SPH REIT: Stable as is boring as is good


SPH REIT announced their financial results for the period ending 31 Aug 2017. This is a very stable counter that’s giving consistent distribution and yields.

Has anything changed to affect its stability?

Let’s take a look. All figures extracted from quarterly reports, financial statements and presentations.

Stable income numbers

Gross revenue (blue line), net property income (orange) and distributable income (grey) have all been fairly stable since listing in 2014.

Net property income has climbed faster than gross revenue, indicating that SPH REIT is able to control property level costs.

That means unitholders have more distributable income, as evidenced by the slight rise in the grey line.

SPH REIT’s characteristic is its stability.

SPH REIT Gross revenue, NPI and distributable income to unitholders
SPH REIT Gross revenue, NPI and distributable income to unitholders

Stable distribution per unit

While the chart below showing distribution per unit seems very volatile, it actually is very stable.

The axis on the left is very tight, showing that distribution per unit is moving in a very tight band. It’s moved from 1.33 singapore cents to the latest of 1.42 singapore cents (or S$13.3 to S$14.2 per 1000 shares).

Once again, SPH REIT has proven to be very stable.

SPH REIT Distribution per unit
SPH REIT Distribution per unit

Dividend yield in line with average

Annualized yield is roughly in line with the average since SPH REIT listed on the Singapore Stock Exchange.

At 5.5%, some REIT investors may find it on the low side.

Personally, I do find it on the low side. My targets are usually 6 to 6.5% yields, which is about or slightly higher than average.

That said, the market may be pricing SPH REIT at this level due to its stability.

For SPH REIT alone, I may enter if yields move out to the 5.8% range. On an absolute price level, anything below S$1.0 may be an entry point, subject to study of other factors affecting the REIT though.

SPH REIT annualized yield
SPH REIT annualized yield

Rising NAV is good for investors

SPH REIT’s NAV per unit has been climbing steadily, albeit a little slowly.

The REIT managers have shown themselves to be capable in controlling liabilities and pushing for a larger asset base.

A rising NAV per unit is good for the stock price, as investors are likely to enter to close the gap between price and NAV.

SPH REIT NAV per unit
SPH REIT NAV per unit

Falling gearing ratio is good as it provides debt headroom

Looking to SPH REIT’s operational metrics, gearing has been on a downtrend.

This can be both good and bad depending on how you look at it.

Good because the financing or interest expense on the balance sheet is under control. In a downturn or when interest rates rise, there is buffer on the balance sheet for SPH REIT to still come out unscathed.

Bad because the manager may not be working hard enough to find investments.

Analysts have been saying that a Seletar Mall acquisition may be in the works sometime soon. If the acquisition does come through, SPH REIT has quite a lot of debt headroom to utilize.

Singapore REITs on average have gearing in the low to mid 30% range.

SPH REIT Gearing
SPH REIT Gearing

High proportion of debt on fixed cost basis

Related to SPH REIT’s gearing ratio, the percent of debt on fixed rate is good at 85.9%.

This isn’t fantastic because most Singapore REITs have around this percent of debt on fixed rates.

Interest rate increases are unlikely to be a concern for SPH REIT.

SPH REIT % debt on fixed rate
SPH REIT % debt on fixed rate

Rising cost of debt is something to watch for

One thing I would be watching out for is the rising cost of debt.

Nothing has change in terms of SPH REIT’s property mix or credit risk, so this is likely due mainly to increases in the interest rate environment.

I wouldn’t be too afraid of a rising cost of debt because a large portion of it is on fixed rate, and SPH REIT has a strong and blue chip parent in the form of Singapore Press Holdings.

One question to SPH REIT could be to ask why their cost of debt is on the rise.

SPH REIT cost of debt
SPH REIT cost of debt

Warning: falling rental reversion

The final piece of the puzzle is rental reversion.

The blue line shows Clementi Mall, grey for Paragon and orange for the portfolio.

First thing that stands out is the downtrend for Paragon and the portfolio.

This is not a good sign.

Reasons could be due to the dipping appeal of Orchard Road as a tourist and shopping destination.

Another could be the popularity of suburban malls that draw consumers with their wide range of products. Consumers may no longer be seeing the need to travel to town as the offerings by malls in town may not be different to what they have in their neighbourhood mall.

Is overcrowding of trains, buses and the roads a reason? Possibly.

E-commerce may be another factor leading to the decline. However, Paragon stocks mainly high end, luxury products so it may not be so affected by e-commerce.

Another reason could be tourism – or a reduction in spending by tourists. Singapore has been posting increases in tourist arrivals and receipts so a more nuanced reason may be that other malls along Orchard Road or around Singapore may be taking customers from Paragon.

Clementi Mall’s rental reversion has stabilized at the 5% range, so there is unlikely to be a worry there. Regarding the dip in 2015, according to SPH REIT, it was due to the “fine-tuning of tenancies to strengthen the offering to a wider base of shoppers.”

SPH REIT rental reversion
SPH REIT rental reversion

100% occupancy and stellar record maintained

Occupancy for SPH REIT’s portfolio remains at 100%, maintaining its perfect record.

Mixed tenant sales and visitor traffic figures

Despite the decline in rental reversion, tenant sales for Paragon has increased year on year.

Clementi Mall’s tenant sales registered its first yearly decrease of 5.8%.

This data point is something to watch out for, but SPH REIT only releases it on a yearly basis.

SPH REIT tenant sales
SPH REIT tenant sales

Visitor traffic is stable for Paragon but dipped by 100,000 people for Clementi Mall. In the big scheme of things, the decline is not something to be unduly concerned with.

SPH REIT visitor traffic
SPH REIT visitor traffic

DBS believes Seletar Mall acquisition is near

In their quarterly note, DBS research believes that the Seletar Mall acquisition is near.

At about S$500m, DBS believes the REIT will use their debt-funded headroom by raising S$350m of debt and S$150m of equity by end of financial year 2018.

They believe gearing will be pushed up to 32% from 26%. This is still conservative compared to peer average of 34%.

In conclusion, SPH REIT continues to maintain its stability, providing a good source of income for REIT investors.

Things to watch out for include the falling rental reversion figures.

If possible, the REIT manager should release visitor traffic and tenant sales figures on a quarterly basis.

This is not investment advice, but I personally would want to enter only at 6% yield or higher.

I know that SPH REIT has not hit the 6% or higher yield range before, but if in a correction, that will be a good place to load up.

Otherwise, a high 5% yield range will be acceptable.

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