• 4QFY17 DPU +0.7% YoY
• FY17 portfolio rental reversion of 1.2%
• Full committed occupancy

4QFY17 Results Within Expectations

SPH REIT reported an in-line set of 4QFY17 results, with gross revenue and NPI growing by 1.3% and 3.9% YoY to S$52.9m and S$41.8m, respectively. This was driven by higher rental income from both Paragon and The Clementi Mall (TCM), coupled with higher NPI margins (+2 ppt YoY to 79.0%) due to proactive management of utility contracts, lower property tax and maintenance expenses.

DPU for the quarter came in at 1.42 S cents, representing YoY growth of 0.7% as management released S$4.5m of taxable income available for distribution retained in 9MFY17, versus S$1.6m released in 4QFY16.

For its full-year performance, SPH REIT reported a 1.5% increase in gross revenue to S$212.8m and a 4.5% jump in NPI to S$168.1m. The latter formed 101.5% of our FY17 forecast. DPU of 5.53 S cents translated into growth of 0.5% and constituted 99.0% of our FY17 projection.

Negative Rental Reversion for Paragon a Surprise

Both Paragon and TCM maintained their 100% committed occupancy, as at end-FY17. However, a downside surprise came from Paragon’s negative rental reversion figure of 0.8% for expiries in FY17. As rental reversions for the mall were positive in 9MFY17 at 3.6%, this implies a weak 4QFY17 showing.

The softness came largely from the retail space, as reversions for the office/medical leases were flat. TCM fared better, with positive rental uplifts of 3.7% for the full-year, thus resulting in an overall portfolio rental reversion of 1.2% in FY17. Shopper traffic for both malls was stable.

While Paragon achieved higher tenant sales of 2.1% in FY17, TCM saw a 5.8% decline. Nevertheless, the occupancy cost for Paragon (19.6%; unchanged) and TCM (15.8%; +0.8 ppt) remains healthy, in our view.

There were also positives from SPH REIT’s portfolio valuation, underpinned by a compression in cap rates adopted by the valuers, as rental assumptions held steady. Paragon’s valuation rose 1.5% to S$2,695m, while that of TCM inched up 1.6% to S$583m.

Maintain BUY

Taking into account this full-set of results, we trim our FY18 and FY19 DPU forecasts by 1.1% and 1.8%, respectively. But as we also roll forward our valuations, our DDM-derived fair value estimate remains unchanged at S$1.08. Maintain BUY.

Source: OCBC Research - 10 Oct 2017