A prelude to Singapore’s resilient industrial sector
(+) NPI increased 5.2% y-o-y
- Revenues increased 14.7% y-o-y to S$44.9m
- Mainly due to increased contributions from hi-tech industrial (NTP, 8 Commonwealth Lane, 23 Serangoon North Ave 5) and warehouses (51 Penjuru Road)
- NPI increased 5.2% y-o-y to S$27.0m
- NPI margins were slightly lower due to higher utility costs and higher operating costs
- Hoping to increase service charges to match inflation in operating costs
(+) 1H22 DPU of 1.59 Scts; in line with expectations
- 1H22 DPU of 1.59 Scts, forming c.47% of our FY22 estimates
- We expect 2H22 earnings to be marginally higher due to an increased contribution from NTP and higher portfolio occupancy rates
- Strong positive rental reversions of 17.4% in 2Q22, mainly driven by higher rents at NTP
(+) 10-year master lease at 30/32 Tuas Ave 8
- A 10-year master lease has been signed at 30/32 Tuas Ave 8
- Property has been fully leased to a tenant from the healthcare sector
- Rental escalations in place throughout the 10-year lease
(+) Portfolio occupancy of 88.2%
- Portfolio occupancy improved c.3ppt q-o-q to 88.2%
- Highest occupancy rate in over 4.5 years
- Excluding 1 Tuas Ave 4 (undergoing AEI), portfolio occupancy would have been 91.3%
(+) Commenced AEI plans for 1 Tuas Ave 4
- Still in the early stages of planning and obtaining the relevant approvals for AEI
- Plans to convert property to a high spec logistics facility
- GFA of 165,000sqft
- Has the option to convert property to a cold storage warehouse if required
- Targeted completion in 2H23
- Discussions ongoing with potential tenants from the logistics sector
- Given that it is still in the early stages of planning, SSREIT has the flexibility to tailor the AEI to the tenants’ needs
(+) S$5.5m revaluation gains
- As compared to 31 Dec 2021, a S$5.5m increase was reported in the portfolio valuation, to S$871.7m
- Cap rates remained relatively stable; higher valuations due to organic rental growth
- Higher valuations were mainly contributed by NTP and 30/32 Tuas Ave 8 (10-year master lease)
- Portfolio valuations are expected to increase further once the AEI of 1 Tuas Ave 4 commences and it has committed occupancies
(+/-) More than 75% of loans hedged to fixed rates, but financing costs inched up
- 75.3% of loans are currently hedged to fixed rates, ensuring stability in financing costs amid rising interest rates
- No loans will be due in the next two years
- Next loan maturity is in FY24
- Gearing improved to 33.4%, as borrowings were gradually paid down with cash from operations and proceeds from DRP
- 100% of portfolio is currently unencumbered
- All-in financing costs inched up to 3.35% in 2Q22
- Partly due to higher SORA that impacted floating loans, as well as higher costs for the fixing of loans
- Every 20bps increase in interest rates will lead to a c.0.5% reduction in DPU
Our thoughts
Being the first industrial S-REIT to report its 1H22 earnings, we were pleasantly surprised with SSREIT’s performance. Despite concerns of higher utility costs, inflation of operating costs, and higher financing costs, SSREIT managed to report healthy organic growth in its earnings. Furthermore, its positive rental reversion of 17.4% in the quarter is testament to the manager’s proactive management of its assets and its past improvement/repositioning efforts bearing fruit.
The marginal increase in portfolio valuations was also a result of organic growth in earnings within its portfolio and we could potentially see further positive rental reversions at its properties. SSREIT’s NAV also consequently inched up to S$0.53 and is starting to look like a bargain, given that it is currently trading at a c.18% discount to NAV.
The AEI plans announced for 1 Tuas Ave 4 will definitely be another organic growth driver, and we would like to have more details on its costs and expected ROI before potentially revisiting our estimates. Any precommitments signed prior to the AEI completion (slated for 2H23) would also be a significant catalyst to our projections.
As such, we will be maintaining our HOLD recommendation with an unchanged TP of S$0.48. This implies a potential total return of more than 18% from the current share price.