SPH REIT continued improvement in operations

Steady inaugural performance
SPH REIT announced its maiden set of results last evening. For the period from 24 Jul (listing date) to 30 Nov 2013, SPH REIT posted an NPI of S$51.4m and distributable income of S$46.5m. This was up 1.8% and 3.2% from the respective pro forma figures for the same period last year. DPU for the period came in at 1.86 S cents, slightly ahead of both its pro forma DPU of 1.80 S cents for previous corresponding period and prospectus forecast of 1.82 S cents, but we judge it to be consistent with our projection of 1.84 S cents. Based on the last closing price, this translates to an annualized yield of 5.3%.

Both malls maintained strong operational metrics
The growth was mainly attributable to higher rental rates at Paragon and stable income from Clementi Mall. Both malls also retained their 100% committed occupancy track record. In addition, Paragon achieved robust rental reversion of 12.4% during the reporting period. While Clementi Mall saw a slight negative reversion of 1.9% due to fine-tuning of its tenancy mix, leasing activities have remained strong, as evidenced the commitment of over 90% of its tenants for a second lease term. Shopper traffic for the first 11 months of 2013 also grew by 9.3% as compared to the same period in 2012. This is likely to keep the leasing demand at the mall resilient in our view.

Maintain HOLD on valuation grounds
SPH REIT’s gearing ratio as at 30 Nov 2013 stood at
26.7%, representing an improvement from its pro forma gearing of 27.3%, while its average cost of debt remained robust at 2.33%. SPH REIT’s keen eye for capital management has enabled it to establish a wellstaggered debt profile and long weighted average term to maturity of 4.8 years. ~54.7% of its interest rate exposure has also been fixed, which will alleviate any negative impact of rising rates to its DPU. Based on our sensitivity analysis, a 1ppt increase in interest rate may reduce its DPU by 2.6%. We continue to like SPH REIT for its unique exposure to the upscale and suburban retail market and healthcare services sector. However, as the stock appears to be fairly priced relative to our fair value of S$0.99, we maintain our HOLD rating.