SPH REIT - DBS Research 2020-04-02: A Long Road To Recovery

SPH REIT (SGX:SK6U) | SGinvestors.io SPH REIT (SGX:SK6U)

SPH REIT - A Long Road To Recovery

  • The 79% cut in DPU to 0.3 Scts for the quarter may come as a shock to investors but could be the best approach to take given current operational headwinds.
  • SPH REIT (SGX:SK6U)’s priority, first and foremost, would be to tide tenants through the COVID-19 situation. We envision tenants within the luxury space to feel the heat the most given a sharp decline in tourist traffic and low domestic appetite for discretionary goods.
  • Nonetheless, the decline in DPU was due to higher retained income that could be channeled towards the tenant relief package. We think that the c.S$33m retained would be returned to unitholders as distributions further down the road if the full quantum is not utilised.

Cut payout ratio, 2QFY20 DPU fell 79% y-o-y to 0.3 Scts

Record revenues in 2Q20.

  • SPH REIT (SGX:SK6U) reported 2QFY20 gross revenue and net property income (NPI) of S$73.3m (+26.1% y-o-y) and S$56.5m (+23.3% y-o-y) respectively. This was on the back of maiden contributions from Westfield Marion, which contributed S$12.6m to topline and S$8.4m to NPI.
  • Distributable income for 1HFY20 of S$77.3m made up 47% of our previous full year estimate of S$163m.
  • DPU declared was 0.3 Scts for 2QFY20, representing a 78.7% drop y-o-y, as approximately S$33m of distributable income was retained in light of COVID- 19 headwinds.

Operational update:

  • COVID-19 Priority would be, first and foremost, to tide tenants through the current COVID-19 difficulties. SPH REIT will be passing on the full property tax rebate, announced as part of the supplementary budget, to tenants in a targeted manner. This is in addition to a c.S$4.6m granted to affected tenants in the form of rebates for Februrary and March.
  • The most impacted tenants will be granted rental rebates of up to 50% of base rents for the subsequent months of April and May.
  • A full waiver will also be granted to tenants within the entertainment and education trade sectors that are undergoing mandatory closure until the end of April.

Rental reversions at +6.7% across Singapore malls

  • Overall portfolio occupancy was resilient at 98.9%, with a blended rental reversion figure of +6.7% across SPH REIT’s Singapore malls. A total of 92 leases were renewed in the past quarter, representing 12.8% of total NLA in Singapore.
  • There remains to be 25% of leases by GRI due for expiry in FY20 (ending August) and another 17% expiring in FY19.

Low gearing at 29.3%

  • Gearing remained low at 29.3% post acquisition of Westfield Marion. SPH REIT is currently in negotiations to refinance debt of approximately S$280m maturing in FY20.
  • Cost of debt inched lower to 2.83% p.a. from 2.9% due to the newly taken up A$200m loan that was used to partially fund the acquisition of Westfield Marion.

Double whammy on Paragon.

Singapore Research Team DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2020-04-02
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