• 1QFY18 DPU flat YoY
• Portfolio rental reversion of -10.6%
• Malls remain fully committed

1QFY18 Results Within Expectations

SPH REIT started FY18 on a stable note, registering a 1.7% YoY increase in gross revenue to S$53.5m and a 1.9% YoY uptick in NPI to S$42.2m for its 1QFY18 results. Both formed 24.9% of our FY18 forecasts.

Management retained S$2.2m of its taxable income available for distribution (1QFY17: S$2.2m retained), implying a payout ratio of 94.1%. Consequently, DPU for the quarter came in at 1.34 S cents, unchanged on a YoY basis and this constituted 23.9% of our full-year projection.

We judge this set of results to be in-line with our expectations.

Negative Rental Reversions Recorded, But for a Small Percentage of Portfolio

Both Paragon and The Clementi Mall (TCM) continued to maintain their 100% committed occupancy, but we believe this came at the expense of rentals. Paragon registered a negative rental reversion of 10.6%, while TCM saw a rental downtick of 9.8%, which management attributed to a change in trade mix for a replacement tenant.

Overall portfolio rental reversion was -10.6%. The silver lining was the fact that the negative rental reversions only applied to 4.4% (15 leases) and 1.1% (one lease) of Paragon’s and TCM’s NLA, respectively, or 3.7% of its total portfolio’s NLA. Furthermore, the leases for Paragon were mostly committed a year ago, when retail sales were softer.

Looking ahead, consumer sentiment appears to have seen some improvement, while we also expect tourism spending to pick up this year. These trends will benefit SPH REIT, in our view.

Share Price Has Performed Well, Downgrade to HOLD

SPH REIT’s share price has performed well, generating total returns of 19.1% since the start of 2017. Its last closing price of S$1.07 is now close to our fair value estimate of S$1.08. We thus downgrade SPH REIT from ‘Buy’ to HOLD on valuation grounds.

We are cognisant that a potential re-rating catalyst could come from SPH REIT’s proposed acquisition of Seletar Mall from its sponsor on accretive terms, which we have not factored in our model.

Source: OCBC Research - 8 Jan 2018