• The 79% cut in DPU to 0.3 Scts for the quarter may come as a shock to investors but could be the best approach to take given current operational headwinds.
• SPH REIT (SGX:SK6U)’s priority, first and foremost, would be to tide tenants through the COVID-19 situation. We envision tenants within the luxury space to feel the heat the most given a sharp decline in tourist traffic and low domestic appetite for discretionary goods.
• Nonetheless, the decline in DPU was due to higher retained income that could be channeled towards the tenant relief package. We think that the S$33m retained would be returned to unitholders as distributions further down the road if the full quantum is not utilised.

Cut Payout Ratio, 2QFY20 DPU Fell 79% Y-o-y to 0.3 Scts

Record revenues in 2Q20.

• SPH REIT (SGX:SK6U) reported 2QFY20 gross revenue and net property income (NPI) of S$73.3m (+26.1% y-o-y) and S$56.5m (+23.3% y-o-y) respectively. This was on the back of maiden contributions from Westfield Marion, which contributed S$12.6m to topline and S$8.4m to NPI.
• Distributable income for 1HFY20 of S$77.3m made up 47% of our previous full year estimate of S$163m.
• DPU declared was 0.3 Scts for 2QFY20, representing a 78.7% drop y-o-y, as approximately S$33m of distributable income was retained in light of COVID- 19 headwinds.

Operational update:

• COVID-19 Priority would be, first and foremost, to tide tenants through the current COVID-19 difficulties. SPH REIT will be passing on the full property tax rebate, announced as part of the supplementary budget, to tenants in a targeted manner. This is in addition to a S$4.6m granted to affected tenants in the form of rebates for Februrary and March.
• The most impacted tenants will be granted rental rebates of up to 50% of base rents for the subsequent months of April and May.
• A full waiver will also be granted to tenants within the entertainment and education trade sectors that are undergoing mandatory closure until the end of April.

Rental reversions at +6.7% across Singapore malls

• Overall portfolio occupancy was resilient at 98.9%, with a blended rental reversion figure of +6.7% across SPH REIT’s Singapore malls. A total of 92 leases were renewed in the past quarter, representing 12.8% of total NLA in Singapore.
• There remains to be 25% of leases by GRI due for expiry in FY20 (ending August) and another 17% expiring in FY19.

Low gearing at 29.3%

• Gearing remained low at 29.3% post acquisition of Westfield Marion. SPH REIT is currently in negotiations to refinance debt of approximately S$280m maturing in FY20.
• Cost of debt inched lower to 2.83% p.a. from 2.9% due to the newly taken up A$200m loan that was used to partially fund the acquisition of Westfield Marion.

Double Whammy on Paragon

• Paragon, a luxury retail mall along Orchard Road and SPH REIT’s anchor asset is likely to be doubly hit by the sharp drop in tourist footfall and general low appetite for luxury goods at this time. Affected tenants would be granted a waiver of up to 2 months of their base rents through SPH REIT’s tenant relief package, which will be partially supported by retained earnings.

Source: DBS Research - 2 Apr 2020