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SPH REIT’s Latest Earnings: Distributions Go Flat

Credit: SPH REIT Management Pte Ltd.

SPH REIT (SGX: SK6U) released its fiscal fourth-quarter earnings report yesterday. The reporting period was from 1 June 2015 to 31 August 2015.

The REIT is an owner of two retail properties in Singapore, namely Paragon and The Clementi Mall. Its main sponsor, majority owner, and manager would be newspaper publisher and property developer Singapore Press Holdings Limited  (SGX: T39).

You can catch up with SPH REIT’s last quarter’s earnings here.

Financial Highlights

Here’s a rundown on the latest financial figures from SPH REIT:

  1. Gross revenue was $50.8 million in the reporting quarter, down about 0.6% from a year ago. For the full year ended 31 August 2015 (FY2015), SPH REIT reported a 1.4% increase in revenue to $205 million.
  2. Net property income (NPI) for the quarter, though, rose by only 0.4% year-on–year to $38.2 million. For the full fiscal year, NPI fared better with a 3.3% increase to $155.6 million.
  3. Distribution per unit (DPU) for the quarter was flat at 1.39 cents, unchanged from the fourth quarter in the last fiscal year. For FY2015, SPH REIT’s DPU tallied up to 5.47 cents, up a slight 0.7% from FY2014.
  4. As of 31 August 2015, SPH REIT’s net asset value per unit is $0.95, a small step-up from the $0.93 seen a year ago; meanwhile, the valuation of SPH REIT’s properties stood at $3.21 billion.

As my fellow Fool Chong Ser Jing had shared before, rental support is a factor to be wary of in REITs. In SPH REIT’s case, there was drop in the rental support from $1.3 million in the fourth-quarter of FY2014 to $744,000.

Foolish investors might also want to keep an eye on the REIT’s debt profile. The debt profile may provide clues on how a REIT is funded and its sensitivity to the interest rate environment. These are summarised for SPH REIT below:

SPH REIT balance sheet details (13 Oct 2015)

Source: SPH REIT’s presentation

There are positive signs in the table above, such as a lowering of SPH REIT’s gearing ratio and an increase in the proportion of fixed-rate borrowings (the latter helps insulate the REIT from any short-term increases in interest rates until refinancing has to occur).

But, there are also areas where SPH REIT has taken a step backward. Its weighted averaged term to maturity has dropped, while its average cost of debt has increased. The REIT may only have 15.3% of its borrowings on floating rates, but if interest rates do step up aggressively over the short-term, it may still feel some pain on the bottom-line.

SPH REIT will have $250 million in debt coming due in 2016 (with $320 million in 2018 and $280 million in 2020). Investors may want to keep an eye on the REIT’s refinancing of its borrowings.

Operational highlights

There was full occupancy for Paragon and The Clementi Mall and both malls achieved low single-digit percentage growth in revenue during the fiscal year. Rental reversion – the revision of rental rates to suit prevailing market conditions – clocked in at a healthy 8.6% for SPH REIT.

Investors might also be pleased to know that visitor traffic to Paragon and The Clementi Mall in FY2015 had grown by 2.0% and 4.7%, respectively. Tenant sales, another important metric that can give clues on the health of SPH REIT’s assets, was a little mixed. The Clementi Mall had experienced a 3.6% improvement in tenant sales, but the number at Paragon had dipped by 3.2% on the back of a tenancy revitalization program at the mall.

The Clementi Mall may have a better operational performance in FY2015 than in FY2014 (for instance, visitor traffic merely held steady in the latter year), but some 85.5% of the mall’s total leases by gross rental income will expire in FY2017. The renewal of those expiring leases is worth keeping a close eye on.

Susan Leng, the chief executive of SPH REIT’s manager, had the following comments on the reporting quarter in the earnings report:

“We are pleased that SPH REIT has delivered another year of healthy operating and financial results in FY2015, amid challenging retail environment. We will continue to proactively manage our properties while seeking opportunities to create value for unit holders.

The chiller decanting project at Paragon was completed on schedule during the year. This asset enhancement initiative converted about 5,000 sq-ft [square-feet] of back-of-house areas to valuable lettable space and contributed close to $1m incremental rental income annually. Paragon will also enjoy savings in utility consumption from the more efficient chillers. We are confident that our continual efforts to build on the strong positioning of both properties, firm partnership with tenants and philosophy of continual asset enhancement will sustain future performance.

On the outlook for FY2016, the near-term economic growth for Singapore is expected to remain modest, amid persisting uncertainties in the global economy and continued tight labour conditions weighing on the domestic economy. Barring any unforeseen circumstances, SPH REIT’s two high quality and well-positioned retail properties in prime locations, are expected to remain resilient, and turn in a steady performance”

Foolish summary

SPH REIT last traded at $0.965 on Monday. This translates to a historical price-to-book ratio of 1.02 and a trailing twelve months distribution yield of around 5.7%.

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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 Chin Hui Leong doesn’t own shares in any companies mentioned.