SPH REIT - DBS Research 2017-04-11: Paying fees in cash (as you wished)

SPH REIT - DBS Vickers 2017-04-11: Paying fees in cash (as you wished) SPH REIT SK6U.SI

SPH REIT - Paying fees in cash (as you wished)

  • Top line grew by 2% in 2Q17 – in line. 8% rental reversion at Clementi Mall and 4% at Paragon.
  • Flat DPU of 1.40Scts due to higher retention.
  • 60% of base fees will be paid in cash in 3Q17.
  • TP raised by 1% while DPU trimmed by 3% p.a. to model in the impact of fees payable in cash; BUY.



2Q17 registered positive earnings growth; partial management fees to be paid in cash next quarter 


Flat DPU due to higher retention despite higher earnings: 

  • Gross revenue for 2Q17 grew by S$0.9m or 1.7% y-o-y to S$54.0m, on the back of higher rental income achieved by both Paragon and Clementi Mall. 
  • Property operating expenses of S$11.3m was S$1.2m or 9.7% lower y-o-y, mainly due to proactive management of utility contract and an additional one-off provision for prior years’ property tax.
  • Net property income (NPI) of S$42.7m was S$2.1m or 5.2% higher y-o-y. Excluding the effect of the additional one-off property tax provision, NPI would have increased by 2.9%.
  • Income available for distribution was S$37.3m, S$0.9m or 2.4% higher y-o-y. 
  • Despite the improvement in distributable income, DPU was flat at 1.40Scts, as the management continues to retain more cash to primarily fund management fees payable in cash, which will start in 3Q17. The payout ratio was 94.0% and 95.8% in 1Q17 and 2Q17, compared to 95.4% and 97.5% in the respective quarters in FY16.
  • 1H17 DPU represents 49% of our previous forecast (before adjusting for management fees payable in cash), in line with our expectations.

60% of management fees will be payable in cash next quarter: 

  • SPHREIT has been paying 100% of its management fees in units. The REIT Manager has elected for partial payment in cash for 3Q17 – a base management fee comprising S$1.2m in cash with the balance in units. 
  • We estimate the amount to be payable in cash is approximately 60% of the base management fee, and have assumed this proportion in our model going forward. 
  • The performance fee will continue to be paid in units. As a result, we have trimmed our DPU estimated by c.3% p.a whereas our TP has been raised by close to 1% uplift as the dilution impact has been mitigated. 
  • We believe this decision should be positively received by unitholders as DPU growth is strengthened and more sustainable. 

Positive rental reversion. 

  • In 1H17, 10.6% or c.96,000 square feet (sqft) of portfolio net lettable area (NLA) was renewed and registered a rental reversion of 6.2% on average. Clementi Mall saw an encouraging uplift of 8.3% whereas Paragon recorded a positive 4.3%. 
  • It is worth noting that all leases due in FY17 at Clementi Mall have been renewed at the point of writing, and only c.3% of the portfolio NLA remains to be renewed in this financial year. The portfolio renewal profile is well staggered with 27.5% and 22.5% of NLA expiring in FY18 and FY19 respectively. Portfolio WALE remains stable albeit relatively short at 2.4 years by NLA.
  • Visitor traffic has been steady.

Positive outlook: upside from The Seletar Mall acquisition.

  • SPH REIT’s current portfolio is very stable. We reiterate our stand that now is an opportune time for the REIT to start discussions about acquiring The Seletar Mall, most ideally in the next six months prior to the completion of The Seletar Mall’s first rental renewal cycle at the end of 2017. 
  • Our basecase scenario estimates a 3-4% rise in DPUs assuming S$200m and S$300m funding in equity and debt, respectively. 
  • Gearing will increase slightly from 26% to 31% but still conservative compared to peer average of 34%.
  • Please refer details of our analysis of The Seletar Mall acquisition in our report: Get Ready (before it’s too late), published on 16 Mar 2017. 


Valuation

  • We increased our DCF-backed TP to S$1.04 from S$1.03 after assuming 40% of base management fees is payable in cash from 3Q17. 
  • The stock offers a dividend yield of close to 6% and price upside potential of 6%. 
  • Maintain BUY.


Key Risks to Our View

  • Timing and price of the The Seletar Mall acquisition. Later than projected acquisition timeline of Seletar Mall could mean downside to our estimates.



Singapore Research Team DBS Vickers | Derek Tan DBS Vickers | http://www.dbsvickers.com/ 2017-04-11
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.040 Up 1.030



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