• SPH REIT’s FY20 DPU of 2.72 Sct (-51% y-o-y) came in below our forecast.
• Acquisitions effect partially offset rental waivers given to tenants.
• Reiterate ADD as we believe current valuation factored in COVID-19 impact.

SPH REIT's FY20 DPU Came in Below Expectations Due to Income Retention

• SPH REIT (SGX:SK6U)’s FY20 revenue grew by 5.6% y-o-y to S$241.5m while NPI increased 1.2% to S$181.9m. The stronger results were mainly driven by the acquisitions of Westfield Marion and Figtree Grove shopping Centre which offset the rental relief of S$31.8m granted to its Singapore tenants. Net income declined 8.2% y-o-y mainly due to rental relief and arrears of S$8.1m for eligible Australian tenants.
• Asset valuation declined 2-4% for its Singapore assets and 5-8% for Australia assets. There was no change in cap rate aside from Figtree Grove.
• SPH REIT retained S$19.4m (S$14.6m will be deferred to FY21 and S$4.9m to build up cash reserve), or 20% of its FY20 income, due to the uncertain outlook.
• SPH REIT's FY20 DPU of 2.72 Scts (-51.4% y-o-y in FY20) came in below at 87.3% of our FY20 forecast.

Rental Reversion Positive But Tenant Sales Impacted

• Thanks to its early lease negotiation strategy, Paragon, Clementi Mall and Rail Mall’s FY20 rental reversions improved 7%, 4.8% and 10.1%, respectively.
• In Australia, Westfield Marion and Figtree Grove, however, reported -1.5% and -9.8% rental reversion, respectively. Management indicated that the weak rental reversion of the Australia assets was in fact better than expected and had been factored into the acquisition price when the REIT acquired the assets.
• Occupancy for all the malls remained high at 92-99% although there was some marginal decline of 0.4-2% pts vs. 1HFY20 for few of its malls. Paragon and Clementi Mall’s shopper traffic declined 27-28% y-o-y but in terms of tenant sales, Paragon (-28% y-o-y) was hit harder than Clementi Mall (-13% y-o-y).
• SPH REIT intends to ride on its loyalty programme to boost tenant sales at Paragon. The inability to travel overseas should help to channel some of the spending to local shopping. We understand that the medical suites have seen a strong pick-up in visitations since phase 2 reopening.
• The Australia malls fared better than the Singapore malls as the malls were not subject to a full lockdown, with tenant sales declining 1-9% and traffic falling 0-11% y-o-y in FY20.
• SPH REIT has 25% of leases up for renewal in FY21. Leasing activities so far have been slow due to the uncertainties caused by COVID-19.

Reiterate ADD on SPH REIT With a Lower DDM-based Target Price

• We raise our FY21F DPU by 6.3%, factoring in the payment of the deferred income in FY20 but reduce FY22F DPU by 3% as we lower our dividend payout ratio assumption from 100% to 97% to reflect SPH REIT’s intention to retain some overseas income to build up its cash reserve.
• We reiterate ADD on SPH REIT as it is trading at 0.9x P/BV which may have priced in potential income downside.
• Upside/down risks include worse/better-than-expected impact from COVID-19.

Source: CGS-CIMB Research - 7 Oct 2020