SINGAPORE (Jan 9): DBS is maintaining its “hold” recommendation on SPH REIT with a target price of $1.07 following the REIT posting its 1Q18 results.
The REIT on Friday announced that its 1Q18 DPU held steady at 1.34 cents compared to the same period last year.
Meanwhile, revenue increased slightly by 1.7% to $53.5 million, due to higher rental income from Paragon and Clementi Mall.
See: SPH REIT 1Q DPU held steady at 1.34 cents
In a Monday report, analyst Derek Tan says, “SPH REIT’s earnings are resilient, supported by sticky occupancies while its low gearing of c.26% empowers the manager to potentially undertake value accretive acquisitions.”
Both the malls have maintained their track record of fully committed occupancy. But renewal rental are under pressure on the back of tepid retail spending for the past three years. Both malls also recorded negative rental reversions.
The REIT’s manager acknowledged that they have been more flexible in their leasing strategy as the ongoing uncertainties in the retail sector are starting to bite.
Hence, they are helping the tenants to maintain their occupancy cost, which is about 19.5% for Paragon and 15.5% for Clementi Mall.
In addition, the REIT’s cost of borrowing seems to remain stable despite $320 million or 37.6% of its total debt outstanding is due in FY18, as the manager is in advanced talks with banks on its refinancing and the rates offered are competitive.
Among the Singapore REITs, SPH REIT’s gearing level is still the lowest at 25.4%.
“The market may have anticipated flat to negative reversion but the magnitude may have come as a surprise. Hence near-term pressure on the stock price is probable,” says Tan.
Tan also believes that Paragon is one of the more resilient retail assets in Singapore in the medium to long run, while the management’s strategy to trade off rental rate for occupancy makes sense.
As at 3.30pm, units in SPH REIT are trading at $1.08 with an FY18 distribution yield of 5.2%.
