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SPH REIT Beats Forecasts – Important Things to Note

SPH REIT (SGX: SK6U), which got listed only on July 2013, is a real estate investment trust that currently has only two properties in its portfolio, the well-known Singapore-based retail malls Paragon Mall and Clementi Mall.

It announced its second quarter results yesterday, for the three months ended 28 Feb 2014, and was able to turn in numbers that were better than the forecasts it gave during its listing.

Both properties are fully occupied

During the quarter, the REIT had experienced positive rental reversions – the adjustment of rents to reflect market conditions – of 10.8% and a 100% occupancy rate for its portfolio. This allowed the trust to record quarterly revenue of S$51 million, which is 1.4% higher than its forecast.

Remarkably, SPH REIT’s property expenses came in 7.7% lower than expected at S$12.2 million. The dual positive effects of better revenue and lower expenses ultimately resulted in distributions that were higher than predicted.

In its IPO prospectus, SPH REIT crunched its numbers and figured it would be paying distributions of 1.33 Singapore cents per unit for the second quarter. Turns out, its actual distributions were 4.5% higher at 1.39 cents per unit.

Since its IPO, SPH REIT has announced a total distribution per unit of a 3.25 Singapore cents for its current financial year. Based on its current price of S$0.995, that translates into an annualised yield of 5.45%.

Balance sheet continues to strengthen

Owning to its good showing, SPH REIT had been able to increase its net asset value per unit from S$0.89 since its listing to S$0.90. That also helped to partly improve its gearing ratio (total debt divided by total assets) from 27.3% a year ago – based on its pro-forma financials as it wasn’t listed then – to 26.9%.

That gearing ratio sported by SPH REIT is actually one of the best when compared to other REITs listed in Singapore and is a sign of its strengthening balance sheet. In addition, with an average debt maturity of 4.5 years and with more than 50% of its debt having fixed rates, SPH REIT might be less affected by global expectations of rising interest rates in the near future.

Risks and growth

As both properties in the trust are enjoying 100% occupancy rates, all of the growth must be coming from rental reversions (i.e. an increase in rent). With only 2.4% of net leasable area up for renewable this year, it might be challenging to significantly improve its results through its existing properties in the near term.

In any case, the REIT’s management still expects the Singapore economy to do well, with an increase in visitors and tourists.

Foolish Summary

SPH REIT is sponsored, managed, and majority-owned by newspaper publisher and property developer Singapore Press Holdings (SGX: T39). Currently, SPH still owns the upcoming Selatar Mall in its portfolio but given the rights of first refusal that SPH REIT has for SPH’s retail properties, it seems likely that Seletar Mall might be merged into the trust in the future.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.