SPH REIT – CIMB

2015 to be stable

SPH REIT’s 1QFY15 DPU was up 2.3% yoy and broadly in line by meeting 22% of our FY15 forecast. Improvements came from higher rental income and margins. We expect FY15 to be a stable year, with 100% occupancy and only 11-13% of the leases set to expire. 2016-17 should be more exciting, with more lease expiry, AEI completion, and potential stabilisation and acquisition of The Seletar Mall. We trim our DPS estimates slightly (leading to a lower DDM-based TP) and keep our Hold call as we think that the positives of its stable portfolio have been priced in at 5.8% FY15 dividend yield and 1.12x P/BV. We prefer to wait for cheaper valuation or greater clarity on future leasing demand.

Results highlights

1QFY15 DPU was up 2.3% yoy, and would have been 4.8% up yoy if not for the S$0.5m retained in the quarter. Improvements came from both higher rental income and margins stemming from savings in utilities, marketing and maintenance costs. During the quarter, 4.9% of the leases by NLA expired and a healthy rental reversion of 12.9% was recorded.

2015: expect stable portfolio and balance sheet

With 100% occupancy and only 11-13% of the leases set to expire in FY2015, we expect SPH REIT to see stability as supply of retail spaces along Orchard Road is limited. Its balance sheet remains strong, with gearing at 26%. Management has hedged ~55% of its debt with no refinancing required until 2016. Its average cost of debt is at 2.35%, up slightly from 2.33% in the previous quarter.

Maintain hold, wait for cheaper valuation or 2016-17

We maintain our Hold rating as we believe that the positives of SPH REIT have been priced in at 5.8% FY15 dividend yield and 1.12x P/BV (vs. 5.6% and 1.07x for its retail S-REIT peers respectively). We expect 2016-17 to be more exciting years for SPH REIT, given 1) AEI will create ~10,000 sq ft of NLA at Paragon, with 5,000 sq ft expected to be completed by FY16 and generate ~S$1m of rental income annually, and another 5,000 sq ft to be phased in from FY16; 2) ~26% and 35% of leases by NLA to expire in FY16 and FY17 respectively; and 3) potential stabilisation and acquisition of The Seletar Mall, which has opened on 28 Nov 2014 with 99.6% committed occupancy. We will wait for cheaper valuation or greater clarity on future leasing demand before accumulating.