Positive reversions eroded by interest cost
- Management expects the positive reversion trend to continue in Singapore.
- FY23 Singapore tenant sales -2% yoy, obscured by 9 months of non-trading by Saint Laurent at Paragon, excluding which tenant sales would be flat.
- Reiterate Hold on limited upside. FY24F DPU yield of 5.3% lags peers.
Topline growth wiped out by higher interest cost
FY23 revenue/NPI grew 1.8%/1.7% yoy to S$288.9m/S$215.1m on the back of stronger performance of the Singapore portfolio, which saw 2.8%/3.2% yoy revenue/NPI growth. FY23 DPU of 5.02 Scts (-9.1% yoy due to higher interest cost) was above at 108.5% of our FY23F, but included S$6.6m or 0.23 Scts of distributions of rollover tax adjustments and distributable income retained from prior periods, excluding which FY23 DPU would have been in line at 100.2% of our FY23F.
High occupancy in Singapore assets supporting reversions
Portfolio reversions for FY23 came in at 6.3%, with Singapore delivering strong reversions of 10.6% (16MFY22: -4.1%). Reversions at Australia dipped further by -8.2% (16MFY22: -7.0%) as management prioritised occupancy over rents against the backdrop of elevated interest rates and softening consumer sentiment. Portfolio occupancy slipped 0.4bps yoy to 98.1% due to transitional vacancies at Rail Mall and its Australian portfolio. Management has guided that FY24F reversions for the Singapore portfolio could land in the mid- to high-single digit range, backed by 100% committed occupancy at Paragon and Clementi Mall.
No decision on Seletar Mall yet
Portfolio valuations increased by 2.2% yoy in FY23, lifted by the 1.9% or S$62.3m yoy increase in the Singapore portfolio, which offset the 5.6% or A$47.5m yoy decline in the Australian portfolio. Gearing remains low at 30%, while cost of debt increased from 4.21% for 9M23 to 4.30% for FY23 (85% fixed). PGNREIT has S$300m in perpetuals with a call/reset date of 30 Aug 2024. Assuming interest rates remain at current levels, the coupon rate will increase from 4.1% to c.6.2%. Our base case assumption is that PGNREIT will opt to redeem the perpetuals by drawing on bank loans. We estimate that at the current interest rate levels, interest on new loans will be c.5% and gearing will rise to c.37%, which is still healthy, in our view. On 15 Jan 24, media outlets reported that Allgreen Properties is in an exclusive due diligence process to buy Seletar Mall. Should a bid be offered, the right-of-first-refusal (ROFR) will be triggered and PGNREIT will have 30 days to exercise the ROFR.
Reiterate Hold on limited upside potential
We cut FY24F-25F DPU by 3.4-4.7% as we raise our reversion assumptions, tweak down our tax assumption and factor in management’s guidance that 100% of manager’s fees will be paid in cash (previous assumption was 95% of fees paid in units). Reiterate Hold. Our DDM-based TP is reduced from S$0.88 to S$0.86 on lower DPU forecasts. Potential upside risks: stronger rental reversions and accretive acquisitions. Downside risks: weak reversions/leasing and a slowdown in consumer spending, leading to lower turnover rent and softer tenant sentiment, hurting PGNREIT’s ability to command positive
reversions.