SPH REIT - DBS Research 2021-10-05: A Gradual Turnaround

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

SPH REIT - A Gradual Turnaround

  • SPH REIT's FY21 full year DPU of S$0.054 ahead on lower rebates and interest cost savings.
  • Portfolio occupancy resilient at 98.9%; Negative reversions still on the cards given the soft leasing environment in Singapore.
  • Paragon mall a natural beneficiary as Singapore kick starts leisure travel through Vaccinated Travel Lanes.
  • Maintain HOLD with unchanged target price of S$0.92.

SPH REIT's full year DPU of S$0.054 exceeded expectations by 7%

  • SPH REIT (SGX:SK6U) reported higher gross revenue of S$277.2m (+14.8% y-o-y) and NPI of S$202.6m (+11.4%).
  • The higher topline results were due to full year contributions from Westfield Marion in FY21 with an incremental NPI of S$9.3m, lower rental rebates provided this financial year.
  • Distributable income rose 71.1% y-o-y to S$157.8m with upside from interest cost savings.
  • Average interest cost in FY21 was 82bps lower y-o-y at 1.84%.
  • Full year DPU of S$0.054 was 7% above our full year estimate of S$0.0505 and includes S$0.0052 deferred from FY20.
  • SPH REIT's gearing remains robust at 30.3% as at 31 August 2021.

High occupancy of 99% maintained; Negative reversions still on the cards

  • SPH REIT's Pprtfolio occupancy remained high at 98.8% with Paragon’s occupancy at 99.1%.
  • Portfolio rental reversions continue to be negative at 8.4% amid a softer leasing momentum in SPH REIT’s Australia portfolio (range of -12.0% to 10.5%) vs Singapore assets (range of -8.7% to 5.4%).
  • WALE stood at 5.4 years by NLA and 2.7 years by GRI.
  • We note that lease expiry is well spread out with 21% and 28% of GRI expiring in FY22 / FY23 respectively, leaving SPH REIT room to lock in lease renewals further up the recovery curve.

Singapore tenant sales stabilise in ‘endemic mode’; Lockdown woes hit Figtree Grove

  • Footfall from Singapore assets stood at 73% of pre-COVID levels and continue to be impacted by minimal tourist footfall and work from home arrangements.
  • Tenant sales rose 1% y-o-y led by a 5% y-o-y increase in tenant sales at Clementi mall and stable sales at Paragon.
  • Figtree Grove Shopping Centre foot fall and tenant sales declined 11% and 7% respectively due to the ongoing lock down in New South Wales, which is expected to be lifted this month.
  • Westfield Marion, which is in the relatively less impacted region of South Australia, saw tenant sales increasing 5% y-o-y on a similar footfall level.

Rental restructuring helped during periodic lockdowns

  • Trade sectors were broadly hit by Singapore’s periodic tightening measures in the past financial year.
  • Luxury segment continues trend below normalised levels, feeling the heat from a lack of tourist spending.
  • A small number of retailers are on instalment plans to allow deferment of rental payments and allow higher flexibility during lock downs.

Valuations marginally positive

  • SPH REIT's portfolio valuation was marginally positive in the past year.
  • Singapore assets rose 0.3% y-o-y to S$3,296.2m led by a S$10m uplift in valuation at Clementi Mall on a more optimistic outlook for suburban rents.
  • Australia assets rose 0.5% y-o-y to A$840.5m.

Paragon a natural beneficiary of green shoots from border reopening

  • Vaccinated Travel Lane was one of the first prominent steps taken by the government to reopen borders to leisure, with the first flight of vaccinated travellers ‘stepping on terra firma’ in September.
  • Tourist arrivals remained lacklustre for the most part of this year and was at ~1% of pre-COVID levels for the month of Aug’21.
  • We envision a more meaningful return of tourists as a catalyst for next year, but do not rule out potential upside should tourist numbers surprise. This also coincides with pent up domestic demand which may reflect more strongly in shopping festivity boost on retail spending this quarter.

Maintain HOLD, target price unchanged at S$0.92; pegged to privatisation offer by Keppel Corp.

Geraldine WONG DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2021-10-05
SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.92 UP 0.800