SPH REIT unit price: what to watch out for its Q3 results

Mall landlord SPH REIT is expected to announce its third quarter earnings results ended May 31, 2019 next Thursday (July 11, 2019). The real estate investment trust (REIT) is sponsored and managed by newspaper publisher Singapore Press Holdings (SPH). The newspaper mogul is also the largest unitholder of the REIT.

SPH REIT owns retail malls in Singapore, the Paragon Mall located at the Orchard Road shopping district and The Clementi Mall. It also owns a leasehold interest in The Rail Mall.

SPH REIT is a mid-cap real estate investment trust, or REIT for short. REITs are a portfolio of real-estate investments, owned and operated by the managers of the trust. REITs take funds from operations to generate income, through the collection of rent, for example.

An important indicator for investors when looking at REITs is the distribution per unit (DPU), which are pay-outs measured through how much an investor gets for every share she/he has in the REIT.

Having a consistency in rental occupancy is a positive attribute for REITs, as it reflects its income flow. Meanwhile, new property investments that add-value to the firm with its high rental occupancy also contribute to a higher DPU.

Units of SPH REIT have gained 9 Singapore cents since the start of this year and is now trading at S$1.10 as of Friday noon. It has S$2.85 billion in value and is seen as a mid-cap REIT.

Previous quarter’s DPU rose while occupancy was at 99.2%

In the second quarter results released in April this year, SPH REIT’s distribution per unit rose 0.7% to 1.41 Singapore cents from a year ago.

Gross revenue increased 8.5% year-on-year to S$58.12 million for the quarter with contributions from The Rail Mall and Figtree Grove Shopping Centre which were bought in June and December last year.

Net property income rose 8.5% higher to S$45.86 million, while income available for distribution gained 2.5% from a year ago, at S$37.02 million.

For the second quarter, the REIT maintained an occupancy of 99.2%. Its overall portfolio received a positive rental reversion of 8.4% for the first half of the financial year 2019. The REIT’s malls Paragon, The Clementi Mall, and The Rail Mall posted positive rental reversions.

Ms Susan Leng, chief executive of SPH REIT Management had said in the earnings statement in April that SPH REIT ‘continues to maintain high occupancy and delivers stable distribution. The overall portfolio registered a positive rental reversion of 8.4% for the first half of 2019 supported by growth in overall tenant sales’.

The positive rental reversions from Paragon and The Clementi Mall reflects positive outcomes in spite of a slowing global economic outlook and softening local economic performance.

Positive rental reversions bolsters outlook

In an April report published after the REIT released its earnings report, DBS Group Research called for a “Buy” recommendation for the unit, with a target price of S$1.15, as it continues to ‘see ample growth opportunities’ for the REIT as well as ‘improving rental reversionary prospects’.

DBS which is more bullish on retail REITs, believes that the ‘limited upcoming retail supply in the sub-market and well-executed strategies leading to the turnaround at Paragon, are proof of the portfolio’s ability to withstand challenges, and stand the test of time’.

Figtree Grove shopping centre expected to drive DPUs higher

The full year contribution from Figtree Grove is likely to boost on the REIT’s DPUs for this year.

‘Value-add opportunities for The Rail Mall and Figtree Grove is expected to drive DPUs to another record,’ the DBS research report said.

In its April earnings report, SPH REIT said it “proactively” manages its financing risk by staggering the debt maturity profile to avoid major concentration of debts maturing in any single year. It said new loans were established in December 2018 to finance the acquisition of Figtree Grove Shopping Centre with total borrowings of S$1.1 billion as at 28 February 2019.

Net debt to EBITDA high, but debt carefully managed

The financial health of REITs is measured through measuring its fund from operations compared to debt. For SPH REIT, it has a ratio of 18%, which adds up to around 5.43 years to pay off its debts using operating income alone. The longer it takes for a firm to pay back its debt, the higher its risks are.

The group has a net debt of 6.95 times its earnings before interest, tax, depreciation and amortization or EBITDA, which places it as a highly leveraged firm. In the event of an earnings downturn, the firm has higher risks to sustain its dividend.

Even so, SPH REIT is seen to be generating enough cash from its borrowings with an interest coverage ratio of 6.73x.