SPH REIT

SPH REIT: 1QFY16 results in line. DPU was flat at 1.33¢, while distributable income rose 3.8% to $35.3m.
Revenue increased 2.9% to $52.1m, while NPI climbed 5.9% to $40.1m, driven by rental uplifts at both Paragon (+3.2%) and Clementi Mall (+5.4%).

As a portfolio, rental reversions fell to 3.2% (4QFY15: 8.6%), revealing a challenging a market. Nevertheless, management cited that shopper traffic remained steady.

Occupancy dipped 0.2ppt q/q to 99.8% due to reorganisation of space, while WALE stood at 2.2 years.
Aggregate leverage stood at 25.7% with weighted average cost of debt of 2.84%.

While SPH REIT will likely see a stable FY16 given only ~4% of leases are up for renewal. The challenge will likely come in 2017, as SPH REIT’s renewal cycle meets a year where Maybank-KE expects a 1.9x net oversupply of retail space. In 2017, 85.2% of Clementi Mall and 18.8% Paragon leases are up for renewal.

SPH REIT will likely have to pursue growth inorganically amid a weak rental market. The ongoing work to reclaim space by switching air handling units into fan coil units is progressing on track and Emporio Armani has pre-committed to take up part of the reconfigured space.

Meanwhile, SPH REIT plans to reconfigure the layout of the Clementi mall and increase the range of products to boost sales. Further details on AEI will be announced in due course.

SPH REIT also has a right of first refusal for Seletar Mall, which could be a medium term catalyst.

SPH REIT is currently trading at 1x P/B and annualized 1QFY16 yield of 5.5%.

Latest broker ratings:
CLSA maintains Underperform with TP of $0.96
CIMB maintains Hold, cuts TP to $1.05 from $1.07