SPH REIT's 3Q20 DPU Up 67% Q-o-q

• SPH REIT (SGX:SK6U)’s 3Q20 DPU was down 64.0% y-o-y, but it rose 66.7% q-o-q to SGD0.50cts, reflecting the cumulative impact from rental relief provided to tenants during Singapore’s ‘circuit breaker’ months, and provisions for additional assistance programmes. Tenant sales for Paragon are likely to be slow, and will lag the recovery in shopper traffic.
• We revised DPUs (by -15% to +7%) to factor in additional tenant support measures. Our DDM-based Target Price stays at SGD0.80 (COE: 7.8%, LTG: 1.5%).
• SPH REIT's balance sheet remains sound, although we see low near-term deal catalysts, as tenant retention gets prioritised. Maintain HOLD.
• We prefer CapitaLand Mall Trust (SGX:C38U) (BUY, Target Price SGD2.40, see recent report: CapitaLand Mall Trust - CGS-CIMB Research 2020-05-01: Bracing For 2Q) for its scale, trading liquidity, and undemanding valuations.

Further Rental Support in Singapore

• Management provided an operational update for its 3Q20. SPH REIT's portfolio occupancy was stable at 98.8%; Singapore properties maintained near-full occupancies except for Rail Mall, which stayed at 92.2%. This was helped by active forward renewals, which suggests higher vacancy risk in the coming quarters against slow leasing activity.
• Shopper traffic has fallen by 52-59% y-o-y, and while footfall in Jun has recovered to 50-60% of pre-COVID levels, tenant sales growth remains uneven.
• SPH REIT will fully pass on the government’s property tax rebates and enhanced its tenant support programme to a total of 2.3 months for eligible tenants.

Encouraging Recovery in Australia

• SPH REIT's Australian properties fared better, as shopper traffic was maintained at Figtree Grove, while it fell 38% y-o-y at the Westfield Marion. According to management, their respective Jun footfalls have returned to 100% and 80% of pre-COVID levels.
• Meanwhile, Scentre Group (SCG AU) reported separately that 92% of all retail stores across its Westfield portfolio have reopened, and that customer visitation during the recent 27 Jun weekend has recovered to 86% from a year ago. We expect tenant sales across the REIT’s assets to gain traction in the coming months.

Strong Balance Sheet

• We expect SPH REIT's leverage would have likely stayed at ~30%; it was 29.3% as of end-Feb 2020 following the completion of its Adelaide deal, with an estimated SGD1.1b in debt headroom (at 45% limit).
• We believe that deal opportunities are unlikely to arise in the near term, as management focuses on tenant retention across its properties.

Source: Maybank Kim Eng Research - 3 Jul 2020