SPH REIT - OCBC Investment 2017-04-11: Positives from leasing front

SPH REIT - OCBC Investment 2017-04-11: Positives from leasing front SPH REIT SK6U.SI

SPH REIT - Positives from leasing front

  • 2QFY17 DPU flat YoY.
  • Positive rental reversions.
  • Balance sheet remains firm.

2QFY17 results within expectations 

  • SPH REIT reported an in-line set of 2QFY17 results. 
  • Gross revenue and NPI grew 1.7% and 5.2% YoY to S$54.0m and S$42.7m, respectively. This was underpinned by higher rental income for both Paragon and The Clementi Mall (TCM), coupled with lower utility expenses and a one-off provision for prior years’ property tax in 2QFY16. Excluding this one-off effect, NPI still increased by 2.9%. 
  • DPU was flat at 1.40 S cents, as S$1.6m of taxable income available for distribution was retained during the quarter (2QFY16: S$0.9m). 
  • For 1HFY17, SPH REIT’s gross revenue rose 1.3% to S$106.6m and formed 49.2% of our FY17 forecast, while DPU edged up 0.4% to 2.74 S cents and accounted for 49.1% of our full-year forecast. 
  • If we include the taxable income available for distribution which was retained in 1HFY17, SPH REIT’s adjusted DPU would have constituted 51.7% of our FY17 projection.

Strong renewal cycle at TCM 

  • Both Paragon and TCM achieved 100% committed occupancy, while strong rental reversions of 4.3% and 8.3% were secured for leases expiring in 1HFY17, respectively. The latter was all the more impressive considering that it was contributed by 23.1% of the property’s NLA. 
  • Overall portfolio rental uplift came in at 6.2%. 
  • Following the completion of TCM’s first renewal cycle in 2014, the mall had ~85.5% of its gross rental income (GRI) expiring in 2017 (leases are typically 3 years in tenure). Management had renewed 74.1% of TCM’s GRI, as at end-2QFY17. 
  • From our understanding, further progress has been made, with the remaining leases now successfully renewed. We believe this reflects management’s solid execution capabilities and TCM’s strong positioning. 
  • TCM achieved an estimated retention rate of 90% by NLA.

Maintain BUY 

  • In terms of financial position, SPH REIT’s gearing remained stable and healthy at 25.7%, as at 28 Feb 2017, with 85.9% of its debt on a fixed rate basis. 
  • We reiterate BUY on SPH REIT, but with a higher fair value estimate of S$1.08 (previously S$1.04) as we incorporate a lower discount rate of 6.7% (previously 6.9%) in our dividend discount model given SPH REIT’s resilient portfolio, robust operational metrics and solid leasing management capabilities.

Wong Teck Ching Andy CFA OCBC Investment | http://www.ocbcresearch.com/ 2017-04-11
OCBC Investment SGX Stock Analyst Report BUY Maintain BUY 1.080 Up 1.040