Were SPH REIT's rents hit by occupancy costs?

Management was mum on rents as overall rental reversion was -6%.

SPH REIT reported lower net property income (NPI) no thanks to overall negative rental reversions (-6%) from Paragon (-6.2%). Maybank Kim Eng also revealed that management was tight-lipped on rental guidance but explained that tenant negotiations were driven by occupancy cost considerations with leases typically committed a year earlier.

According to a report, however, tenant sales improved and YTD shopper traffic remained stable. Luxury brands also had double-digit sales growth and led the recovery in tenant sales and lowered occupancy costs below 19% from 19.6% in FY2017.

Maybank KE analyst Chua Su Tye noted that sportswear sales have also strengthened, explaining an increased visibility of standalone mono-brand stores on the third floor. “We forecast rents to rise 3-5% in FY2018-2019,” he added.

Chua added that the Seletar Mall remains available as an acquisition opportunity, whilst third-party Australian retail assets are likely at the “tail-end of the investment cycle” according to management.

“A potential Seletar Mall deal adds 4-8% to FY2019 distribution per unit (DPU) estimates, assuming the purchase of a 100% stake that is fully debt-funded given its low gearing of 26%,” Chua said. “We peg a higher probability to the acquisition of its sponsor’s 70% stake (in the mall), as the rest is owned by United Engineers, now controlled by two distinct developer parties.”

Meanwhile, the Rail Mall deal, completed on 28 June, is considered a “small step.” According to Chua, management believes the locality’s private residential catchment is conducive in expanding its F&B tenancies, which are resilient to e-commerce threats.

Near-term organic growth is likely to be limited with occupancy at 96% and low footfall, the analyst said, including the $63.2m acquisition assuming an NPI yield of 7% given the shorter remaining land lease.