SPHREIT – CIMB

Post-results feedback

The key issues discussed during the investor luncheon we hosted following SPH REIT’s 3QFY14 results were: 1) the potential AEIs at Paragon, which could add c.10,000 sq ft of NLA, 2) rental outlook for both the retail mall and medical suites at Paragon, and 3) the potential acquisition of Seletar Mall. We remain confident that SPH REIT will continue to expand, while offering sustainable returns to investors. Maintain Add and target price of S$1.09.

What Happened

We recently hosted an investor luncheon for SPH REIT following its 3QFY14 results announcement.

What We Think

Management highlighted three potential AEIs for Paragon that would add c.10,000 sq ft of NLA. The first AEI (slated for completion in 1QFY16) involves replacing the existing chillers with smaller, more efficient units and relocating them outdoors. This would add c.5,000 sq ft of NLA to level five of the mall. Management did not share any details on the other two AEIs as those projects are awaiting the approval of the board of directors and authorities. However, management guided that upon completion, one of the projects would add 5,000 sq ft of NLA and the other would improve Paragon’s efficiency.

Shopper traffic at both Paragon and Clementi Mall dipped slightly in 3QFY14 due to different reasons. For Paragon, the dip (-1% yoy) caused by the weak Chinese visitor numbers. Management also noted that future rental growth is expected to moderate to c.3% p.a., given the passing rent of S$21.70 per sq ft/month. The rental rates for the medical suites (passing rent of S$11.06 in 3QFY14) are expected to rise at a slower pace than those for the retail segment. As for Clementi Mall, the slower shopper traffic was due to the rising competition in the Western region of Singapore. However, Clementi Mall’s shopper traffic YTD was still higher yoy. Given the passing rent of S$15.90 per sq ft/month, management was confident of maintaining rental income to the supported level of S$18 per sq ft/month, as it reshuffles its portfolio to include stronger tenants, before the end of its income support in FY18. Seletar Mall, which is slated for completion at end-CY14, is likely to be injected into the REIT 1-2 years after the date it first commences operations.

What You Should Do

Maintain Add as SPH REIT continues to deliver stable earnings, while enjoying growth opportunities in the long run.