1Q20 in Line, Adding Adelaide Deal; Upgrade to BUY

• SPH REIT (SGX:SK6U)'s 1Q20 DPU, up 3.3% y-o-y, was in line with consensus and our estimate, driven by stronger performance at Paragon in SG and the Figtree Grove contribution in Australia.
• We see DPUs supported by rental recovery at Paragon and higher visibility from its rising Australian contributions. Its strong balance sheet and high SGD1.4b debt headroom supports upside from further deals.
• At 12% total return, we upgrade SPH REIT from HOLD to BUY.

SG Assets Saw Strong +10.9% Rental Reversion

• SPH REIT's 1Q20 revenue and NPI rose 11.8% y-o-y and 12.4% y-o-y, driven by:
  1. Paragon, which saw revenue and NPI rise 4.8% y-o-y and 5.6% y-o-y; and
  2. its 85% interest in Figtree Grove acquired on 21 Dec 2018.
• Portfolio occupancy improved from 99.1% to 99.3% - all properties saw near-full occupancies except for Rail Mall, but this rose from 84.3% to 89.5%.
• Portfolio rental reversion at +10.9% was strong across all 3 Singapore assets, led by Rail Mall (+12.8%), Paragon (+10.7%) and Clementi Mall (+10.6%). We see prime Orchard Road rents rising 3-5% in FY20-21E given tight supply, to support further positive rental reversions at Paragon from FY20-21.

Australia Contribution Rises, High DPU Visibility

• We raised FY20-21E revenue and NPI by 13-20%, as we factor in the Westfield Marion acquisition completed on 6 Dec 2019. Its AUM from Australian properties will rise from 5% to 20% going forward.
• Meanwhile, Westfield Marion’s 6.7-year WALE (by GLA) and 4.2 years by income extends SPH REIT’s portfolio WALE from 3.3 to 5.1 years (by NLA). This is a strong asset backed by reputable anchors across its 300-plus tenancies, and we see higher DPU visibility supported by favourable lease structures as the bulk of specialty tenant leases are embedded with an annual rental escalations based on CPI and an added 2.0-2.5% spread.

Balance Sheet Strong; SGD1.4b Headroom for Deals

• Its leverage improved to 26.8% as of end-Nov 2019; it rises to 29.5% with the completion of its latest deal that was backed by a SGD164.5m equity fund raising in Dec 2019. We estimate SGD1.4b in debt headroom (at 45% limit) to support further deals.
• Seletar Mall remains its primary potential sponsored deal in Singapore, which could add 3-6% to FY20-21 DPUs, assuming a fully debt-funded deal.

Source: Maybank Kim Eng Research - 13 Jan 2020