SPH Reit DPU Steady as a Rock but Risk has also increased

The headline of SPH REIT’s press release last Friday read “SPH Reit 2Q 2019 Distribution Income 2.5% Higher Year-on-Year”.

However, looking into the numbers, the cash distribution available was only up 1.0% and the DPU increase was even smaller at +0.4%. This is despite SPH Reit increasing the “cash payout ratio” from 96.8% last year to 97.5% this year.

I think they upped the payout ratio because they wanted to maintain the DPU or show a small increase. Showing a negative DPU doesn’t help in shaping investors’ perception after they just did 2 quick acquisitions within months. Acquisition is supposedly yield accretive, a decline in DPU will tell an opposite story.

The increase in the number of units usually by about 2.1 million units per quarter doesn’t help. This is the payment to the management company for managing the Reit and for helping shareholders find and successfully acquire new assets.

The increase in rental for lease renewal in Paragon and Clementi helped but the real value that SPH Reit should focus is how to increase the value of those two assets that they just acquired and made them work harder with more rental income. Capitaland Mall Trust is an expert in this and the difference in valuation and dividend yield reflect the difference in the capabilities of both companies. SPH Reit has much to learn 😊

By the way, SPH Reit suffered a loss in fair value in the last quarter – i wonder if it is paying too much for the recent acquisitions or the rental forecast for their assets is not as rosy as expected previously?

But on the whole, SPH Reit DPU is still steady as a rock but it will need to work harder to unlock more value. It is no longer as Low risk as investors may think like before. It’s gearing is 30% now.

I am vested in SPH Reit. So I sure hope the management will bring SPH Reit to new height. Only time will tell ….

Have a great investment week ahead.

Regards

Warriortan

 

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