• 2QFY17 DPU flat YoY
• Positive rental reversions
• Balance sheet remains firm

2QFY17 Results Within Expectations

SPH REIT reported an in-line set of 2QFY17 results. Gross revenue and NPI grew 1.7% and 5.2% YoY to S$54.0m and S$42.7m, respectively. This was underpinned by higher rental income for both Paragon and The Clementi Mall (TCM), coupled with lower utility expenses and a one-off provision for prior years’ property tax in 2QFY16. Excluding this one-off effect, NPI still increased by 2.9%. DPU was flat at 1.40 S cents, as S$1.6m of taxable income available for distribution was retained during the quarter (2QFY16: S$0.9m).

For 1HFY17, SPH REIT’s gross revenue rose 1.3% to S$106.6m and formed 49.2% of our FY17 forecast, while DPU edged up 0.4% to 2.74 S cents and accounted for 49.1% of our full-year forecast. If we include the taxable income available for distribution which was retained in 1HFY17, SPH REIT’s adjusted DPU would have constituted 51.7% of our FY17 projection.

Strong Renewal Cycle at TCM

Both Paragon and TCM achieved 100% committed occupancy, while strong rental reversions of 4.3% and 8.3% were secured for leases expiring in 1HFY17, respectively. The latter was all the more impressive considering that it was contributed by 23.1% of the property’s NLA. Overall portfolio rental uplift came in at 6.2%. Following the completion of TCM’s first renewal cycle in 2014, the mall had ~85.5% of its gross rental income (GRI) expiring in 2017 (leases are typically 3 years in tenure).

Management had renewed 74.1% of TCM’s GRI, as at end-2QFY17. From our understanding, further progress has been made, with the remaining leases now successfully renewed. We believe this reflects management’s solid execution capabilities and TCM’s strong positioning. TCM achieved an estimated retention rate of 90% by NLA.

Maintain BUY

In terms of financial position, SPH REIT’s gearing remained stable and healthy at 25.7%, as at 28 Feb 2017, with 85.9% of its debt on a fixed rate basis. We reiterate BUY on SPH REIT, but with a higher fair value estimate of S$1.08 (previously S$1.04) as we incorporate a lower discount rate of 6.7% (previously 6.9%) in our dividend discount model given SPH REIT’s resilient portfolio, robust operational metrics and solid leasing management capabilities.

Source: OCBC Research - 11 Apr 2017