• Stable occupancy in 1QFY21. The negative rental reversion was expected.
• Tenant sales close to pre-COVID-19 levels; lease renewals are less of a concern, in our view.
• Reiterate ADD. SPH REIT is currently trading below book at 0.86x P/BV.

SPH REIT's 1QFY21 Revenue Boosted by Acquisition

• SPH REIT (SGX:SK6U)’s 1QFY21 (Sep 2020 to Nov 2020) revenue grew by 10.8% y-o-y to S$66.6m, at 24% of our full-year forecast. The stronger results were mainly driven by the acquisition of Westfield Marion (completed in Dec 2019) which offset weaker revenue from Paragon (-12.9% y-o-y) and The Clementi Mall (-6.6% y-o-y).
• As a whole, Australia malls performed better than Singapore malls in revenue. While Australia revenue was boosted by the acquisition of Westfield Marion, Figtree Grove remained stable in 1QFY21. The weaker Singapore revenue in 1QFY21 (-11% y-o-y) was mainly due to rental relief granted to tenants.
• SPH REIT's 1QFY21 distribution of S$0.012/share (-13% y-o-y) came in below at 20% of our FY21 forecast.

Tenant Sales Saw Good Recovery Although Rental Pressure Remains

• SPH REIT's occupancy rate across all malls remained stable q-o-q at 97-100%. The Rail Mall’s occupancy rose from 92% in 4QFY20 to 100% in 1QFY21 despite the pandemic.
• 1QFY21 rental reversion was negative but as expected with the REIT’s focus on retaining tenants. We understand tenants remain cautious due to the uncertainties caused by COVID-19.
• In Singapore,
  • Paragon saw strong improvements in tenant sales in Nov 20 (85% of last year’s level vs ~70% in Sep and Oct 20) due yearend festive seasons and exceeded the recovery of footfall that continue to be capped by border closures.
  • Clementi mall’s tenant sales continued to improve on a m-o-m basis from 84% of last year’s level in Sep 20 to 89% in Nov 20. Footfall lagged behind at only 50% of pre-COVID-19 levels, impacted by work-from-home arrangements.
• Australia malls recovered faster than Singapore malls with tenant sales at 92-99% of pre-COVID-19 levels in Sep-Nov 20, while footfall was at 82% (Westfield Marion was impacted by 3 days of lockdown in South Australia) to 96% of pre-COVID-19 levels. No pre-termination in Australia thus far.
• SPH REIT managed to bring down FY21 expiring leases (by GRI) in Singapore by ~25%. The percentage of expiring leases in Australia in FY21 remained relatively unchanged q-o-q as renewals in Australia typically take longer to execute. Considering the strong tenant sales recovery, barring a resurgence of COVID-19, we believe lease renewals would be less of a concern although rental reversions would be under pressure.

Reiterate ADD on SPH REIT; Expect Gradual Recovery

• We adjust our SPH REIT's FY21-23F distribution forecasts by -3% to +0.4% as we update our model based on annual report numbers. Our DDM-based target price is slightly reduced to $1.06 accordingly.
• Barring the resurgence of COVID-19, we expect the malls to experience gradual recovery in footfall from current levels. SPH REIT's share price is trading below book at 0.86x P/BV (-1 s.d. below mean) and with > 6% yield.
• Upside/downside risks include better-/worse-than-expected impact from COVID-19.

Source: CGS-CIMB Research - 14 Jan 2021