SPH REIT - CIMB Research 2017-04-10: 2QFY17 Clementi renewal cycle almost completed

SPH REIT SK6U.SI

SPH REIT - 2QFY17 Clementi renewal cycle almost completed

1HFY8/17 DPU of 2.74 Scts (+0.4% yoy) was in line with consensus and our expectations at 49% of our full-year forecast. 2QFY17 DPU was at 49%.
Portfolio occupancy remained full and there was a positive portfolio rental reversion of 6.2% for 1HFY17.
Second renewal cycle of The Clementi Mall more or less completed. Tenant retention at the mall was 90% in 1HFY17, indicating strong endorsement.

A low gearing of 25.7% should enable the trust to explore inorganic growth opportunities.
Maintain Hold but raise our DDM-based target price to S$1.01.

2QFY17 revenue grew 1.7% yoy while NPI was 5.2% higher yoy due to lower utilities and property tax.
Excluding one-off provision of the prior year’s property tax, NPI improvement would have been 2.9% yoy.
Income available for distribution increased 2.4% yoy while distribution to unitholders increased 0.6% yoy as 4.2% of available distribution was retained.
We note that the manager has elected for partial payment in cash (S$1.2m) for 3QFY17. 100% of management fees for 1HFY17 were paid in units.

Portfolio occupancy remained full and there was a positive portfolio rental reversion of 6.2% for 1HFY17 (1QFY17: +4.6%). Paragon achieved +4.3% reversion for 7.2% of its NLA in 1HFY17; The Clementi Mall achieved +8.3% reversion for 23.1% of its NLA or 30% of the second renewal cycle. 1HFY17 visitor traffic remained steady.

With 85% of The Clementi Mall’s leases expiring in FY17 (by GRI), 74% has been renewed ahead of time as at 1HFY17.
At this juncture, we understand that verbal agreements have been reached for the remaining 11%. Tenant retention at The Clementi Mall was 90% by NLA. Judging from the towers, we also observe management’s efforts to smoothen the lease expiry profile for the mall.
Meanwhile, 3.2% of Paragon’s leases (by GRI) are up for renewal in the remainder of FY17.

SPHREIT’s healthy balance sheet should enable the trust to explore inorganic opportunities.
As at 1HFY17, SPHREIT has a gearing of 25.7% and weighted average debt tenure of 2.6 years. Average cost of debt for 1HFY17 was 2.79% (1HFY16: 2.84%).
85.9% of total borrowing was on a fixed rate basis.

We keep our FY17-19F DPU but raise our DDM-based target price to S$1.01, following a sector-wide decrease in our Singapore discount rate.
Maintain Hold on limited near-term upside.
Upside/downside risks hinge on the retail environment and leasing activities.

YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2017-04-10

CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 1.01 Up 0.950