SPH REIT's 1Q21 DPU in Line, Maintain HOLD

• SPH REIT (SGX:SK6U)’s 1QFY21 (Sep 2020 to Nov 2020) distribution, down 13% y-o-y, jumped 122% q-o-q to S$0.012/unit, as a quarter of deferred distributions was returned, on the back of recovering fundamentals. The results were in-line with ours and the street’s estimates, and we maintain forecasts and DDM-based target price (COE: 7.8%, LTG: 1.5%).
• We see a slow pick-up in tenant sales at Paragon as tourism spend remains depressed by tight border controls, and hence its operational weakness to persist beyond FY21, even as Singapore’s retail recovery gains traction.
• SPH REIT's balance sheet remains sound, but we see low near-term deal catalysts, as tenant retention gets prioritised. We prefer Frasers Centrepoint Trust (SGX:J69U) (see report: Frasers Centrepoint Trust - Maybank Kim Eng 2020-11-03: Suburban Strength) for its more resilient suburban mall portfolio.

Singapore Portfolio Occupancies Holding Up

• SPH REIT's portfolio occupancy rose slightly to 97.9% (from 97.7% at end-Aug 2020) with improvement at Paragon (from 97.8% to 98.0%) and stable occupancy at Clementi Mall (99.6%). While revenue at Paragon and Clement Mall fell ~13% and ~7% y-o-y, tenant sales were cushioned by stronger domestic spend, and recovered during the year-end festive period to -15% y-o-y and -11% y-o-y, ahead of footfall, at -34% y-o-y and -51% y-o-y respectively, which remained squeezed by border restrictions and work-from-home arrangements.
• Rental reversions were negative according to management, but forward leasing activity has eased expiries in FY21 at Paragon down to 17% (from 22% at end-Aug 2020) and Clementi Mall to 16% (from 20%).

Australia Properties Expected to Fare Better

• SPH REIT's Australian properties fared better y-o-y, as revenue was flat at Figtree Grove and Westfield Marion contributed S$12.8m. The latter saw an 18% y-o-y decline in tenant sales, with lockdown restrictions in Adelaide in Nov 2020. Figtree Grove’s suburban residential catchment should support its fundamentals, while Westfield Marion remains a strong destination asset, with visibility from favourable lease structures.
• The majority of specialty tenant leases are embedded with yearly rental escalations at CPI plus an additional 2.0-2.5% spread. Australia has reported low COVID-19 cases year-to-date and we expect tenant sales to improve in the coming months.

Sound Balance Sheet Lacking Deal Catalysts

• We expect that refinancing of SPH REIT's S$215m borrowing due in Jul 2021 could result in ~S$2m cost savings, while its leverage, maintained at ~30%, suggests a S$400-800m debt headroom (at 40-50% limit).
• Management believes its operations have stabilised and expect to restart its acquisition growth efforts (in Australia).

Source: Maybank Kim Eng Research - 14 Jan 2021