SPH REIT - DBS Research 2020-10-07: Cash Conservation Mode

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

SPH REIT - Cash Conservation Mode

  • SPH REIT (SGX:SK6U)'s FY20 full year DPU missed estimates on lower 79% payout.
  • Occupancy held up at 97.7%; positive 6.4% rental reversion for Singapore portfolio a positive surprise.
  • Paragon’s valuation was 3.8% lower, in line with expectations.
  • Forward DPU adjusted to reflect lower payout ratio to conserve cash.

Cash conservation mode

Revenue and NPI increased 5.6% and 1.2% y-o-y respectively

  • Revenue and NPI increased by 5.6% and 1.2% y-o-y to S$241.5m and S$181.9m respectively.
  • The results reflect incremental contributions from Westfield Marion (S$26.3m) and full year contribution from Figtree Grove (S$12.5m), which more than offsets rental rebates and lower topline contribution from the Singapore portfolio.
  • Full year DPU of 2.72 Scts (-51% y-o-y) missed our full year estimate of 4.31 Scts on a lower 79% payout ratio for the full year.
  • SPH REIT will be withholding S$14.5m of capital allowances for near term financial flexibility, which will be paid out by August 2021 at the latest in accordance with MAS guideline, based on a 90% distribution policy.

Positive rental reversion maintained with disciplined lease renewals

  • Portfolio lease reversion was positive 5.9%, fueled by lease renewals and new leases within the Singapore portfolio prior to COVID-19.
  • Paragon achieved positive 7% rental reversion, while the Singapore portfolio recorded positive 6.4% reversion.
  • Reversions within the Australia portfolio was -3.2%, which was within expectations, and priced into the agreed purchase price at the time of acquisition.

Building up of cash reserves a priority

  • Approximately S$31.8m of rental rebates was provided for tenants in the Singapore portfolio for the financial year, above government tax reliefs.
  • S$8.1m rental relief was offered to Australian tenants, which was a reflection of the percentage decline in underlying tenant sales (below 35%) according to the National Cabinet Mandatory Code of Conduct.
  • SPH REIT will be extending support in terms of rental rebates in FY21 if required.
  • Apart from the S$14.5m withheld (to be distributed in FY21), SPH REIT will be retaining S$15m in capital allowances for working capital needs, bringing the total buffer to S$29.5m.
  • Priority has been given to build up internal cash reserves, which may mean that future distribution ratio will range between 90% to 100% as opposed to the historical 100%.

Outlook and Recommendation

Normalisation in operational performance unlikely at Paragon, not until tourists return

  • SPH REIT's portfolio occupancy retreated 1.4ppts y-o-y to 97.7%.
  • On a full year basis, total footfall fell by 28% y-o-y at Paragon and Clementi and 12% y-o-y at Westfield Marion.
  • Tenant sales posted a similar trend, declining 30% y-o-y to S$508m at Paragon, but to a lesser extent at Clementi Mall (-13% y-o-y to S$207m), indicating that consumers continue to open up their wallets but on selected consumption items – mainly F&B and selected services.
  • Shopper footfall and tenant sales held up relatively better within Australia, relatively flat at Figtree and declining 11.2% and 9.1% y-o-y at Westfield Marion.

Cap rates steady within the Singapore portfolio

  • Paragon’s valuation declined 3.8% y-o-y to S$2.64bn with cap rate assumptions unchanged at 4.50% for retail and 3.75% for Medical Suites.
  • The fall in valuation was in line with the 4.6% drop at Wisma Atria reported earlier.
  • Valuers factored in greater weakness among central malls, benchmarking to luxury expenditure, as opposed to defensive suburban malls, suggesting a softer recovery profile for Orchard Road and tourist positioned malls.
  • Other portfolio assets declined 2.2%, 4.9% and 7.8% y-o-y at Clementi Mall, Westfield Marion and Figtree Grove respectively.

SPH REIT's softer rental outlook captured within our estimates.

  • We have factored in a lower occupancy of 95% at Paragon, with a negative rental reversion of 5% in FY21, maintaining a conservative stance that a slower recovery profile is likely. The S$14.5m that was retained this financial year will see mandatory payment by August 2021 under the MAS rule, which may boost DPU in FY21. We think that SPH REIT will likely even out distributions in the coming few years, by adjusting the payout ratio.
  • We have adjusted the payout ratio to 80% in FY21 and 90% thereafter from the historical 100% in view of SPH REIT’s cash conservation mode. Target price remains unchanged at S$0.80 as we roll forward valuation base to FY21.
  • See SPH REIT Share Price; SPH REIT Target Price; SPH REIT Analyst Reports; SPH REIT Dividend History; SPH REIT Announcements; SPH REIT Latest News.

Singapore Research Team DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2020-10-07
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