• 4QFY18 DPU +0.7% YoY
• Portfolio rental reversion of -3.5%
• Maiden contribution from The Rail Mall

4QFY18 Results Within Expectations

SPH REIT reported a predictable set of 4QFY18 results which came in within our expectations. Gross revenue and DPU grew 0.2% and 0.7% YoY to S$53.0m and 1.43 S cents, respectively. This included the maiden contribution from The Rail Mall (TRM), which was acquired by SPH REIT on 28 Jun 2018, and helped to offset the 2.2% YoY dip in gross revenue from Paragon.

For FY18, SPH REIT’s gross revenue came down slightly by 0.4% to S$211.8m and this constituted 98.7% of our full-year forecast. DPU of 5.54 S cents was flat (+0.2%) as compared to FY17, and formed 99.0% of our FY18 projection.

Stabilising Operating Metrics

Overall committed portfolio occupancy stood at 99.4%, as at 31 Aug 2018, a mild decline from the preceding quarter (99.6%). As for rental reversions, although this still came in negative for Paragon in FY18 (-3.7%), we are encouraged to see that the magnitude of decline has moderated over the quarters (1Q: -10.6%, 2Q: -7.1%, 3Q: -6.2%).

For The Clementi Mall (TCM), rental reversions were positive at 3.0% for FY18. Overall portfolio rental reversions were -3.5% as the bulk of the NLA renewed/new leases signed came from Paragon. Given the negative rental reversions at Paragon, its occupancy cost consequently declined from 19.6% in FY17 to 18.3% in FY18.

We believe this would help to ensure the sustainability of the mall over the long run. Occupancy cost for TCM increased from 15.6% to 16.2%, but is still at a healthy level, in our view.

Full-year Contribution From TRM in FY19

TRM has 41.5% of its leases expiring (by gross rental income) in FY19. While this may pose concerns to some investors, we believe it also represents opportunities for SPH REIT to reinvigorate the mall as it intends to improve the tenancy mix further when the leases expire.

Management highlighted that it plans to introduce a set of programmes to increase footfall at the mall. This involves rolling out engaging activities, but is still subject to the authorities’ approval. Currently, ~40% of the TRM’s space is taken up by F&B tenants, and SPH REIT intends to keep this as the dominant trade sector going forward.

After fine-tuning our assumptions (more conservative longer-term rental rates and higher finance costs), we lower our fair value estimate from S$1.02 to S$0.99.

Source: OCBC Research - 12 Oct 2018