• SPH REIT (SGX:SK6U)'s 1QFY20 DPU of 1.38 Scts (+3% y-o-y) came in line with our forecast.
• Strong y-o-y performance driven by higher rental income from Paragon and Clementi Mall as well as the acquisition of Figtree Grove in Dec 2018.
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• Westfield Marion further underpins income stability and DPU yield is attractive at 5.5% versus peers’ average of 5%.

Stronger 1QFY20 Performance

• SPH REIT’s 1QFY8/20 revenue grew by 11.8% y-o-y while NPI increased 12.4%, mainly due to higher rental income from Paragon and Clementi Mall as well as contribution from Figtree Grove Shopping Centre which was acquired in Dec 2018. Rental income from The Rail Mall was flat y-o-y.
• 1QFY20 DPU was 1.38 Scts versus 1.34 Scts in 1QFY19, making up 24.1% of our forecast.

Double-digit Rental Reversion

• Portfolio rental reversion was strong at 10.9%. Double-digit rental reversions were seen across all the malls in Singapore.
• The Rail Mall reported the strongest rental reversion of 12.8% in 1QFY20 on the renewal of 19.6% of the mall’s NLA. Paragon and Clementi Mall reported +10.7% and +10.6% rental reversions on the renewal of 5.5% and 2.5% of the malls’ NLA, respectively.

Expiring Leases Should be Renewed Positively

• SPH REIT has 13% of leases up for renewal in FY20, with the bulk of it coming from Paragon (8% of the mall’s NLA) and Clementi Mall (33% of the mall’s NLA versus 61% in 4QFY19). We believe these leases will be renewed favourably given the niche position of its malls and lower retail supply.

Acquisition of Westfield Marion Enhances Income Stability

• SPH REIT had just completed the acquisition of Westfield Marion (WM), the largest and only shopping centre in South Australia to feature full-line department stores in David Jones and Myer in Dec 2019. Together with Figtree, ~19.7% (versus 5.3% pre-acquisition) of SPH REIT’s portfolio by valuation will be derived from Australia.
• Post-acquisition, portfolio WALE will also improve from 3.2 years to 5.1 years, while contribution from top 10 tenants by income will decline from 19.3% to 15% with no more than 2.6% attributable to a single tenant which should enhance income stability.

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• We tweak our FY20-22 DPU forecasts by -6% to +1% after adjusting the effects of the acquisition of WM on more clarities.
• Its low gearing of 26.8% would place the REIT in a strong position for accretive acquisitions. More importantly, its 5.5% DPU yield is attractive vs. peers’ average of 4.9% after the recent price weakness.
• Upside/downside risks include weaker/stronger rental reversion and AUD fluctuations.

Source: CGS-CIMB Research - 13 Jan 2020