• SPHREIT's 3Q and 9MFY18 DPU were within expectations.
• Smaller negative rental reversion at Paragon in 3QFY18.
• Strong balance sheet provides room for inorganic acquisitions.
• Maintain HOLD with unchanged Target Price of S$1.07.

3QFY18 Highlights

SPHREIT posted a set of in-line 3QFY8/18 results with revenue declining 2.9% y-o-y to S$51.8m and net property income falling a slightly larger 3.8% y-o-y on the back of higher utilities cost. However, distributable income grew 0.6% y-o-y to S$35.2m (DPU: 1.37 Scts) with no cash retained (vs. 2% retention rate in 3QFY17).

For 9MFY8/18, DPU of 4.11 Scts made up 74% of our FY18 forecast.

Smaller Negative Reversion Drag at Paragon

The drop in topline was largely due to negative rental reversion of -6.2% for the 27.3% of NLA at Paragon leased/renewed in 9MFY18 as the leases were mostly negotiated about a year ago during the retail sales downturn. Nonetheless, the decline moderated in 3Q vs. 1HFY18.

On the other hand, The Clementi Mall recorded positive rental reversion of 5.3% in 9MFY18 with the renewal of 3.2% of its NLA. Average rental reversion came in at -6% in 9MFY18. 

In tandem with the recovery in retail sales since Jun 2017, overall tenant sales continued to register growth, while portfolio was close to full occupancy at 99.6%.

Continual Asset Enhancement to Improve Yield

SPHREIT has 3.7% of NLA due for renewal in the remainder of FY18 and another 21% in FY19, the bulk of which will come from Paragon. With improved retail sales sentiment and economic outlook in Singapore, we anticipate the rental reversions in 4QFY18F to be better than the -6% reported in 9MFY18.

Meanwhile, the trust is taking the opportunity to refresh its properties by conducting selective asset enhancement initiatives (AEI) at Paragon; phase 1 of the mall's new retail zone of about 16,000 sf at Level 3 was launched in Jun. The new retail concept should help to boost the mall's attractiveness.

Robust Balance Sheet Provides Room for Acquisitions

SPHREIT's balance sheet remains robust with gearing of 25.4% and stable funding cost of 2.84% as at end-3QFY18. It has a remaining S$185m of loans to be rolled over for the remainder of FY18.

Management indicated that it continues to review both third-party and right of first refusal (ROFR) properties in Singapore as well as Australia for inorganic growth opportunities. Given its strong balance sheet, SPH has a lot of debt room for acquisitions.

Maintain HOLD

We leave our FY18-20 DPU estimates unchanged and retain our DDM-based Target Price of S$1.07 as well as our HOLD rating. We continue to like Paragon and The Clementi Mall for their niche positioning in their micro markets.

New and accretive acquisitions should serve as potential share price catalysts. Downside risks include protracted downturn in the retail sector which could result in a prolonged period of negative rental performance.

Source: CGS-CIMB Research - 10 Jul 2018