SPH REIT - OCBC Investment 2020-10-08: Slow Recovery Amid A Protracted COVID-19

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

SPH REIT - Slow Recovery Amid A Protracted COVID-19

  • SPH REIT (SGX:SK6U)'s 4QFY20/FY20 DPU fell 63%/51% y-o-y.
  • S$14.5m of FY20 income available for distribution was deferred.
  • Tenant retention and supports remain the key focus.

SPH REIT's FY20 results below expectations

  • SPH REIT (SGX:SK6U)’s FY20 results came in below Bloomberg consensus’ and our expectations on deferred income, and rental reliefs. Gross revenue grew 5.6% y-o-y to S$241.5m and net property income (NPI) increased marginally by 1.2% y-o-y to S$181.9m. The growth was largely driven by the acquisition of Westfield Marion in Dec 2019 and Figtree Grove in Dec 2018, but partially offset by the S$31.8m of rental waivers and reliefs provide to eligible tenants in Singapore.
  • Management deferred S$14.5m of FY20 income available for distribution to FY21 and provided S$8.1m for eligible tenants in Australia. In addition, S$15m of capital allowance was utilised for financial flexibility. As such, 4QFY20 DPU fell 63.0% y-o-y to 0.54 S cents.
  • For full-year, SPH REIT's FY20 DPU declined 51% to 2.72 S cents, which formed 70% of our forecast.

Positive rental reversion of 5.9% due to pro-active leasing

  • As at 31 Aug 2020, SPH REIT’s portfolio occupancy rate remained healthy at 97.7% and recorded positive rental reversion of 5.9%, thanks to SPH REIT’s pro-active leasing strategy.
  • We understand from management that SPH REIT typically negotiates and renews leases 6-8 months in advance to mitigate vacancies. Hence, a majority of the leases were renewed/signed before COVID-19.
  • SPH REIT’s Singapore assets reported positive rental reversions of 6.4% and high occupancy rate of 97.8%. Separately, SPH REIT’s Australia assets recorded negative rental reversion of 3.2%. However, this is better than management’s projections when they acquired the assets.

COVID-19 weighed on traffic and sales

  • Visitor traffic and tenant sales have been adversely impacted by COVID-19 with larger impact seen from Paragon given its focus on luxury brands and heavier reliance on tourists. Paragon’s traffic and tenant sales fell 27.4% and 28.2% y-o-y for FY20. With a protracted COVID-19 and weak travel demand, management intends to attract local consumption to Paragon.
  • Performances of The Clementi Mall and Figtree Grove were relatively more resilient given the suburban location of The Clementi Mall and higher percentage of non-discretionary shops for Figtree Grove.

Intention to retain overseas income to build up cash reserve

Chu Peng OCBC Investment Research | https://www.iocbc.com/ 2020-10-08
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