SINGAPORE (Jan 13): Analysts are keeping their positive stance on SPH REIT following the REIT’s 1Q20 results announcement on Jan 10.
The REIT recorded a DPU of 1.38 cents, 3.0% higher than 1.34 cents in 1Q19. This came on the back of an 11.8% y-o-y increase in gross revenue to $60.1 million and a 12.4% y-o-y increase in net property income to $47.0 million.
SPH REIT’s portfolio maintained a high occupancy rate of 99.3%. In Singapore, its assets registered an occupancy rate of 99.4% with a positive rental reversion of 10.9% for 1Q20. Occupancy at Figtree Grove Shopping Centre in Australia also remained strong at 99.2%.
Post-1Q20, the REIT has completed its acquisition of a 50% stake in Westfield Marion Shopping Centre, the largest and only regional shopping centre in South Australia.
On the REIT’s positive 1Q20 results and completion of its latest acquisition, Maybank Kim Eng Research has upgraded its recommendation on SPH REIT to “buy” from “hold” with a higher target price of $1.15 from $1.10 previously.
In a Monday report, analyst Chua Su Tye says, “We see DPUs supported by rental recovery at Paragon and higher visibility from its rising Australian contributions. Its strong balance sheet and high $1.4 billion debt headroom supports upside from further deals.”
Chua also believes that Westfield is a “strong asset” as the shopping mall is backed by reputable anchors across its 300-plus tenancies. The analyst also sees higher DPU visibility supported by favourable lease structures as the bulk of specialty tenant leases are embedded with an annual rental escalations based on CPI and an added 2.0-2.5% spread.
Meanwhile, DBS Group Research is keeping its “buy” call on SPH REIT, but with a lowered target price of $1.20 from $1.25 previously, as the research house prices in the REIT’s Westfield acquisition.
In a Monday report, DBS says, “We think that SPH REIT’s acquisition appetite remains strong with a well below average gearing of 30.2% forecasted for FY20.”
DBS is also positive on higher tourist spending in FY20, on the back of increased diversion within Asia and a good line up of meetings, incentives, conferences and exhibitions (MICE) events in 2020. This in turn bodes well for Paragon, which is located along Orchard Road.
“Coupled with the limited upcoming retail supply in the Orchard submarket, we think that Paragon may deliver further rental upside in FY20,” says DBS.
Additionally, Westfield will see maiden contributions next quarter and hence is expected to boost the REIT’s 2Q20 DPU. “The longer lease expiries (more than five years) and in-built rental escalations between 2.0% and 2.5% will bring greater stability to SPH REIT’s portfolio and reduce exposure to its anchor asset Paragon,” adds DBS.
On the other hand, OCBC Investment Research is less bullish on the counter as it continues to rate SPH REIT “hold”, but with a higher fair value estimate of $1.13 from $1.10 previously.
The REIT’s 1Q20 results came in within the research house’s expectations, as gross revenue and NPI increased on the back of higher contributions from Paragon and Figtree Grove Shopping Centre. Gearing ratio also remained healthy at 26.8% and average cost of debt was 2.91%. NPI for Paragon and The Clementi Mall saw an increase of 5.4% and 3.9% respectively, while The Rail Mall’s NPI remained flat.
The REIT’s Westfield acquisition was funded through a combination of proceeds from the $300 million of perpetual securities, proceeds from the private placement of about 15.6 million units at $1.05 per unit, and debt. The manager expects DPU accretion of 1.6% for this deal and an implied NPI yield of 5.6%.
As at 3.32m, units in SPH REIT are trading at $1.09 or 19.9 times FY20 earnings with a distribution yield of 5.5%, according to DBS’ estimates.
