• 2QFY18 DPU unchanged YoY
• Portfolio rental reversion of -7.1%
• 100% fully committed occupancy

2QFY18 Results Within Expectations

SPH REIT reported its 2QFY18 results which came in within our expectations. Gross revenue and NPI slipped 0.8% and 1.1% YoY to S$53.6m and S$42.3m, respectively. This was driven by Paragon, which saw weaker rental income due largely to negative rental reversions, coupled with slightly lower NPI margins at both its properties.

DPU for the quarter was unchanged YoY at 1.40 S cents, as management retained a smaller amount of taxable income available for distribution (S$152k versus S$1.6m in 2QFY17). For 1HFY18, SPH REIT’s gross revenue inched up 0.5% to S$107.1m, while DPU was flat at 2.74 S cents and formed 48.9% of our full-year forecast.

Some Challenges Seen But Operational Outlook Has Improved

Both Paragon and The Clementi Mall (TCM) continued to maintain their 100% committed occupancy, but rental reversions remained under pressure, coming in at -7.1% for Paragon and - 2.5% for TCM (overall portfolio: -7.1%) for expiries in 1HFY18. For Paragon, this was made up by 20.5% of the property’s NLA. However, these leases were largely committed a year ago.

The operational outlook now appears more positive, and management pointed out that Paragon has seen an uptick in luxury sales. There are also some key tenants which have invested in capex to renovate their stores. Paragon is also undergoing an AEI to create a new concept at level 3, and this would be opened in phases from Jun to Nov this year.

Awaiting Acquisitions

SPH REIT’s financial position remains healthy, with a low gearing ratio of 25.4% (unchanged QoQ). Looking ahead, SPH REIT remains on the lookout for acquisitions both locally and overseas given its sufficient debt headroom. For the latter, Australia seems the most likely destination, but management highlighted that any deal would have to be yield accretive for unitholders.

As for Seletar Mall, we believe the intention to acquire is firm, but any transaction would also have to depend on the owners of the mall, SPH (70% stake) and United Engineers (30%). In light of the recent increase in market volatility, we raise our cost of equity assumption slightly from 6.7% to 7.0%. Consequently, our fair value estimate declines from S$1.08 to S$1.02.

Source: OCBC Research - 9 Apr 2018