$52.1m and constituted 24.6% of our full-year forecast. NPI was up by a stronger 5.9% to S$40.1m due to savings in utilities and lower marketing expenses, but partially offset by higher property taxes and other premises cost.

Although SPH REIT’s income available for distribution grew 3.8% YoY to S$35.3m, DPU was flat at 1.33 S cents, as S$1.6m of taxable income available for distribution was retained, implying a distribution payout ratio of 95.4% for the quarter. This formed 24.2% of our FY16 forecast. We believe a portion of the income retained could be distributed to unitholders in subsequent quarters.

Portfolio rental reversion moderated to 3.2%

Both Paragon and The Clementi Mall (TCM) achieved positive rental reversions of 3.2% and 5.4%, respectively, although the latter comprised only one lease which forms 0.2% of the mall’s NLA. Overall portfolio rental reversion came in at 3.2%, and was a moderation from the 8.6% attained in FY15. Paragon’s occupancy was 99.8%, while TCM was fully leased, as at 30 Nov 2015.

Paragon added several international retailers, which includes Loewe, Ralph Lauren Children and APM Monaco. We see minimal leasing risks for SPH REIT in FY16, as it has only 3.3% of expiries (as a percentage of gross rental income) for the remainder of the financial year.

Strong balance sheet; reiterate HOLD

SPH REIT’s balance sheet remained strong, with a low gearing ratio of 25.7%, similar to the previous quarter. 84.7% of its S$850m debt facility is on a fixed rate basis, which we believe helps to mitigate the risks in a rising interest rate environment. We retain our projections given this in-line set of results. Maintain HOLD and S$0.99 fair value estimate on SPH REIT as we see limited potential total returns ahead. The stock is trading at FY16F P/B ratio of 1.01x and distribution yield of 5.8%.

Source: OCBC Research - 6 Jan 2016