The headlines from their latest Media Release last week screamed “SPH REIT delivered steady distribution. 1Q 2019 DPU held steady at 1.34 cents. Figtree Grove Shopping Centre – yield-accretive acquisition in New South Wales, Australia”.
As an income investor, I am naturally happy.
But is everything so rosy for SPH Reit? I somehow didn’t feel so.
Looking at the hard-financial numbers, it is not difficult to see that:
- Net property income (“NPI”) for 1Q 2019 was $41.8 Mln, a 1.0% drop compared to Q1 2018 last year.
- Revenue also dropped but only by 0.6%. So, the property expenses was the culprit and indeed, it increased by 6.5% for the same period!
- Income available for distribution also dropped by 2.0% from $36.54 Mil to $ 35,86 Mil.
- But DPS the same leh at 1.34 cents, so, the payout % has to be bumped up to 96.5% to enable the same DPS. Previous payout % was only 94.1%. That’s a 2.4% absolute jump. Wow!
Hmm, doesn’t feel good really.
Then, another piece of positive news from the Media Release – “Paragon recorded positive rental reversion of 10.1% for new and renewed leases for 1Q 2019 … The overall portfolio registered a positive rental reversion of 9.7%.”
Wait! If rental reversion went up, then revenue must go up right? But it was down. What is the problem then?
But nowhere in the media release nor the financials nor the presentation pack tried to provide an explanation for this. After an extensive search for answer, I can only postulate that the reason is the declining “Committed Occupancy”. By the way, this is the first time the SPH Reit used this term “Committed”. It used to be just “Occupancy”. Does it mean just committed but actual occupancy is lower? Does it mean something else from what we used to know?
Committed Occupancy for Q1 2019 was 99.2%.
In contrast, occupancy at Q4 2018 was 99.4%, Q3 2018 was 99.6%. SPH Reit used to have 100% before that. By the way, I don’t know how occupancy % is measured … is it by Net Lease Area, by number of contracts signed, or by expected rental? If more information is provided, we can do a better job at analyzing the issue.
And if we take a closer look at the financials, it is not difficult to get the feeling that the largest drop in occupancy must come from Paragon, which is a big worry as it makes up 80% of SPH Reit revenue and net income.
Hmm… is SPH Reit sacrificing occupancy in order to maintain or get a higher rental rate?
So far, this strategy didn’t seen to work. Rental reversion up 10% but Net income down 1%, Income available for distribution came down and occupany also went down.
Are the Acquisitions working out as planned?
The other thing that I feel SPH Reit could reveal more information is how The Rail Mall is yield accretive or is it not. I think they need to be accountable to Shareholders whether their plan to acquire The Rail Mall has really yielded the benefits and added the promised value to Shareholders.
Now they are going to acquire Figtree Grove Shopping Centre and SPH Reit claims that it is also yield accretive acquisition. But I haven’t seen the track record to be convinced. Furthermore, Figtree is located in Australia which has a market structure that is very different from Singapore. How is SPH Reit going to manage FigTree actively so that it realizes the return for the Shareholder? Does SPH Reit as a newcomer know how to compete there? It is not going to be easy.
Much remains to be seen … I hope in the short term they will be successful to stem the declining occupancy in Paragon. Otherwise, I think we will have to be prepared for lower DPU in the future unless The Rail Mall and FigTree can make up for it. But both are challenging to manage.
I am vested in SPH Reit by the way.
I am not selling their shares. In my opinion, it still provides attractive yield to me as I bought most of them at a much lower price than today. But if you are buying today, you may want to look closer and think about it.
Have a great investment week ahead folks.