Results First Take: Another quarter of double-digit positive rental reversions
- Robust positive rental reversions of 10.2% in 3Q22
- Key positives: i) continued positive rental reversions, ii) improvement in portfolio occupancy rates, iii) low gearing that provides ample debt headroom
- Key negatives: i) 12.8% of its portfolio leases will be expiring in the next 3 months, ii) further spike in interest rates could lead to some downside in earnings
- Maintain HOLD with a TP of S$0.48
| Key operational data | 3Q2022 | 2Q2022 | % Change | 3Q2021 | % change |
| Portfolio occupancy (%) | 89.1% | 88.2% | 0.9% | 85.3% | 3.8% |
| WALE (years) | 2.7 | 2.8 | -0.1 | 2.7 | 0 |
| Rental Reversion | 10.2% | 17.4% | -7.2% | 7.8% | 2.4% |
| Aggregate Leverage | 33.7% | 33.4% | 0.3% | 34.8% | -1.1% |
| Interest Coverage Ratio | 3.9 | 4.0 | -0.1 | – | – |
| All-in cost of debt | 3.8% | 3.4% | 0.4% | 3.3% | 0.5% |
(+) Strong positive rental reversions and improvement in occupancy
- Portfolio occupancy inched up to 89.1%; highest occupancy in over 5 years
- Excluding 1 Tuas Ave 4 (undergoing AEI), portfolio occupancy would have been 92.2%
- Mainly due to new leases signed with tenants from the logistics and media sectors
- Continued strong positive rental reversions of 10.2%
- Will be watching out for the c.12.8% of portfolio leases that are due to expire in 4Q22
(+) Healthy leverage of less than 34%
- Gearing in 3Q22 was 33.7%
- Ample debt headroom of more than S$142m
- More than 73% of its borrowings hedged to fixed rates
(-) Increase in financing costs; two-thirds of the increase mitigated by fixing of debt
- All-in financing costs crept up to 3.77%, a 63 bps increase since the start of the year
- 3-month SORA increased 1.78% since start of the year
- All-in borrowing costs only increased 0.63% in the same period; mitigated by high proportion of debt on fixed rates
- Every 100 bps increase in interest rates will lead to a -2.5% to DPU
- Our projections have accounted for expectations of higher financing costs
- If interest rates coneintue to spike at such as fast pace as the last few months, then it could lead to downside risk to estimates
- No debt due for refinancing until FY24
Approximately two-thirds of the spike in interest rate has been mitigated by SSREIT’s high proportion on debt hedged to fixed rates
Source: SSREIT
Our thoughts
Operationally, SSREIT’s portfolio continues to perform well. Their overall portfolio reported an almost 1% increase in occupancy, and this was mainly due to the 83,588 sqft of new leases signed in the quarter. The new leases were signed with tenants from the media and Publishing sector, as well as the continued growth of the logistics sector. In 3Q22, SSREIT continued to benefit from the 10.2% positive rental reversion, the seventh consecutive quarter of positive rental reversions. However, c.12.8% of its portfolio leases will be expiring in 4Q22, and we will be keeping a close watch on these expiries.
On the capital management front, SSREIT has not been spared by the rising interest rates. As compared to 31 December 2021, their all-in financing costs have increased by 63 bps. The impact to SSREIT’s borrowing costs would have been much higher if not for the c.73% of debt that has been hedged to fixed rates. In our projections, we have accounted for higher financing costs this year amidst the rising interest rates. However, if the SORA continues to increase at such as fast pace for the rest of the year, then there could be some downside risks to our earnings. However, we do note that a further 100 bps increase in borrowing costs from current levels will lead to a c.2.5% impact to DPU.
Although we remain positive on SSREIT’s robust operating metrics, we will be keeping a close watch on its lease expiries for the rest of the year. With the persistent high inflation and rising interest rates, leasing activity could slow down as we enter into the last quarter of FY22. As such, we will be maintaining our HOLD recommendation with a TP of S$0.48.