Large DPU Cut a Negative Surprise, Downgrade to HOLD

• SPH REIT (SGX:SK6U)’s 2Q20 DPU fell by 78.7% y-o-y and 78.3% q-o-q to SGD0.30cts, as management envisions a more challenging outlook for its retail properties for the remaining FY due to Covid-19, and it has retained distributions as a result.
• We lowered DPUs by 15-18%, and our DDM-based Target Price falls to SGD0.80 (COE: 7.4%, LTG: 1.5%).
• SPH REIT's balance sheet remains sound at 29.3% leverage, although we see low near-term deal catalysts, as tenant retention gets prioritised. Downgrade to HOLD.
• We prefer CapitaLand Mall Trust (SGX:C38U) (BUY, Target Price SGD2.70) for its scale, and stronger acquisition and potential development growth pipelines.

A Steady Quarter Operationally…

• SPH REIT's revenue rose 26.1% y-o-y and 21.8% q-o-q while NPI jumped 23.3% y-o-y and 20.4% q-o-q with the maiden contribution of Westfield Marion from 6 Dec 2019 and broad-based improvement across its Singapore properties.
• Portfolio occupancy dipped slightly from 99.3% to 98.9% - its Singapore properties saw near-full occupancies except for Rail Mall, and this rose from 89.5% to 92.2%.
• Portfolio rental reversion at +6.7% was strong across all three Singapore assets, led by Rail Mall at +14.5%, with Clementi Mall at +8.2% and Paragon at +5.6%.

…but Retail Headwinds Could Persist Longer

• Management shared that its retail and F&B businesses were adversely impacted by the stricter social distancing measures introduced at end- Mar 2020 to control the spread of Covid-19. Meanwhile, its supermarket, pharmacy and take-away food tenancies are holding up well.
• SPH REIT will fully pass on the government’s property tax rebates and it granted SGD4.6m in rental rebates for two months (for Feb-Mar) for affected tenants. It further expects to grant up to 50% of base rent in rental rebates for its most affected tenants, the majority of which are in discretionary trade sectors.
• We see further erosion in shopper traffic and tenant sales in 3Q20 due to the tight restrictions on inbound tourists.

Balance Sheet Strong, Deals on Backburner for Now

• SPH REIT's leverage rose to 29.3% with the completion of its Adelaide deal, which was supported by a SGD164.5m equity fund raising in Dec 2019. Its balance sheet is strong and we estimate SGD1.1b in debt headroom (at 45% limit) to support further deals, although we believe these are unlikely in the near term, as management focuses on tenant retention.

Source: Maybank Kim Eng Research - 2 Apr 2020