Weaker fourth quarter earnings due to lower revenues and revaluation gains
Perennial Real Estate Holdings released its fourth quarter earnings yesterday, reporting revenues of S$21.5m for 4Q 16, down 24.2% from S$28.4m over the same period last year. This was due mainly to lower rental revenue from TripleOne Somerset as expiring leases were not renewed due to ongoing asset enhancement works. 4Q16 PATMI (profit after tax and minority interests) was down 37.8% to S$25.6m from S$41.1m in the same period last year, mainly due to lower share of operating results from joint ventures and lower net fair value gains on revaluation of its investment properties, apart from lower revenues contribution from TripleOne Somerset.
For full year FY16, the Group's revenues fell marginally by 6.4% to S$110.2m from S$117.7m in FY2015, while PAMI fell 39.6% to S$35.1m from S$58.1m in FY15 due to lower revenue, impairment provision, write-off of intangible assets and higher financing expenses. The slight fall in revenue over FY16 was due mainly to the absence of acquisition fee of AXA Tower earned in 2015 and lower rental revenue from TripleOne Somerset, offset by strata sales of office units in the development.
Decent FY16 performance overall; recent divestment of TripleOne Somerset expected to reduce Group's leverage over the near-term
Overall, we think that the Group pulled in a decent performance over FY16, with its revenues well supported by recurring income from its Singapore and China commercial properties (TripleOne Somerset, Perennial Jihua Mall, Foshan and Perennial Qingyang Mall, Chengdu) amid strong occupancy rates. Strata sales of its the office and medical suites at TripleOne Somerset and AXA Tower contributed to the Group's earnings, allowing the company to recycle capital to higher-yielding assets such the completion of its acquisition of an additional stake in Chinatown Point in December, increasing its effective interest in the property from 5.15% to 45.15% which will provide a further boost to its recurring income.
The Group also made strides in its integrated real estate and healthcare strategy in China through acquisitions and joint ventures and building up scale in the business, along with the continuing development of Perennial International Health and Medical Hub and Chengdu East High Speed Railway Integrated Development Plot D2.
In January, Perennial announced the divestment of 20.2% stake in TripleOne Somerset to a wholly-owned subsidiary of Hong Kong-listed Shun Tak Holdings Limited, reducing its stake from 50.2% to 30%. The Group has guided that it is likely register a pre-tax gain of approximately S$34.3m from the sale, and expects its net debt-to-equity to reduce to around 46% from the 66% level as of end-Dec 16, which is amongst the lowest compared to its peers.
Bonds trading tighter in recent weeks; 2018 retail bonds continue to be favoured
Perennial's credit curve has shifted down in recent weeks, sporting average spreads of 252bps as of 9 Feb 17, tightening from around 288bps seen in early January. This is in line with the recent strength we've seen in the wider SGD HY segment (which registered a gain of 1.4% in January) as investors re-entered the space after a weak 2H16. We note also that benchmark SGD Swaps curve has traded lower in January across all tenors falling between 17-23 bps, which supported prices of local currency denominated bonds. Investors may note that Perennial's two retail bonds are still yielding higher compared to its wholesale issues, with PREHSP 4.650% 23Oct2018 Corp (SGD) - Retail and PREHSP 4.550% 29Apr2020 Corp (SGD) - Retail trading at yields of 4.35% and 5.01% respectively. For investors looking for exposure to the company's bonds, we continue to favour the 2018 retail bonds over the 2020s, which offers a shorter durational exposure, mitigating the impact of possible benchmark rate rises over 2017.
Chart 1: Perennial Real Estate Holdings' Bonds