SPH REIT - DBS Research 2017-07-13: Clementi Mall Renewals ~ Checked

SPH REIT - DBS Vickers 2017-07-13: Clementi Mall Renewals: Checked SPH REIT SK6U.SI

SPH REIT - Clementi Mall Renewals: Checked

  • 3Q17 DPU of 1.37 Scts, up 0.7% y-o-y.
  • 60% of base management fees paid in cash for the first time.
  • Clementi Mall completed its renewals with average reversion rate of 3.7% and 89% retention rate.
  • SPH REIT’s stock performance is found to be more correlated with Singapore retail sales.



BUY for resilience. 

  • In a generally challenging retail market, both assets in SPH REIT’s portfolio, Paragon and Clementi Mall, have been maintaining full occupancy and single digit rental reversion rates (versus flat for most other retail REITs). 
  • The stock price and yield have proved to be resilient since its IPO in July 2013.


Where we differ: Priced in the acquisition of Seletar Mall. 

  • We believe it is now an opportune time for SPH REIT to consider acquiring The Seletar Mall (c.S$500m) from its Sponsor, a non-consensus view at this point in time. We believe the acquisition could happen as soon as in the next 12 months and most ideally within the next six months prior to the completion of the mall’s first renewal cycle at the end of 2017. 
  • Following the acquisition, we estimate a 3-4% lift in DPUs on the assumption of a partial equity fund raising of S$200m. This will push up gearing slightly from 26% to 31%, which is still conservative compared to the peer average of 34%. 
  • Under a more aggressive debt-raising scenario, gearing could rise to 36% with close to 10% increase in DPU (see detailed analysis Get Ready (before it’s too late) published on 16 March 2017). Moreover, improved liquidity should boost the stock price.


Potential Catalyst: The Seletar Mall to drive higher growth. 

  • With The Seletar Mall, SPH REIT will derive a higher proportion of its income from suburban shopping (rising from 20% to 32%), which will add to the resilience of the portfolio.


Valuation

  • Maintain DCF-backed Target Price at S$1.04, 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 5%. 
  • Maintain BUY.


Key Risks to Our View

  • Timing and price of The Seletar Mall acquisition. We have factored in contributions from The Seletar Mall from FY18.
  • Later-than-projected timeline or higher purchase price means downside to our estimates.


WHAT’S NEW


3Q17 results: flat DPU mainly due to base management fees paid in cash 60% of base management fees paid in cash for the first time: 

  • As disclosed in the last announcement (See SPH REIT Announcements dated 2017-04-28), 60% of base management fees, or S$1.2m, was paid in cash instead of units for the first time since the REIT’s IPO. 
  • We are positive on this decision, as it preserves value for unitholders by reducing the dilution impact from fees paid in units. The performance fees will continue to be paid in units.

Flat DPU due to fees paid in cash and higher retention: 

  • Despite a y-o-y growth of 5.4% in NPI to S$53.3m, income available for distribution was only 2.0% higher y-o-y due to management fees payable in units. DPU increased marginally by 0.7% y-o-y to 1.37 Scts due to an enlarged unit base.
  •  We expect the dilution impact to moderate in FY18 due to fees paid in cash. 9M17 DPU represents 73.4% of our full-year FY17 forecast of 5.6 Scts.

Clementi Mall completed its second renewal cycle. No major renewal for rest of FY17. 

  • Over three quarters of FY17, Clementi Mall renewed 80% of its NLA with an average reversion rate of 3.7% and 89% retention rate. We noticed that the average reversion rate at the mall for 1H17 was 8.3% with 23% of NLA renewed. Hence, we infer that the average reversion rate for the difference (c.57% of the NLA) renewed over 3Q17 could be as low as 2%. 
  • Nonetheless, we have assumed a low single-digit rental growth at Clementi Mall in our model and so this is within our expectations. The average reversion rate at Paragon was 4.3% for 7.2% of its NLA renewed in 9M17. The portfolio has no major renewals for the remainder of FY17.

Recap of how the income support works for Clementi Mall: 

  • The reported revenue and NPI for Clementi Mall in the presentations and financial statements are the organic performance of the asset, i.e. excluding any income support.
  • The guaranteed NPI for Clementi Mall p.a. is S$31m, the REIT receives from its Sponsor the difference between Clementi Mall’s actual and guaranteed NPI as income support, and that the aggregate top-up NPI does not exceed S$20m over five years. 
  • The income support will cease on 23 July 2018, five years from the REIT’s IPO. As of 9MFY17, Clementi Mall received income support of S$1.3 from the REIT’s Sponsor, which was about 70% compared to what it used to receive over the same period in FY16 and was c.5.9% of the accrued NPI of S$21.9m from Clementi Mall. 
  • On a pro-rata basis, Clementi Mall’s 9MFY17 NPI represents 94.3% of the guaranteed NPI by the Sponsor, i.e. a difference of over 5%. This means, in a year’s time when the income support expires, it is likely that Clementi Mall’s NPI would dip slightly given its reversion rate of 3.7% is lower than the difference between the actual and guaranteed NPI. 
  • Our model suggests that Clementi Mall’s NPI would be just over S$30m by the end of FY18F.




Singapore Research DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2017-07-13
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.040 Same 1.040



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