SPH REIT
SK6U.SI
SPH REIT (SPHREIT SP) - A Pedestrian First Quarter
Results in line, maintain HOLD
- We left our forecasts unchanged following SPH REIT’s 1QFY18 results, which were in line, with DPU flat YoY at S1.34cts. Its two commercial property assets remained fully occupied, while Paragon’s 10.6% rental reversion against earlier retail sales weakness reflects an expected slow recovery, despite more optimistic macros.
- We continue to see Paragon (82% of its AUM) as a good proxy into an earlier recovery for prime Orchard road rents. The share price of SPH REIT continues to anticipate potential acquisition upside.
- We also see limited upside catalysts but some downside risk to our TP offset by the 5.2% yield. Maintain HOLD and SGD1.00 DDM-based TP (WACC: 6.9%; LTG: 1.5%).
Portfolio rental reversion at -10.6%
- SPH REIT delivered in line 1Q18 results, with revenue and NPI up 1.7% YoY and 1.9% YoY, respectively and its two malls fully occupied. Its performance was helped by a successful second renewal cycle at Clementi Mall in FY17.
- Rental reversion increased 3.7% in 1Q18 and the retention rate by NLA was 89%; revenue/ NPI was up 5.9% YoY/ 8.3% YoY.
- Paragon recorded a -10.6% rental reversion for its leases (comprising 4.4% of its NLA) mostly committed a year ago against high occupancy costs. These reflect the recent softer retail backdrop despite a more optimistic macro outlook. Hence, we would expect a turnaround in reversions towards 2H18.
Strong balance sheet, waiting for deal catalyst
- Gearing stayed at 25.4% at end-Nov 2017, with average borrowing cost up slightly QoQ from 2.82% to 2.84%.
- SPH REIT is exploring refinancing options for a SGD320m tranche of its term loan facility due in FY18 (comprising 38% of its total debt). We further estimate about SGD820m in debt headroom (at 40% gearing) for potential acquisitions (Seletar Mall ROFR property and third-party assets in Australia).
Valuations are fair
- SPH REIT is trading at peak valuations since its IPO with a FY18E yield of 5.2% and P/B of 1.1x. We believe these largely price in potential acquisitive growth, given 1% DPU growth.
- We prefer Frasers Centrepoint Trust (Rating: BUY, Target Price SGD2.45, see report: Frasers Centrepoint Trust (FCT SP) - Trust In Community) for its resilient portfolio and visible growth drivers supporting 3.5% DPU CAGR FY17-20E.
Swing Factors
Upside
- Earlier-than-expected pick-up in leasing demand for retail, office space driving improvement in occupancy.
- Better-than-anticipated rental reversions.
- Accretive acquisitions or redevelopment projects.
Downside
- Prolonged slowdown in economic activity could reduce demand for retail, office space, resulting in lower occupancy and rental rates.
- Termination of long-term leases contributing to weaker portfolio tenant retention rate.
- Sharper-than-expected rise in interest rates could increase cost of debt and negatively impact earnings, with higher cost of capital lowering valuations.
Chua Su Tye
Maybank Kim Eng
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http://www.maybank-ke.com.sg/
2018-01-08
Maybank Kim Eng
SGX Stock
Analyst Report
1.000
Same
1.000
