According to the Singapore Department of Statistics (DOS), the retail sales index, excluding automobiles, registered a 2.2 percent increase in May 2018 compared to a year ago.

This signals a pickup in the retail sector, although market watchers are wary of waning momentum given the lower-than-expected 2Q18 GDP data released just two weeks ago. Meanwhile, Singapore retailers continue to struggle with rising manpower and rental costs, combined with the stiff competition from online retailers.

Accompanying the recent macroeconomic data, SPH REIT reported its third quarter earnings result. We review the results to see if the current valuation befits the company’s performance.

Results Overview 

In the latest 9M18 results, gross revenue and net property income slipped 0.7 percent and one percent to $158.8 million and $125 million respectively. Management attributed its weak top line performance to the lower revenue generated from Paragon mall, which was accompanied by higher utility costs. 

Distributable income to unitholders for 3Q18 came in at $35.2 million, down 0.6 percent. The saving grace was that distribution per unit (DPU) remains unchanged at 1.37 cents as management paid out $0.1 million of income available for distribution which was retained earlier in 1H18.

SPH REIT ended the quarter with net asset value per unit of $0.94, down 1.1 percent from a year ago. For the period, SPH REIT maintains a healthy balance sheet with total debt-to-equity standing at 25.4 percent unchanged since 31 August 2017. The leverage ratio is significantly below the 45 percent threshold.

Operational Highlights 

SPH REIT’s landmark Orchard Road shopping mall Paragon recorded a negative rental reversion of -6.2 percent for 9M18 upon renewal of 27.3 percent of its net lettable area (NLA). While rental reversions continue to trend downwards, there was a moderation in decline as compared to the -7.1 percent in 1H18. Management explained the leases were committed a year ago, during the retail sales downturn.

On the other hand, Clementi Mall saw a pick-up in rental reversion, bouncing up 5.3 percent for 9M18 from the negative rental reversion of 2.5 percent in 1H18.

Overall, SPH REIT’s portfolio rental reversion came in at negative six percent, with overall portfolio slipping from the full occupancy to 99.6 percent for 9M18.

Going forward, SPH REIT has 3.7 percent of total NLA due for renewal in the remainder of FY18 and another 21.1 percent in FY19. The bulk of which will come from Paragon mall. With the earlier-than-expected pick-up in leasing demand for retail which will hopefully drive improvement in occupancy, the rental reversions in 4Q18 is anticipated to be better.

Strong Balance Sheet Provides Room For Acquisitions 

SPH REIT’s balance sheet remains robust with leverage ratio of 25.4 percent and the average cost of debt came in at 2.8 percent per annum. It has a remaining $185 million of repayable loan within one year.

The strong balance sheet provides a lot of debt room to make yield-accretive acquisitions. In term of acquisition opportunities, management indicated that they are continuing to review both third-party right of first refusal (ROFR) assets in Singapore and Australia. A potential accretive acquisition is Seletar Mall which could improve yield and add value to SPH REIT’s portfolio, assuming the purchase is fully funded by debt.

Progressively, SPH REIT is conducting selective asset enhancement initiatives to refresh about 16,000 square feet of Paragon mall. This entails about 20 fashion, lifestyle and F&B tenants. The renewed shopping concept should help to boost the mall’s attractiveness and bring in more foot traffic to the mall.

Recent Rail Mall Deal

On 28 June 2018, SPH REIT completed its acquisition of The Rail Mall, a cluster of shop units along Upper Bukit Timah Road for $63.2 million. The Rail Mall deal provides an opportunity for SPH REIT to include another retail mix catered for private residential catchment which is more resilient to e-commerce threats.

However, the short land lease tenure of 28 years could be a main concern for some investors as it could be too short for the REIT to deliver a decent return on capital on the property. On a positive note, most leases are expected to turn over in next two years, allowing the manager to negotiate and renew leases. Redevelopment of the property could also enhance its value over the long-term.

Valuations

REIT Price to Book Ratio Distribution Yield
SPH REIT 1.06 5.48%
Average of 42 S-REITs 0.97 6.46%

Source: SGX StockFacts (Data as of 23 July 2018)

Based on SPH REIT’s annualised DPU of 5.48 cents (from the year-to-date DPU of 4.11 cents) and its closing price of $1.00 as of 23 July 2018, the REITs have an annualised distribution yield of 5.5 percent compared to the S-REIT average of 6.5 percent. Despite its less attractive yield, SPH REIT is currently trading at a premium to the market average, at 1.1 times price-to-book value compared to the average of one time. While the economic outlook in Singapore remains uncertain and challenging, the retail sector is in a healthier position as compared to two or three years ago. That said, given continuing underperformance of SPH REIT, we think the current valuation is somewhat demanding. In addition, there are a number of S-REITs offering better yield to investors. As such, investors looking to accumulate SPH REIT should stay on the sideline and wait for a better entry price.

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