SINGAPORE (July 12): CGS-CIMB is reiterating its “hold” recommendation on SPH REIT with a target price of $1.07.
This came following the trust posing its 3Q18 results, which were within the research house’s expectations.
Distribution per unit (DPU) for 3Q18 remain unchanged from 3Q17 at 1.37 cents.
However, gross revenue dropped 2.9% to $51.8 million from $53.3 million last year. With property operating expenses increasing 0.6% y-o-y to $11.2 million, net property income came in at $40.6 million, 3.8% lower than $42.2 million a year ago.
See: SPH REIT posts flat 3Q DPU of 1.37 cents as net property income falls
The group attributed the decline in topline to negative rental reversion of -6.2% for the 27.3% of net leasable area (NLA) at Paragon leased/renewed in 9M18, as the leases were mostly negotiated about a year ago during the retail sales downturn.
Nonetheless, the decline has moderated in 3Q compared to 1H18.
The Clementi Mall recorded positive rental reversion of 5.3% in 9M18, as 3.2% of its NLA was renewed, while average rental reversion was -6% during the period.
Meanwhile, in tandem with the recovery in retail sales since Jun 2017, overall tenant sales continued to grow, while the trust’s portfolio was close to full occupancy at 99.6%.
The trust has 3.7% of NLA due for renewal for the remainder of FY18 and another 21% in FY19, with the bulk of it coming from Paragon.
In a Tuesday report, analyst Lock Mun Yee says, “With improved retail sales sentiment and economic outlook in Singapore, we anticipate the rental reversions in 4Q18 to be better than the -6% reported in 9M18.”
In addition, the trust is conducting selective asset enhancement initiatives (AEI) at Paragon, with phase 1 of Paragon’s new retail zone of about 16,000 sqf at Level 3 was launched in June.
The analyst reckons that this new retail concept should help to boost the mall’s attractiveness.
The trust’s balance sheet remains robust with gearing of 25.4% and stable funding cost of 2.84% as at end-3Q18. It also has $185 million remaining loans to be rolled over for the remainder of FY18.
The trust’s management also indicated that it continues to review both third-party and right of first refusal (ROFR) properties in Singapore as well as Australia for inorganic growth opportunities.
With this, Lock believes that the trust has a lot of debt room for future acquisitions.
“Management indicated that it continues to review both third-party and right of first refusal (ROFR) properties in Singapore as well as Australia for inorganic growth opportunities,” says Lock.
As at 12.42pm, units in SPH REIT are trading 1 cent higher at $1.01 or 1.06 times FY18 book with a dividend yield of 5.57%.
